Apollo tyres, an attractively valued bluechip stock
As part of this blog post, I have started publishing rationale behind my stock-picks in every quarter. In last blog post, I have explained how Karnataka bank can add value to your portfolio. While searching for quality picks, I found another blue chip company worth adding to my portfolio, Apollo Tyres !
Introduction
Apollo tyres is one of the biggest tyre manufacturing company which enjoys ~20% of market share in India. The company also has presence in European market (Netherlands and Hungary). It is 17th biggest tyre producer in the world.
Business
Apollo tyres has presence in commercial and personal vehicles segment. Company has made debut in the 2 wheeler market in 2016. The company sells under brand name “Apollo Tyres” and “Vredestein” in India and in European market respectively. Now, I am going to present SWOT analysis of the Apollo tyres.
SWOT analysis
Strengths
1. Apollo Tyres enjoy diversfied business presence in the market including India and Europe. The company has plan to expand in Middle east and US market.
2. Apollo Tyres provides tyres to commercial vehicles, passenger vehicles and 2 wheeler space. Hence, it is a full range player.
3. Apollo Tyres has acquired Germany based, retail tyre distributor, Reifencom GmbH. The purpose of this acquisition is to expand retail network in Europe.
4. Apollo Tyres is focuses on R&D through center in Germany.
Weaknesses
1. Company doesn’t have presence in European OEM market.
2. Still couldn’t cope up with cheap imports from China.
Opportunities
1. Company has a vision 2020, to be premier tyre company with a diversified and multinational presence.
2. Leader in Truck Bus Radial tyres in India.
3. Eyeing European market.
4. Expansion of plans through new Hungary plant. Initiatives to capture new markets like Mid-east, South east Asia.
5. Anti dumping duty imposed by Govt. Of India will help Indian tyre manufacturers.
6. GST to play major boost for auto and auto-ancillaries companies as consumption will increase after next couple of quarters
Threats
1. Dependency on natural rubber and crude oil and government’s interference in controlling taxes on them.
2. Cheap tyre imports from China.
3. Economic slowdown in India and Europe could be a threat to earnings.
4. Indian currency fluctuations could result in pressure on margins.
Quality of management
Apollo tyres is run by seasoned entrepreneur Onkar Kanwar. Even though challenging domestic and global business scenario, the company is profitable and distributing good dividends while keeping debt under check. The management has expansion plans across continents like Europe, Middle east and US. This management could scale the distributor network in pan-India. So, I have faith in the management.
Conclusion and investment rationale
Despite being strong blue chip company in tyre sector, valuation of Apollo tyres looks reasonable. It is trading at 239 as of today. Company provides 20%+ RoE with consistent EPS. Considering growth in auto sector, tyre sector poised for growth. Hence, their earnings will certainly improve. Well established companies like Apollo tyres will benefit from recent anti dumping duty. Apollo tyres is also expanding in 2 wheeler market in India. Additionally, distributor network expansion in Europe will be seen as unlocking upside potential. Company has less debt (0.22 debt-to-equity). That’s why, I bought shares of Apollo tyres.
References
1. http://www.moneycontrol.com/
2. https://www.apollotyres.com/en-in/car-suv-van/tyre-finder/
3. Annual reports of 2014–15, 2015–16, 2016–17.
Call to action
If you like the article, please share and comment. Next set of stocks will be shared in the month of Dec-2017. So, please stay tuned. Happy Diwali to all of you.
Disclaimer
Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.
Also, published in http://cpaithane.blogspot.in/2017/10/apollo-tyres-attractively-valued_5.html
