Apollo Tyres Has Multiple Positives But Morgan Stanley Still Downgrades It. Here's Why

Shares of Apollo Tyres Ltd. fell after Morgan Stanley downgraded the tyremaker citing that all the positives for the stock are priced in.

Shares of Apollo Tyres fell 1.50% to Rs 400.60 apiece compared to a 0.61% rise in benchmark Nifty 50 as of 9:44 a.m. The total traded volume stood at 2.4 times its 30-day average at the time.

Of the 30 analysts tracking the stock, 17 maintain a 'buy', eight recommend a 'hold', while five suggest a 'sell', according to Bloomberg data. The average of 12-month price targets implies a potential upside of 4.1%.

Bull Case

• Morgan Stanley estimates Apollo Tyres will generate a free cash flow of Rs 2,400 crore in FY24 and the capex pick-up in the next cycle will be gradual.

• Sees sharper-than-expected recoveries in domestic replacement and the European union market.

• Target price of Rs 593, implying 46% upside; assumes aggressive market share gains in Europe with leverage gains supporting margins.

Bear Case

• Commodity prices are volatile and have a sizeable impact on earnings and a slowdown in domestic demand and European Union recovery is prolonged.

• Competitive intensity remains benign as Apollo Tyres, CEAT Ltd. and JK Tyres Ltd. focus on margins in this cycle.

• Assume a weaker demand environment coupled with continued commodity headwinds, resulting in a scenario value of Rs 172, implying 58% downside.