Apollo Tyre, India’s second-largest tyre company by revenue, surged in Tuesday’s trading session after Morgan Stanley began covering the stock with an “overweight” rating. The brokerage’s price target of 329 per share implies a potential upside of 31% from Monday’s closing price.

Shares of Apollo Tyres rose 7% in today’s trade to a 52-week high of Rs 272. The stock was also the top performer in the Nifty Midcap index. Of the 32 analysts tracking the stock, 24 have a “buy” rating, seven have a “sell” rating, and only one has a “hold” recommendation.

Morgan Stanley is betting on the tyre market on the back of a solid sales outlook and improving margins and returns. It expects tyre sales to grow at a compound annual growth rate (CAGR) of 7% between 2021-25 and 3% between 2016-2021.

The companies also expect demand from original equipment manufacturers (OEMs) to remain strong due to an improving macro environment and normalisation of chip supply and replacement demand. It expects OEM tyre tonnage to grow at a CAGR of 11% from 2021 to 2025.

Morgan Stanley has started an “underweight” rating on Balkrishna Industries, even though it has overweight Apollo Tyres. The company highlighted various factors why it prefers Apollo over Balkrishna:

It prefers India to export to the EU and US. 68% of Apollo’s FY22 sales came from India operations. For Balkrishna, however, the figure dropped to 17%.

The brokerage expects Apollo to grow at a CAGR of 33% in FY22-25, while BKT’s CAGR is only 9%. On a P/E basis, Apollo trades at 0.6 times earnings, while BKT trades at three times earnings.

It also expects Apollo’s return on equity (RoE) to expand to 11% by FY25 from the current level of 6%. On the other hand, BKT’s RoE may narrow from the current 21.8% to 19% in FY25.

Morgan Stanley also said in its report that Apollo has been overcoming commodity headwinds with higher prices. Its strong brand identity and premiumisation push also contribute to better fulfilment. “The recent decline in crude oil prices, if sustained, could help Apollo’s margins expand significantly,” the brokerage noted.

Risks highlighted by Morgan Stanley for Apollo Tyres include the potential loss of market share, failure to pass commodity inflation, persistent commodity inflation and a CCI fine of Rs 425 crore that materialises and hurts cash flow.

Morgan Stanley’s target price of Rs 1,649 on Balkrishna Industries implies a potential downside of 17% from Monday’s close.