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Calibrated capex spends amid muted margin scenario comforting, retain capital efficiency focus…

About the stock: Apollo Tyres (ATL) is a leading tyre manufacturer with operations in India and Europe. APMEA (largely India), Europe comprise ~67%, ~31% of sales, respectively

* FY22 segment mix: Truck/bus ~43%, PV ~35%, OHT ~10%, others ~12%

* FY22 channel mix: Replacement ~81%, OEM’s ~19%

Corporate Day Key takeaways

* ATL retained its FY26 targets in terms of revenue (US$5 billion), EBITDA margins (>15%), RoCE profile (12-15%) and leverage on b/s (net debt: EBITDA <2). However, it reiterated that it will not chase revenues at the expense of capital efficiency. Therefore, it refrained from committing any fresh growth capex given the prevailing pressure on margins & return ratios

* Immediate aim is for sweating of assets, taking calibrated price hikes to augment margins & consequently improve return rations. ATL is taking industry leading price hikes (increase in quantum as well as more frequent) and is prepared for small market share loss for protecting profitability

* Gross margin pressure is expected to continue until Q2FY23 vs. the initial guidance for Q1FY23, a key negative surprise from the meet

* Current domestic demand is driven by OEM segment with replacement segment demand holding steady. In Europe demand was driven by all season tyre segment with focus on OHT segment including agri

* Maintenance capex across Indian & Europe operations is seen at | 400 crore & €30-35 million. Capacity utilisation across plants was at >=80%

What should investors do? ATL’s stock price has de-grown at ~7% CAGR from ~| 247 levels in June 2017, underperforming the Nifty Auto Index in that time-frame.

* We retain our BUY rating on ATL amid retained focus on capital efficiency

Target Price and Valuation: Marginally revising our estimates, we now value ATL at a target price of | 230 i.e., 5x FY24E EV/EBITDA (previous target price: | 250).

Key triggers for future price performance:

* With demand drivers in place, topline is seen growing at a CAGR of 11.2% over FY22-24E. Margins in a similar timeframe are seen improving to 13.3% with consequent RoCE seen at 10%. Trades at inexpensive valuations

Alternate Stock Idea: Apart from ATL, in our auto coverage we like M&M.

* Strong demand traction in PV portfolio. EV proactiveness. BUY with target price of | 1200

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