Recovery In Demand And Market Share Gains Will Drive Future Success In Tyre Industry

Key Takeaways

• Strategic focus on profitability and product mix shift towards Ultrahigh Performance Tires in Europe is likely to boost margins.
  
• Market share gains and debt reduction efforts in India, U.S., and Middle East will enhance revenue growth and earnings.
  
• High raw material costs and CapEx needs, coupled with missed export opportunities, are pressuring Apollo Tyres' profitability and cash flow.

Catalysts

Manufactures and sells automotive tires, tubes, and flaps in the Asia Pacific, the Middle East, Africa, Europe, and internationally.

• Apollo Tyres is expecting to see a recovery in demand momentum in both India and Europe, which should positively impact revenue growth in the coming quarters.
  
• The company's strategic focus on enhancing profitability through internal initiatives and a better product mix, especially in Europe with a shift towards the Ultrahigh Performance Tire (UUHP) segment, is likely to boost net margins.
  
• The expected stability and potential reduction in raw material costs, coupled with previous price increases, should help improve gross margins and, consequently, overall earnings.
  
• Continued market share gains in key segments like the domestic passenger car replacement (PCR) and agricultural sectors in India indicate potential revenue growth.
  
• Debt reduction efforts, as seen with a decline in net debt, and plans for growing demand in new markets like the U.S. and Middle East are set to improve net margins and positively impact earnings through reduced interest costs and expanded revenue streams.

Apollo Tyres Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Apollo Tyres's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 7.3% in 3 years time.
• Analysts expect earnings to reach ₹23.5 billion (and earnings per share of ₹37.24) by about September 2028, up from ₹8.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹20.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, down from 37.1x today. This future PE is lower than the current PE for the IN Auto Components industry at 29.3x.
• Analysts expect the number of shares outstanding to grow by 1.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.73%, as per the Simply Wall St company report.

Apollo Tyres Future Earnings Per Share Growth

Risks

• Elevated levels of raw material costs continue to exert pressure on margins, potentially impacting net margins and profitability if not mitigated.
  
• Declines in domestic OEM segment margins suggest challenges in maintaining profitability across all segments, which could impact overall earnings.
  
• Interest costs remain stable despite reductions in debt, driven by increased working capital borrowings due to profitability challenges, potentially affecting net profitability.
  
• Weak performance in India’s exports, unlike some peers, suggests missed revenue opportunities in global markets, which could affect revenue growth.
  
• High short-term CapEx needs for increasing capacity in passenger car tires could strain cash flows and potentially impact free cash flow generation negatively.

Valuation

• The analysts have a consensus price target of ₹509.292 for Apollo Tyres based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹600.0, and the most bearish reporting a price target of just ₹399.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹320.8 billion, earnings will come to ₹23.5 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 14.7%.
• Given the current share price of ₹485.65, the analyst price target of ₹509.29 is 4.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.