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STOCK UPDATE Apollo Tyres
Recommendation: Buy
Price target: Rs189
Current market price: Rs155 On a fast track; retain Buy with a price target of Rs189 Key points -
With rubber prices continuing to remain weak, Apollo Tyres Ltd (ATL) is expected to sustain the margin at relatively higher levels in Q4FY2014 and also the first half of FY2015 despite the firming up of prices of some of the raw materials like carbon black among others. -
The performance of the Indian operations (under the stand-alone parent entity) is expected to pick up in H2FY2015 as against a muted volume growth in FY2014. The European operation is also expected to remain healthy as the balance sheet would strengthen further and the return ratios would improve over the next two years (after considering a possible expansion in Europe). -
Given the continued softness in the rubber prices, we have marginally raised our earnings estimates for FY2015 (by 4%) and FY2016 (by 3%). ATL is our preferred pick in automobile ancillary sector. We remain positive on the stock and reiterate our 'Buy' recommendation with a revised price target of Rs189.
VIEWPOINT FIEM Industries
Current market price: Rs409
View: Positive Lighting up Key points -
FIEM Industries, an automotive lighting and rear view mirror manufacturer, is riding on the robust volume growth from its OEM customers, like Honda Motorcycles and Scooters India (HMSI; growing by over 30% with a sharp gain in the market share) and TVS Motors (improving the volume growth on new launches). What is more, the potential revival in the automobile demand would further aid in its overall growth momentum. -
In addition, it has entered into the emerging LED segment and tied-up with railways and buses to offer these products. The management sounds very optimistic and expects the industry to see a huge transformation in the lighting segment (from conventional to LED lights). We expect the company's revenues and earnings to grow at a CAGR of 18% and 24% during FY2013-16E respectively. -
Despite the recent run-up in the stock price, we believe a strong growth in the two-wheeler industry, improvement in the product mix and the company's effort to reduce the debt would lead to better margins and return ratios. Currently, the stock trades a 20% discount to its average multiples based on our FY2016 estimate and consequently offers scope for a close to 25% appreciation in the stock price (rough target of Rs500-520) over the next few quarters.
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