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Apollo Tyres zooms to a 52-week high as Morgan Stanley bets on India growth

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Apollo Tyres zooms to a 52-week high as Morgan Stanley bets on India growth


Morgan Stanley is betting on Apollo Tyres but does not express similar confidence on Balkrishna Industries, despite the latter having a superior business model. Find out why.

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Buy / Sell Apollo Tyres share

India's second-largest tyre company in revenue terms, Apollo Tyres surged in Tuesday's trading session after Morgan Stanley initiated coverage on the stock with an "overweight" rating. The brokerage's price target of 329 per share implies a potential upside of 31 percent from Monday's closing levels.
Shares of Apollo Tyres gained as much as 7 percent in today's trade to a 52-week high of Rs 272. The stock is also the top performer on the Nifty Midcap index. Out of the 32 analysts that track the stock, 24 have a "buy" rating, seven say "sell" while only one has a "hold" recommendation.
Morgan Stanley is betting on the tyre space due to a stable volume outlook, improving margins and return ratios. It expects tyre volumes to achieve a 7 percent CAGR (compound annual growth rate) between 2021-25, compared to 3 percent between 2016-2021.
The firms also expects demand from original equipment manufacturers (OEMs) to remain robust due to improving macro conditions, normalizing chip supply and replacement demand. It expects tyre tonnage from OEMs to grow at an 11 percent CAGR between 2021-2025.
While Morgan Stanley is overweight on Apollo Tyres, it has initiated coverage on Balkrishna Industries with an "Underweight " rating. The firm has highlighted various factors as to why it prefers Apollo over Balkrishna:
  • It prefers India over exports to the EU and the US. 68 percent of Apollo's FY22 sales came from the India business. However, for Balkrishna, that figure drops to 17 percent.
  • The brokerage expects 33 percent earnings CAGR for Apollo between FY22-25, compared to only 9 percent for BKT. On a price-to-earnings growth basis, Apollo trades at 0.6x while BKT trades at 3x.
  • It also expects Apollo's Return on Equity (RoE) to expand to 11 percent by FY25 from the current level of 6 percent. On the other hand, BKT's RoE may narrow to 19 percent in FY25 from 21.8 percent currently.
  • Morgan Stanley also said in its note that Apollo has consistently been passing the commodity headwinds through price hikes. Its strong brand identity and premiumisation push is also helping in better realisations. "The recent decline in crude oil prices, if sustained, could aid in Apollo's meaningful margin expansion," the brokerage firm noted.
    Among the risks highlighted by Morgan Stanley for Apollo Tyres include a potential loss of market share, inability to pass through commodity inflation, persistent commodity inflation, and a CCI penalty of Rs 425 crore that materializes and hurts cash flows.

    Morgan Stanley's Bull Case on Apollo Tyres:

    • Price target: Rs 472
    • Business close to meeting FY26 revenue target
    • FY22-26 revenue CAGR is 13%
    • FY25 EBITDA margin at 15% versus FY26 target of 15%+ margins
    • A sustainable reduction in fixed costs
    • Value engineering efforts which reduce raw material costs by 5-7%
    • Morgan Stanley's Bear Case on Apollo Tyres:

      • Price Target: Rs 135
      • Surge in inflation and supply-side issues hit auto sales
      • Commodity inflation hurts near-term margins
      • Competition in key segment limits ability to pass commodity headwinds
      • FY24 EPS is 59% lower than base case
      • Here are also some reasons why Morgan Stanley is Underweight on Balkrishna Industries:
        • Expects growth momentum to slow down
        • Slower recovery in margins than street expectations
        • Elevated capex requirements can keep return ratios under pressure
        • Sharper-than-expected slowdown in the EU
        • Commodity prices remain elevated and pricing environment weakens.
        • Morgan Stanley's price target of Rs 1,649 for Balkrishna Industries implies a potential downside of 17% from Monday's closing price.
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