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Maintaining FY26 target of USD5bn revenue with 12-15% ROCE

* In its analyst meet, APTY management reiterated its revenue target of USD5bn in FY26, implying a 15% CAGR over FY22-26E vs. a 9% CAGR over FY18-22. Revenue growth will be driven by underlying industry growth, premiumization, and market share gains in India and Europe.

* Management maintained the ROCE (pre-tax) target at 12-15% by FY26E (7% in FY22), led by better asset turnover and margins. Future capacity expansions would be done mainly through debottlenecking and brownfield capacities. Margin expansion is expected to be driven by premiumization and cost-savings, such as reduction in material usage and digitization efforts.

* In the near term, cost pressures due to an increase in prices of crude derivatives and a lag in the pass-through of commodity inflation are likely to impact margins. We reduce FY23E/FY24E EPS by 8%/5% to Rs10.1/Rs17.9. Following the revision, we expect revenue/earnings CAGRs of 15%/33% over FY22-24E.

* The stock trades at 17x/10x P/E on FY23E/24E earnings. Near-term stock performance would depend on the movement of crude prices as derivatives form a major portion of RM costs (40%+). We retain our positive view on expectations of a cyclical upturn in the underlying automobile industry and improving free cash flows (avg. Rs13bn/year over FY23E/24E). Reaffirm Buy with a TP of Rs245 (Rs255 earlier), applying 13x Jun’24E EPS.

Key takeaways from Analyst Meet

FY26 revenue target at USD5bn : Management has guided for a revenue CAGR of 15% over FY22-26E, driven by expectations of 1) volume growth in underlying segments such as PCR, CVs and Tractors; 2) continuing radialization in Truck & Bus industry; 3) an increase in the share of exports for standalone from 15% of revenue in FY22 to 20% in FY26E, with focus on Europe, USA, Middle East and Africa regions; 4) the launch of new products: Vredestein brand in India for PCRs/2Ws and all-season PCRs, TBR, OHT as well as EV tyres for Europe/US markets; 5) an increase in revenue share of UHP/UUHP categories in Europe PCR; 6) an increase in OEM market share in Europe; and 7) an increase in distribution reach in rural India.

ROCE target at 12-15% for FY26E : EBITDA margin of over 15% and better asset turnover are expected to drive ROCE from 7% in FY22 to 12-15% in FY26E. Future capex requirements are likely to be lower as expansions would be done mainly through debottlenecking and brownfield capacities. Debottlenecking efforts can increase the capacity by 5-8%. Going forward, capex is likely to be in a staggered manner and not bunched up, resulting in positive FCF generation

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