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Q2 EBITDA beats estimates; expect benefits of commodity deflation in Q3

Apollo Tyres’ Q2FY23 revenue increased by 17% YoY (3-yr CAGR at 14%) to Rs59.6bn, slightly below our estimates. EBITDA increased by 12% YoY (3-yr CAGR at 18%) to Rs7.1bn, in line with our estimate. Management expects Q3 RM-cost to reduce by 3% QoQ, owing to commodity deflation. We increase FY23-25E EPS by 2-6%, to account for the higher margin assumptions. Following the revision, we expect FY23E revenue growth to be robust at 18%; this uptrend is likely to endure, with FY23-25E revenue CAGR at 9%, led by robust growth in the OEM segment, stable replacement demand and market-share gains in Europe. Driven by better scale and improved net pricing, we expect EBITDA margin to expand, from 12.3% in FY22 to 12.7% in FY23E and to 14.7% in FY25E. We maintain our BUY rating, with a revised TP of Rs345/share (Rs325 earlier), applying 13x Dec-24E EPS (Sep-24E earlier). Key downside risks: Lower-than-expected demand in key geographies, higher competitive intensity and adverse movement in currency/commodity prices.

Q2 EBITDA in-line: Revenue grew by 17% YoY (3-yr CAGR at 14%) to Rs59.6bn, at 4% below estimate of Rs61.8bn, owing to lower-than-expected India replacement and Americas’ revenue. Within this, revenue for the APMEA region (mainly India) grew by 16% to Rs42.8bn and by 29% for Europe (in Euro terms) to EUR219mn. In India, domestic OEM and export volumes grew in double-digits, while replacement volumes saw a slight decline due to price hikes and the erratic rainy season. Management expects replacement volume growth to turn positive in H2FY23, supported by better demand in the Truck & Bus segment and continuing growth in the PCR segment. Europe volume growth was in double-digits, supported by market-share gains. EBITDA grew by 12% (3-yr CAGR at 18%) to Rs7.12bn, in line with our estimate. EBITDA margin contracted by 60bps to 12%. APMEA EBIT margin contracted by 80bps to 4.8%, while Europe EBIT margin expanded by 40bps to 5.7%. Overall, adj. PAT grew by 9% YoY (3-yr CAGR at 33%) to Rs1.95bn, broadly in line with our estimate. What we liked: 1) Strong margin performance. 2) Continual market-share gains in Europe and improving mix of premium tyres. What we did not like: 1) Volume decline in the India replacement segment in Q2.

Earnings-Call KTAs: 1) FY23 volume growth expected in a single digit in India. 2) Marketshare loss in Q2, in the India replacement segment; Management expects recovery in H2 supported by marketing efforts and new products. 3) Europe volume growth in double digits in Q2, owing to market-share gains. Expects growth to taper in H2 due to the mild winter. 4) Premiumization continues in Europe, with Q2 UHP share increasing to 42% vs. 39% in the corresponding quarter last year. 5) In Q2, increase in tyre-prices stood at 5% and in RM cost at 3%. Expect improvement in margins in Q3, due to reduction of 3% in RM cost.

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