IDFC SSKI in a report punctured the hopes of Apollo Tyres stock. The tyre industry is more of a commodity play with limited pricing power for players despite >90% capacity utilization. Though select players have hiked prices by ~1% in December 2007 in the replacement market to counter rising raw material prices, MRF’s non-participation raises doubts on sustainability of the price hike and rules out future increases.
SSKI recommends investing in tyre companies at PER of 8-9x with target valuations of 11-12x (both 2- year forward valuations). At 13.8x FY09E and 12.3x FY10E consolidated earnings, and 6.1x FY09E and 5.3x FY10E consolidated EV/EBIDTA, the stock appears fully priced at Rs 57. Given that there is currently no case for any material upside to growth estimates an UNDERPERFORMER rating is assigned to the stock.