On Friday, UBS analyst upgraded Apollo Tyres (APTY:IN) stock from Neutral to Buy, setting a new price target at INR640, raised from the previous INR450. The upgrade is grounded in the expectation of continued strong operational performance in the company’s India and Europe segments, which is anticipated to contribute to further deleveraging.
The analyst anticipates that revenue growth trajectories for Apollo Tyres in the India and Europe markets will begin to improve starting from the first quarter of the fiscal year 2025, following a relatively weaker second half of the fiscal year 2024. Despite expectations that EBITDA margins have reached their peak, only a slight moderation is projected due to the robust pricing environment in both regions, supported by timely price hikes.
In Europe, volumes have shown recovery in recent months, with profitability outperforming expectations. This has been attributed to disciplined pricing and cost rationalization efforts. The positive outlook for European tire companies extends to a forecast of approximately 10% EBIT growth in 2024.
The report also notes Apollo Tyres' strategic decision to avoid expansion-related capital expenditures for the next 18 months, which is expected to aid in the company's deleveraging process.
With the stock currently valued at 7 times its fiscal year 2026 estimated EV/EBITDA and 15 times its fiscal year 2026 estimated PE, the valuation is considered reasonable. This assessment takes into account the improved return ratios, the auto sector's strong re-rating, and the tire industry's long-term prospects, which are seen as secure due to the absence of electrification risks.
InvestingPro Insights
In light of UBS analyst's recent upgrade of Apollo Tyres, it's worth noting that the company, known by its ticker APLO, is currently trading at a low P/E ratio of 11.56 relative to near-term earnings growth. This aligns with the analyst's perspective on the company's valuation being reasonable and suggests that the stock may be attractively priced for investors considering its earnings potential.
Adding to the appeal for dividend-seeking investors, Apollo Tyres has a strong track record of maintaining dividend payments, with a history of 24 consecutive years of dividends. This is complemented by a robust dividend yield of 6.05%, which is particularly attractive in the current investment landscape, where income generation is a key consideration for many.
Despite a projected sales decline in the current year, Apollo Tyres remains a prominent player in the Automobile Components industry. Investors may take comfort in the fact that the company has a perfect Piotroski Score of 9, indicating strong financial health, which may bode well for its ability to navigate near-term challenges.
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