Q1 EBITDA beats estimates; Expect benefits of commodity price easing in Q3

*  Apollo Types’ Q1FY23 revenue increased by 7% qoq (3-year CAGR at 11%) to Rs59.4bn, in line with estimates. EBITDA increased by 10% qoq (3-year CAGR at 13%) to Rs6.9bn, 7% above estimates, due to better gross profit and lower employee costs. APMEA’s EBIT margin expanded by 70bps to 4.8%, while Europe’s EBIT margin was flat at 4.9%. Management expects benefits of commodity price easing in Q3.

*  We expect a 17% CAGR in APMEA revenue over FY22-24E, led by strong recovery in the OEM segment and stable replacement demand. We believe European revenue should register an 8% CAGR with pick-up in replacement demand and market share gains

* We have increased our FY23E-24E EBITDA by 3-5%, mainly due to better gross margin assumptions and cost savings. Following the revision, we expect revenue/EBITDA CAGRs of 15%/19% over FY22-24E.

* With strong FCFs of Rs13bn/year over FY23-24E, we expect Net Debt-to-EBITDA to drop to 1.3x in FY24E from 2.1x in FY22. We maintain our Buy rating with a revised TP of Rs275 (Rs245 earlier), applying 13x Sep’24E EPS (Jun’24E earlier).

* Q1 EBITDA above estimates: Apollo Tyres’ Q1FY23 revenue grew by 7% qoq (3-year CAGR at 11%) to Rs59.4bn, in-line with estimates. APMEA revenue grew by 11%, while Europe revenue (Euro terms) was slightly lower by 2%. Gross profit grew by 6% (3-year CAGR at 8%) to Rs23.6bn, 1% above estimates. EBITDA grew by 10% (3-year CAGR at 13%) to Rs6.9bn, 7% above estimates, owing to better gross profit and lower-thanexpected employee expenses. Beat in EBITDA was supported by APMEA region (mainly India business). EBITDA margin expanded by 40bps to 11.6%. APMEA’s EBIT margin expanded by 70bps to 4.8%. In comparison, Europe’s EBIT margin was flat at 4.9%. Depreciation was lower by 8% to Rs3.4bn. Interest cost was lower by 8% to Rs1.2bn. Gross Debt/Equity stands at 0.51x as of June 2022 vs. 0.53x as of March 2022. Overall, adjusted PAT grew by 68% (3-year CAGR at 10%) to Rs1.9bn (estimate: Rs1.25bn), above estimates due to better operating profit and lower depreciation/interest expenses..

* Retain Buy: Our positive stance is underpinned by expectations of strong volume growth in both domestic and European regions. We maintain Buy with a revised TP of Rs275, applying 13x Sep’24E EPS. Key downside risks: Lower-than-expected demand in key geographies, higher competitive intensity, further increase in commodity prices, and adverse currency movements.

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