Should I invest in Apollo Tyres?
-Pranob Sarkar
Apollo Tyres is India’s second-largest tyre company after MRF In terms of revenue.
In FY11, the replacement tyre market contributed 80 per cent of its sales while the passenger car segment accounted for 37 per cent of sales. Both these are high-margin segments. As the company derives a high percentage of its revenue from these two segments, its profitability is higher than the industry average.
Exports, which currently constitute 11 per cent of its revenue, could account for a larger share in future. The company already sells its brands in overseas markets, such as Dunlop in Africa and Vresdestein in Europe. This will make it easier for Apollo to grow revenues in these markets or outsource the production o n behalf of its subsidiaries to its production facilities in India. The company has established a sales hub in Dubai for servicing the West Asian markets.
The company’s consolidated debt increased by 45.2 per cent in FY11 compared to FY10. Sharp increase in the price of rubber and pricing pressures on account of large capacity additions by other players are additional concerns for Apollo.
The stock is currently trading at a premium to its five-year median P/E ratio of 11.11. Over the last five years, it has clocked a CAGR in earnings per share of 15.3 per cent. This gives it a PEG ratio of 1.2. Given the unattractive valuations and rising debt, avoid the stock for the present.
This article was originally published on February 17, 2012.
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