Apollo Tyres reported its first quarter results yesterday and they look like this:

Apollo Tyres Q1 – 2017 Q4 – 2016 Q1 – 2016 %change Q-Q % Change Y-Y
Total Income 3,304.14 2,989.67 2,851.85 10.52% 15.86%
EBIT 459.77 368.63 431.51 24.72% 6.55%
EBIT Margin 13.91% 12.33% 15.13% 1.58 Bpt -1.22 Bpt
Net Profits 314.69 249.91 284.45 25.92% 10.63%

 

Apollo Tyres first quarter results look good. Net profits had increased by almost 11% and total income from operations by 16%. The only negativity in the results is the loss of EBIT margin. Apollo Tyres profitability mostly depends on the rubber prices in the market. Any fluctuation in rubber prices or any other variables can impact negatively to its profits as profit margins are in single digit.

The total percentage of cost of raw material to total income in the first quarter of 2017 was 43.52%, in the last quarter it was 45.06% and in the last year first quarter it was 46%. So this means that rubber pricing was in the favour of Apollo Tyres but big jump in the cost of employees and other expenses chewed up its margin for this quarter.

All the analysts who follow this stock are expecting its profits for 2017 in range of Rs 840 – Rs 1,195 crore. Looking at the first quarter results and assuming that they maintain the same margins, it looks they can manage to achieve those profits at the higher end and even good chances to beat that spectrum. If we consider those analysts profits in our intrinsic value calculations then the intrinsic value band for 2017 for Apollo Tyres comes in range of Rs 99 – Rs 199 per share. They are trading within this band and its stock price today is giving margin of safety of around 12% from its upper band.

We start accumulating stocks where at least we get 20% of margin of safety. However, same time you also need to find the answers to these questions before investing:

  1. Will rubber prices will remain at same level as of today? If not where are the rubber prices today in its price cycle?
  2. Will management will be able to control its expenditure on its employees and other expense?

Once you have answers to these questions, it becomes easy to take decision on should you buy Apollo Tyres or not.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.