Apollo tyres, an attractively valued bluechip stock

As part of this blog post, I have started publishing rationale behind my stock-picks in every quarter. In last blog post, I have explained how Karnataka bank can add value to your portfolio. While searching for quality picks, I found another blue chip company worth adding to my portfolio, Apollo Tyres !

Introduction

Apollo tyres is one of the biggest tyre manufacturing company which enjoys ~20% of market share in India. The company also has presence in European market (Netherlands and Hungary). It is 17th biggest tyre producer in the world.

Business

Apollo tyres has presence in commercial and personal vehicles segment. Company has made debut in the 2 wheeler market in 2016. The company sells under brand name “Apollo Tyres” and “Vredestein” in India and in European market respectively. Now, I am going to present SWOT analysis of the Apollo tyres.

SWOT analysis

Strengths

1. Apollo Tyres enjoy diversfied business presence in the market including India and Europe. The company has plan to expand in Middle east and US market.

2. Apollo Tyres provides tyres to commercial vehicles, passenger vehicles and 2 wheeler space. Hence, it is a full range player.

3. Apollo Tyres has acquired Germany based, retail tyre distributor, Reifencom GmbH. The purpose of this acquisition is to expand retail network in Europe.

4. Apollo Tyres is focuses on R&D through center in Germany.

Weaknesses

1. Company doesn’t have presence in European OEM market.

2. Still couldn’t cope up with cheap imports from China.

Opportunities

1. Company has a vision 2020, to be premier tyre company with a diversified and multinational presence.

2. Leader in Truck Bus Radial tyres in India.

3. Eyeing European market.

4. Expansion of plans through new Hungary plant. Initiatives to capture new markets like Mid-east, South east Asia.

5. Anti dumping duty imposed by Govt. Of India will help Indian tyre manufacturers.

6. GST to play major boost for auto and auto-ancillaries companies as consumption will increase after next couple of quarters

Threats

1. Dependency on natural rubber and crude oil and government’s interference in controlling taxes on them.

2. Cheap tyre imports from China.

3. Economic slowdown in India and Europe could be a threat to earnings.

4. Indian currency fluctuations could result in pressure on margins.

Quality of management

Apollo tyres is run by seasoned entrepreneur Onkar Kanwar. Even though challenging domestic and global business scenario, the company is profitable and distributing good dividends while keeping debt under check. The management has expansion plans across continents like Europe, Middle east and US. This management could scale the distributor network in pan-India. So, I have faith in the management.

Conclusion and investment rationale

Despite being strong blue chip company in tyre sector, valuation of Apollo tyres looks reasonable. It is trading at 239 as of today. Company provides 20%+ RoE with consistent EPS. Considering growth in auto sector, tyre sector poised for growth. Hence, their earnings will certainly improve. Well established companies like Apollo tyres will benefit from recent anti dumping duty. Apollo tyres is also expanding in 2 wheeler market in India. Additionally, distributor network expansion in Europe will be seen as unlocking upside potential. Company has less debt (0.22 debt-to-equity). That’s why, I bought shares of Apollo tyres.

References

1. http://www.moneycontrol.com/

2. https://www.apollotyres.com/en-in/car-suv-van/tyre-finder/

3. Annual reports of 2014–15, 2015–16, 2016–17.

Call to action

If you like the article, please share and comment. Next set of stocks will be shared in the month of Dec-2017. So, please stay tuned. Happy Diwali to all of you.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Karnataka Bank — On the journey of transformation !

Introduction

Karnataka bank is decades old private sector bank whose business is primarily located in southern state of Karnataka with expansion plan across pan-India. The bank is well governed and complying with Reserve Bank of India’s (RBI) guidelines.

Business model

Karnataka bank has stakes in following business operations :

1. Treasury operations
2. Corporate / Wholesale Banking
3. Retail Banking
4. Other Banking Operations like stock trading in stock exchanges, insurance and mutual funds.

SWOT Analysis

Strengths

1. Government of India (GOI) is taking steps to resolve distressed assets.
2. Government of India has plans for financial inclusion.
3. The bank is conforming all the guidelines set by RBI.
4. The bank has taken initiatives to mitigate financial risks.
5. The bank is willing to take new customer centric initiatives.
6. Good market share in southern Indian market.

Weaknesses

1. Non Performing Assets (NPA) menace in the banking industry in India.
2. The bank is tied up with distributors to provide Non Banking Finance Company (NBFC) services like insurance and mutual funds. They have least presence in NBFC space.

Opportunities

1. Government’s focus on infrastructure spending and boost to manufacturing will enhance bank business. Also, Government’s agenda of financial inclusion augurs well for banking sector.
2. Aim to provide less cash economy provides ample opportunities to participate in the digital banking.
3. Karnataka bank has a vision 2020 to double the turnover by 2020.
4. Wide and growing distribution network in multiple states and union territories.
5. Bank aim to provide NBFC services like demat trading, Insurance and Mutual Funds. Bank has tied up with multiple institutions to provide the service.

Threats

1. Rising NPA is a problem for this company. Karnataka bank has slippages in earnings due to NPA. However, NPA is well contained as compared to other banks available in the market.

Quality of Management

Promising financial ratios maintained as per direction of RBI. Karnataka bank is paying continuous dividend. The management is hungry for sustainable growth. By 2020, they want to augment the turnover by twice.

Conclusion and investment rationale

I bought shares of Karnataka bank this quarter because stock is available at very cheap valuation at P/B of 0.7. Other banks in the market with this quality are available at 2X or 3X of book value. Significant check on NPAs (2–3%) is a sign of quality management. Government’s boost to resolve NPA issue will turn into favor of all banks. So, investing into a good bank early is necessary. If bank’s Vision 2020 plan plays out well, the book value of the bank should go up by 2X. Additionally, other indicators (like Return On Assets, consistent Return on Equity and EPS growth etc) for financial institutions look good. This will create great wealth for long term investors.

References

1. http://www.karnatakabank.com/ktk/Index.jsp
2. http://www.moneycontrol.com/
3. Annual reports of Karnataka bank from 2014 to 2017.

Call to action

If you like the article, please share and comment.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

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Originally published on medium : https://medium.com/@cpaithane/karnataka-bank-on-the-journey-of-transformation-23f4588a9cd2