JP Morgan upgraded shares of Apollo Types (APTY) from Neutral to Overweight, underscoring the company’s commitment to reducing debt and delivering disciplined growth. Despite the slight decline in margins in its Q4 FY2024 results, APTY has already announced price increases to counter the impact of environmental protection regulations (EPR) and inflation on commodities. In addition, a high free cash flow (FCF) conversion rate of over 100% underscores the company’s financial strength.
APTY’s recent share price decline, down 12% since third-quarter results, compared with a 16% rise, reflects concerns about commodity inflation and higher environmental costs. While margins may face some pressure in 1HFY25, JP Morgan expects higher pricing and lower interest costs to support full-year earnings, forecasting 13% year-on-year growth.
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Despite maintaining FY25/26E EPS estimates, JP Morgan raised its price target to INR 555 and moved it to June 25. APTY’s current valuation is 13x P/E at 26FY with a free cash flow yield of 7%.
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But if we look at fair value Apollo Tires (NS:), investors may not have a big smile on their faces. After analyzing 15 complex financial models, the fair value was INR 469.95, leaving a slight upside of 0.9% compared to the CMP of INR 492.6. The shares can be considered almost fairly valued.
A total of 26 analysts covering the matter have given an average upside target of INR 529.35. While JP Morgan is also targeting INR 555, investors may consider holding their positions a little longer but at the same time, they can also try to tighten their stop losses to protect their profits in case the stock takes a 180 turn degrees.
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Key Highlights of the FY 2024 Q4 Scorecard:
– Consolidated adjusted EBITDA was INR 11 billion, up 10% year-on-year, slightly below JP Morgan’s estimates.
– India’s earnings-adjusted EBITDA declined 2%, although year-on-year revenue remained flat, offset by higher-than-expected profitability.
– Reported PAT of INR 3.5 billion was 30% below JP Morgan’s estimates, primarily due to operational errors and EPR provisions.
– Net debt fell to INR 25 billion as on March 24, with ROCE improving markedly to 16% in FY24.
APTY management has emphasized the need for price adjustments to mitigate the impact of EPR and commodity inflation, with a 3% price increase already implemented. Capex for FY24 was below the forecast of INR 7 billion and FY25 forecast of INR 10 billion, which implies achieving near debt-free status by FY26.
India saw double-digit replacement growth in April, pointing to a strong start to FY25. Growth in the EU is also robust, with a focus on improving the product range, especially ultra-high performance (UHP) tyres.
Measured at the June 26 P/B ratio, which reflects improving earnings multiples. The target price implies a P/E of 15x and EV/EBITDA of 7.5x. Risks include potential price competition in India, weak demand for replacement tires in the EU and the resumption of a major capex cycle.
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