Apollo Tyres shares get ‘buy’ rating

AS per media reports, tyremaker Michelin announced a 12% increase in truck tyre prices in Africa and India. Apollo Tyres is present in both these geographies. As per an article in Rubber World, Yokohama Tire raised truck tyre prices by 8%. We believe this sets the stage for price increases by other tyre manufacturers and bodes well for the fundamentals of the tyre industry.

Over the past two weeks, natural rubber prices in India have declined from R240/kg to R220/kg. Natural rubber costs are 30% of revenues for Apollo Tyres. We assume a natural rubber cost of R225/kg for Apollo Tyres over FY11. We have also analysed the potential for substitution of natural rubber usage in the glove industry and believe that higher rubber prices would lead to substitution of natural rubber by synthetic rubber in that industry.

We derive our price target from our sum-of-the-parts valuation. We value the company’s India business at 4.5x (times) the average of FY12-13e (September 2012e) EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) and its international business at 5.5x. Apollo Tyres share is trading at 7.2x March 2012e PE (price-to-earnings).