Published by Gulshan Sachdev on 22/03/2019 at 10:23 PM

Case Study Analysis (Apollo Tyres) – Sharp fall in stock price after good quarterly result

Background: 3 fold earnings jump was reported for the Tyre company. Usually after such positive news, retail investors buy the share in hope of some short term gains.

But from the day of result, the stock only went down south and fell, eventually from the levels of 300 to 190, deteriorating almost 7000 Cr market Cap in span of just 2 months.

To understand this first we need to analyse the authenticity of news. There was no problem with the authenticity of the news. News compared the current quarter profit with last year’s same quarters profit (Year on Year). As seen in the table below, there was a 3 fold jump in profit from 88 Cr to 251 Cr.

These are very good numbers, and under normal circumstances the share price should have responded positively to this result.

So why did price fell? Well the answer was in the current Price to Earnings Level as compared to its Historical PE Levels.

One needs to understand the Factor Analysis during end of Quarter 2. Major part of natural rubber is imported from Southeast Asian countries. Kerala Floods caused extensive damage to local Natural Rubber plantation crops which lead to high price of imported natural rubber. High Crude Oil Price spiked the crude oil derivatives which is another crucial raw material for tyre industry. Weak currency further worsened the conditions. Naturally, all these factors would impact the upcoming quarters which means suppressed future earnings. Further, a day before result, PE of Apollo tyres was at 23, which was already at very high levels as compared to its historical level which was around 10. So even though good positive earnings came in, they were exhausted in bringing the PE level down, 22% to be precise. But even after absorbing all the earnings in bringing the PE down, the PE was at levels of 18, which was still very high as compared to the historical PE. With no immediate future earnings in sight, the only way the PE could have come down was with drop in price. Hence stock price fell, to the levels of 190’s at which the PE was  at around 14, which was relatively closer to the historical PE.

IMPORTANT NOTE: Whole objective of an investor should be to analyse the valuation and corresponding realistic price of a share. To do this, he should use combination of Fundamental Analysis (Valuation Analysis) and Technical Analysis (Price Chart Analysis). Also contracts volume and open interest positions in derivative market has to be taken into consideration. A 30% or Rs 100, short position of just one Future Contract of Apollo Tyres would fetch Rs 3 Lacs. Hence combined analysis of Fundamental, Technical, Futures and Options is collectively used to understand the future direction of a script.