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Strong Demand and Margin Expansion ahead; Reiterate BUY

Apollo Tyres (APTY) recorded a strong operating performance in 1QFY23 with EBITDA margin coming at 11.6% (down 75bps YoY and up 38bps QoQ), 20bps higher than our estimate of 11.4%. Consolidated revenue increased by 30% YoY (up 7% QoQ) to Rs59.4bn, 4% above our estimate of Rs57.1bn, due to the better performance of India operations. Standalone revenue grew by 38% YoY (up 11% QoQ) to Rs44.4bn. Consolidated EBITDA stood at Rs6.9bn (up 22% YoY and up 10% QoQ), 5.8% above our estimate of Rs6.5bn due to high operating leverage despite higher commodity cost. RM/sales grew by 307bps YoY and 7bps QoQ to 60.3%. Adjusted PAT stood at Rs1.9bn (up 48% YoY and 68% QoQ) vs. our estimate of Rs1.4bn, due to strong operating performance. Operating leverage, regular price hike and geographical mix would aid margins. In view of the strong volume growth ahead, regular price hikes, healthy export potential, structural positives in European operations and comfortable valuation, we maintain BUY on APTY with a revised Target Price of Rs290 (vs. Rs235 earlier).

Strong Volumes and Margin Improvement Steadily amid Price Hikes

APTY’s consolidated revenue rose by 30% YoY to Rs59.4bn, while its standalone revenue also rose by 38% YoY. Replacement demand would revive strongly, while ease on semiconductor supply would lead to healthy OEM sales in 2HFY23. Additionally, regular price hikes taken by the company across segments would also cushion its margins going forward. We expect double-digit growth in FY23E, on account of the new capacity, healthy OEM demand, revival in replacement demand and strong traction in exports. Moreover, strong traction in NA, ASEAN and Middle east would boost its exports thereby improving its margins. Its European operation is also on strong traction with steady market share gain. Though near-term margin pressure is inevitable due to higher commodity cost, while regular price hike and softer commodity cost would expand margins in 2HFY23. We expect strong rebound in volumes and margin recovery fully in 2HFY23 onwards. We expect consolidated EBITDA margin to improve from 12.3% to 14% over FY22-FY24E.

Outlook & Valuation

We expect APTY’s consolidated revenue to grow in double-digit in FY23E, due to regular price hikes and higher volumes. We expect a strong volume traction in FY23-FY24 on the back of production ease for OEMs and a likely revival in replacement demand in CVs. We expect the higher export contribution at favourable exchange rate and price hikes to benefit the company on the revenue front. Therefore, we increase our revenue estimate by 8% and 11% for FY23E and FY24E. We maintain our margins; hence we increase our EBITDA estimates by 7%/11% for FY23E/FY24E. In view of the strong volume growth ahead, regular price hikes, healthy export potential, structural positives in European operations and comfortable valuation, we maintain BUY on APTY with a revised Target Price of Rs290, valuing the stock at an unrevised P/E multiple of 12.5x.

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