Investor's Eye: Update - Apollo Tyres (Price target revised to Rs84); Cement (Dispatches growth slow down in February on Holi)

 

 

Investor's Eye [March 18, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Apollo Tyres   Cluster: Apple Green Recommendation: Buy Price target: Rs84 Current market price: Rs74 Price target revised to Rs84  The current strong demand environment in automobile industry has led to supply-demand mismatch and hence production strain for original equipment manufacturers (OEMs) and tyre manufacturers. And to meet the strong demand in the sector, almost all the tyre companies are operating at full capacity utilisation. Apollo Tyres, with the commencement of 100-tonne-per-day additional capacity at its new Chennai plant this month (which will increase its overall capacity by ~11% for FY2011) is likely to be the key beneficiary of the boisterous demand in the sector. We believe that the automobile demand (commercial as well as passenger vehicles) is likely to remain buoyant at least for the next couple of years as the economy picks pace?this will benefit tyre manufacturers such as Apollo Tyres. And the phased capacity ramp-up at its new Chennai plant will help Apollo Tyres to reap maximum benefit from the demand rebound. Furthermore, the increasing radialisation of truck and bus tyres in the country and with the company?s new Chennai plant all set to produce TBR tyres, Apollo Tyres is likely to benefit from the structural shift to radialisation, which in turn will maximise its overall profitability. At the current market price, the stock is trading at 8.1x and 7.1x its FY2011E and FY2012E earnings of Rs9.2 and Rs10.5 respectively. In line with the increase in our consolidated earnings estimates, we are revising our price target to Rs84 (based on 8.5x average of FY2011E and FY2012E earnings). We maintain our Buy recommendation on the stock. SECTOR UPDATE Cement Dispatches growth slow down in February on Holi After posting a strong double-digit volume growth during the November 2009-January 2010 period, cement dispatches witnessed a slowdown in growth in February this year. In view of the unavailability of the volume dispatch figures of ACC and Ambuja Cement, we have done the entire analysis of monthly dispatches after adjusting the previous year?s numbers of the two companies. Cement dispatches in February 2010 grew by 4.9% year on year (yoy) to 13.35 million metric tonne (MMT). The dispatch growth was poor partially due to the shortage of labour on account of Holi festival. On a sequential basis, the dispatches declined sharply by 8.1% during the month. During the month under review the central region witnessed the highest volume growth of 16.9%. The western and northern regions also posted a dispatch growth that was above the industry average. Due to poor demand and political hurdles in Andhra Pradesh, the southern region posted a 1.1% decline in dispatches yoy. On a sequential basis, all the regions posted a decline in dispatches.  Among the cement companies under our coverage, JP Associates has emerged as a frontrunner with a robust volume growth of 56.6% yoy to 1.08MMT for February 2010. Madras Cement and Orient Paper and Industries also registered an impressive volume growth of 27.3% yoy and 26.1% yoy respectively. However, for the same month the top cement makers posted a mix performance in terms of volume growth on a year-on-year (y-o-y) basis.  As per our interaction with cement dealers, in most regions cement prices have been hiked by Rs10 with effect from March 1, 2010 to offset the cost inflation due to the changes announced in the Union Budget 2010. In addition to the aforesaid price hike the cement players operating in the southern region are looking to increase their prices by another Rs15-20 per bag by the end of March 2010. The average cement price in Mumbai stood at Rs265 and in the major cities of Gujarat cement is selling at Rs220-225 per bag. In Hyderabad the price has increased to Rs175 per bag and by the end of March the price is likely to reach Rs190 per bag. Going forward, we believe with the stabilisation of the new capacities the cement prices are expected to come under pressure by Q1FY2011. The recent increase in cement prices in the last couple of months with improved offtake due to a pick-up in infrastructure activity is a positive for the domestic cement industry. On the volume front, we expect a sequential improvement due to a pick-up in urban construction and real estate activity. However, with the stabilisation of the new capacities the supply is expected to surpass the incremental demand, which will create pressure on utilisation and consequently on cement prices.     Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions