Why is Apollo Tyres Ltd. falling/rising?

Short-Term Price Performance and Market Sentiment

The recent price movement of Apollo Tyres reflects a period of underperformance relative to both its sector and the broader market. Over the past week, the stock has declined by 5.24%, significantly underperforming the Sensex benchmark, which fell by only 0.94% during the same period. This downward trend has extended over the last month as well, with the stock losing 5.83% compared to the Sensex’s modest 0.35% decline. Year-to-date, Apollo Tyres has dropped 4.05%, again lagging behind the Sensex’s 2.28% fall.

Adding to the bearish sentiment, the stock has been on a three-day losing streak, cumulatively falling by nearly 6%. Intraday trading on 16-Feb saw the share price touch a low of ₹477, representing a 2.55% drop from the previous close. The weighted average price indicates that a greater volume of shares traded closer to this lower price point, signalling selling pressure.

Technical indicators also point to weakness, with the stock currently trading below all major moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages. This technical positioning often suggests a bearish trend and may deter short-term investors from entering positions.

Investor participation appears to be waning as well. Delivery volumes on 13-Feb were recorded at 4.55 lakh shares, marking a 17.64% decline compared to the five-day average delivery volume. This reduction in investor engagement could be contributing to the stock’s recent price softness.

Strong Fundamentals and Valuation Support

Despite the recent price weakness, Apollo Tyres continues to demonstrate solid financial health and operational performance. The company’s ability to service debt remains strong, with a low Debt to EBITDA ratio of 1.40 times, indicating manageable leverage levels. Furthermore, the debt-equity ratio stood at a low 0.29 times in the half-year period, underscoring prudent capital management.

Operationally, Apollo Tyres has shown healthy growth, with net sales increasing at an annual rate of 11.60% and operating profit expanding by 16.45%. The latest quarterly results reinforce this trend, with net sales reaching a peak of ₹7,743.08 crore and an operating profit to interest coverage ratio of 11.85 times, reflecting strong earnings relative to interest expenses.

The company’s return on capital employed (ROCE) of 11.3% and an enterprise value to capital employed ratio of 1.8 suggest an attractive valuation, especially when compared to peers’ historical averages. This valuation discount may offer a compelling entry point for long-term investors.

Institutional investors hold a significant stake of 41.73%, which often signals confidence in the company’s fundamentals given their capacity for detailed analysis and long-term perspective.

Balancing Recent Profit Declines with Long-Term Gains

While the stock has delivered a commendable 16.01% return over the past year, it is important to note that profits have declined by 5.7% during the same period. This divergence between share price appreciation and profit contraction may be contributing to the recent cautious sentiment among investors. The market appears to be weighing the company’s strong sales growth and operational metrics against the pressure on profitability.

Liquidity remains adequate, with the stock’s trading volumes supporting transactions up to ₹1.35 crore based on 2% of the five-day average traded value. This ensures that investors can enter or exit positions without significant price impact, although the recent decline in delivery volumes suggests some hesitation among market participants.

In summary, Apollo Tyres Ltd.’s recent share price decline on 16-Feb is primarily driven by short-term technical weakness, reduced investor participation, and profit margin pressures, despite the company’s solid balance sheet, healthy sales growth, and attractive valuation. Investors may view the current dip as a potential opportunity, given the stock’s long-term outperformance relative to the Sensex and strong institutional backing.

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