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.

The research firm lowered Apollo Tyres rating to 'equalweight' from 'overweight', according to a July 2 note. It increased the 12-month target price from Rs 400 to Rs 425, implying an upside potential of 4%.

Apollo Tyres is expected to deliver on its margin and return on capital employed targets, according to Morgan Stanley. It cited an expected fall in commodity prices, focus on profitable growth through better pricing and mix, enhanced productivity, a lean capex structure for the outlook.

• Morgan Stanley expects Apollo Tyres to post an Ebitda margin of 15.7% and return on capital employed of around 11%

• Sees FY25 return on equity at 12.3% and price-to-book multiple at 1.7x; the risk-reward is balanced.

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 Vs Bear Scenario 

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.