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Soft quarter; improving demand outlook lends margin visibility

Q4 results were soft, with flat revenues, and ~80bps QoQ margin decline to ~17.5% (adj. for ~110bps EPR provision). Replacement, exports, and Europe demand outlook is improving, with strengthening mix and sustained focus on profitability. Recent spike in RM, emergence of EPR burden (~1% of sales for industry), and CV softness have caused ~14% fall in APTY’s stock price from the recent peak. However, we retain BUY because of: a) ongoing price increase (incl. 3% by APTY in May), b) 15-20% drop in RM from recent highs, c) improving volume outlook (high-single digit/low-double digit for TBR/PCR replacement), d) structural tailwinds, and e) improved performance on FCF, RoCE parameters (Exhibit 7). We cut FY25E/26E EPS by 4-5% (EPR costs; buildin 12% EPS CAGR); our revised TP is Rs600 at 16x FY26E PER (Rs625 earlier).

Flattish growth across segments; EPR impacts profitability

Consolidated revenues were flattish YoY (across geographies) at Rs62.6bn; standalone replacement volumes rose 4%, with export volumes up 30%, and OEM volumes down 10%. Consolidated margins declined 189bps QoQ to 16.4%, despite ~60bps gross margin expansion due to Extended Producer Responsibility (EPR) provision of Rs685mn in the standalone operations. Without these, standalone margins would have stood at 17.2% vs. 18.1% in Q3 and reported margin at 15.6%. APMEA/Europe EBIT margins declined 161bps/222bps QoQ to 11.6%/9.8%, respectively.

Earnings call KTAs

1) India TBR, PCR replacement volumes grew double-digits in April, with agri segment and exports displaying green shoots; APTY expects high-single digit/low-double digit growth in TBR/PCR replacement, respectively. In FY25E; exports are seen doing well. 2) Company gained some market share in truck replacement and suffered a loss in truck OEMs; it maintains focus on premiumizing the portfolio by reducing exposure to lessprofitable segments. 3) April saw double-digit growth in Europe also; whereas Middle East, Africa, and US markets were seen doing better than Europe, APTY expects YoY growth in FY25E in Europe also, accompanied by further mix improvement (ultra-high performance share now over 45% vs. ~43%). 4) Current utilization levels in India PCR segment is >80%; in TBR it is in the early 70s (dragged by bias segment); Company continues to guide for judicious capex going forward (Rs10bn capex in FY25E vs. Rs7bn spent in FY24); APTY could undertake some capex toward PCR (already built into guidance) for addressing possible growth opportunities from FY27; it has enough capacities on hand for FY25 and FY26. 5) RM costs to rise by 4-5% QoQ in Q1; Company has undertaken a price hike of up to 3% across segments in May to address EPR-related costs and part of RM increase; further hike of 2-2.5% may be required going forward to pass on the balance input cost increase; Company is planning 1-2% price hike in Europe in Q2 also. 6) APTY is confident of sustaining 16-17% margins in Europe. 7) Q4 RM costs (Rs/kg): natural rubber – 163, synthetic rubber - 155, and carbon black – 120.

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