Research Notes – November 8, 2010

Retain ‘buy’ on Apollo Tyres – TP hiked to Rs.82

 Buy call on Apollo Tyres has been reiterated with a higher target price of Rs.82, as against the earlier projection of Rs.70. TP hike is due to the rollover of the valuation year to FY12 from FY11.

 Despite temporary challenges like increasing cost of natural rubber, Apollo Tyres is preferred from the long term perspective due to favorable demand – supply scenario in India, market share gains in the Commercial Vehicle (CV) and passenger car tyre segments and its early lead in the radialisation of CV tyres.

 Slowdown in replacement demand for CV tyres, which contributes nearly 60% of Apollo’s domestic revenue and recent hike in international rubber prices have resulted in temporary loss of pricing power of the company. However, this seems to be a temporary setback to the company and strong winter tyre sales in Europe may partially offset the above challenges.

 Lean inventory levels and expectation of an extended winter in 2009 – 2010 may act as positives to the company.

 Slowdown in replacement demand is due to increase in truck fleet size. In such periods, the average wear and tear of old trucks drop due to an increase in the proportion of new trucks, leading to lower replacement sales.

 Another major reason for the temporary setback to the company is rising prices of natural rubber. Price has run up 15% in recent months and current price is 18% above the Q1FY11 average cost of Rs.165/ kg. If the slowdown in replacement demand persists with higher rubber prices, company’s pricing power would be under pressure in the near term.

 However, the long term prospects appear good because of favorable demand – supply scenario of tyres in India and rising market share of the company in CV and passenger car segment. Extremely high prices of natural rubber due to heavy rain in India and South East Asia may be softened in the medium term.

 The stock is watched from its long term perspective and the buy call is maintained with a higher target price of Rs.82, which is at 7 multiple of FY12 expected EPS.

Maintain ‘buy’ on IBREL – TP Rs.246

 Buy call on Indiabulls Real Estate is reiterated with a target price of Rs.246 over one year.

 Amaravati power plant with 1350 MW capacity under the upcoming India Bulls Power is under construction and the execution is gaining momentum with construction in full swing.

 India Bulls Real Estate has 58.6% stake in Amaravati Power plant.

 Phase 1 of the project with 1350 MW capacity has achieved financial closure and the first unit with 270 MW capacity is expected to be operational in by May 2012.

 The entire plant is expected to be ready by 2013 and India Bulls Power has signed a PPA (Power Purchase Agreement at a tariff rate of Rs.3.26/ kWh for 1200 MW of power.

 Power business is expected to contribute around 36% of IBREL’s net asset value estimates for FY12.

 Considering the long term prospects of the company, it seems that the risk – reward ratio is compelling and buy call is reiterated with one year target price of Rs.246.

Source: Geojit