Multi Baggers

Apollo Tyres

Rationale for upgrade

Apollo Tyre was in a trading range around 90-100 before cooper deal got announced. Now it's almost certain Apollo will back out from the deal and likely possibility deal will not go through the above range of consolidation can easily be tested from 4-6 months perspective.

Interestingly, fundamentals have changed better for Tyre industry in India. Higher sales backed by replacement industry demand and OEM industry demand it is going to see traction for next two quarters. On valuation front this is available at a very attractive PE multiple of5.5 x on estimated EPS of over 12.5.

Risks and Concerns

Apart from a sudden slowdown in overall replacement and OEM demand the biggest concern and risk area is which is a possibility What if Cooper deal goes through?

On hindsight we believe there has been lot of areas where Cooper and Apollo valuations will have conflicting issues for which Apollo is now backing out and should also be allowed to withdraw the bid. The China subsidiary issue and projections of revenue and profit from Cooper pre and post deal looks good enough for which Apollo is making an easy case of misrepresentation

How projections dwindle by almost 26-28 percent post deal in bottom-line and almost 21 percent in topline. Given valuations attractive and the new legal hurdle we sense a good investment opportunity over next 6 months on the stock.

We are now advising to enter Apollo Tyre CMP 66.95, target 95-109 based on news events along with taking a fundamental call on the stocks. There is higher probability of Apollo to be given a free-way to withdraw from deal and if it happens there will be spurt of short covering on the stock. There has been under ownership on the stock which will instigate demand for stocks on long side.