Long term investment thesis intact…

About the stock: Apollo Tyres (ATL) is a leading tyre manufacturer, with operations in India & Europe with an installed capacity of ~7.9 lakh MT p.a. In India, ATL has a substantial presence in TBR (31% market share) & PCR space (21% market share).

* Derives ~67% revenues from APMEA (largely India), ~32% from Europe

* FY21 segment mix: Truck/bus ~43%, PV ~35%, OHT ~11%, others ~11%

Q1FY22 Results: The company posted a mixed performance in Q1FY22.

* Consolidated net sales decline was limited to 8.8% QoQ (| 4,584 crore)

* Consolidated margins were down 385 bps QoQ to 12.4%, with standalone gross margin decline sharp at ~440 bps QoQ

* Consequent consolidated PAT was lower by 55.5% QoQ to |128 crore

What should investors do?

ATL’s stock price has grown at ~6% CAGR from ~| 175 levels in August 2016, outperforming the wider Nifty Auto Index in that time.

* We continue to be positive on ATL and retain BUY rating on the stock

Target Price and Valuation: We value ATL at an unchanged target price of | 275 i.e. 6x FY23E EV/EBITDA.

Key triggers for future price performance:

* Expected India CV cyclical rebound, higher radialisation levels, pent up demand in PV and network expansion would be major topline drivers. We expect India-led 14.7% FY21-23E net sales CAGR

* Higher cost competitiveness post Dutch plant specialisation, Europe mix improvement, operating leverage benefits to result in 14.3% FY23E margins

* Ongoing deleveraging focus to accentuate PAT, return ratio momentum

Alternate Stock Idea: Apart from ATL, in our ancillary coverage we like JK Tyre.

* Walking the talk on b/s deleveraging, sweating of assets & capital efficiency

* BUY with target a price of | 180

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