Why Apollo Tyres stock could be on a roll

Apollo Tyres' (APTY) profit margins improved in the second quarter (Q2 FY24) compared to the previous quarter (Q1 FY24), increasing by 163 basis points to 18.5 per cent, according to an Emkay Global Research report. This was better than Dalal Street estimates, which had forecast a growth of 16.6 per cent. This improvement was because the company had a better product mix, lower raw material prices, and controlled costs, says the report.

According to the report, the tyre industry is doing well right now because of certain favourable factors. These include restrictions on tyre imports, increased competitiveness in the export market, more high-end tyres used by car manufacturers, and careful spending on expanding production capacity.

"This means there's a stable demand for tyres, and APTY should continue making good profits. We expect APTY's profits to stay strong. We've increased our estimates for their earnings in the next few years (FY24E, FY25E, and FY26E) by about 13 per cent, 10 per cent and 9 per cent, respectively, considering the expectation that they will have high-profit margins for longer," says the report.

"Because of this, we're upgrading our recommendation for APTY's stock from "Hold" to "BUY." We also have a new target price for their shares at Rs 470 each. This is based on a multiple of 12.5 times their expected earnings for FY26E. (Our previous target price was Rs 375)," it adds. 

"One thing to remember is that there has been a slight drop in APTY's market share in revenue recently, and there could be economic challenges in Europe that might affect their business."

Read the Emkay Research report here.