IGI Logo

Entering a period of elevated FCF generation

Apollo Tyres’ (ATPY) Q4FY22 operating performance was in line with our estimates. EBITDA margin came in at 11.2%, amidst an adverse raw material cost environment. EU revenue was up 20% YoY led by ~14% volume growth as against India revenue up ~10% YoY with flat volumes. Company lost market share slightly in TBR replacement segment due to higher than peer price hikes to maintain gross margin. For APTY, we believe cyclical reversal in demand and gross margin along with limited capex needs would be the key drivers to deliver ~Rs30bn FCF in FY23E-FY24E. In EU, amidst a long-term volume CAGR of 4-5%, post cost-restructuring exercise, improved pricing power and higher sourcing from India would keep EBITDA margin in the 16-18% band. Rising infra spends, improving truckers’ economics with stable freight demand and disciplined freight rates would help APTY improve capacity utilisation in TBRs from present 75% (~1,000TPD capacity, including AP ramp-up). Maintain BUY with a DCFbased target price of Rs305 (earlier: Rs317), implying 13x FY24E earnings.

Key takeaways from conference call:

* Roughly flat YoY volumes in India and higher by ~14% in the EU. Domestic replacement volumes were marginally negative YoY in Q4. Overall India utilisation was ~85%, with PCR and TBR being on the higher side vs farm tyres on the lower side. Andhra Pradesh capacity will come fully on stream and add to capacity in the quarters to come, thus giving visibility of ~Rs9bn India capex in FY23. APTY is using AI and ML to enhance productivity and is planning to debottleneck capacity to grow without depending on growth capex. EU capex in FY23E is expected at EUR40mn.

* 3-4% price hikes were taken across segments in Q4FY22, to be followed by acrossportfolio hikes in Q1FY23 to combat ~4% QoQ raw material basket (RMB) inflation in Q4FY22 and similar inflation in Q1FY23 as well. APTY has slightly lost market share in TBR replacement segment due to higher than peer price hikes and is focusing on profitable growth rather than mere preservation of market share. Looking forward at topping out of RMB cost by Q1FY23-end and subsequent price hikes, or RMB reversal, would add to gross margins. TBR contributed ~36% of India revenues in FY22 and this is expected to remain steady in FY23 with PCR expected to pick up post a tepid FY22.

* FY22 India volume growth was at ~15% vs ~12% for EU. Russian exports to Eastern EU markets, with Vredestein adding new smaller markets in Eastern Europe to its distribution, helped it outperform overall EU replacement market trends, despite taking higher than peer price hikes. EU EBITDA margin at ~15% in Q4FY22 was largely in line with recent mean levels, despite other expenses in EU operations being slightly elevated during the quarter due to higher energy and logistic costs.

* India maintenance capex is expected at Rs3bn-3.5bn in FY23 vs EU maintenance capex at EUR25mn-30mn. Post delivering positive FCF in FY22 despite RMB adversities, FCF quantum is likely to improve substantially post covid impact in H1FY22, on the back of: 1) improving gross margin expected in the coming quarters, 2) improving scale, and 3) limited capex outflow. This would help deleverage from the present net debt level of ~Rs45bn.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer