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Better pricing power drives performance; RM benefit an additional lever

During 2QFY23, Apollo Tyres reported consol. EBITDAM of 12% (-60bps YoY, +30bps QoQ), 30bps above JMFe, driven by resilient performance in EU business. Standalone EBITDAM stood at 10.3% (flat YoY, +60bps QoQ), c.20bps above JMFe. EBITDAM of EU operations remained resilient at 15.3% despite high energy and RM inflation. Better mix and price hikes helped offset inflationary pressures. In 2Q, domestic demand remained strong in OE/export segments. While T&B replacement demand was subdued in 2Q, it has started recovering during 3Q. Overall, the company expects double-digit demand growth in FY23 led by steady domestic demand, exports and strong demand tailwind in EU PCR market due to import restrictions from Russia. Margin performance has been resilient owing to the company’s ability to take gradual price hikes. With softening commodity prices, we expect margins to recover to sustainable levels during 2HFY23. Capex peaked during FY16-22 and the company has guided for reduced capex intensity from FY23. We estimate EPS CAGR of c.40% over FY22-25E driven by positive demand momentum and margin recovery. We maintain BUY and ascribe a 14x PE to arrive at Sept’23 TP of INR 350. Weakness in domestic replacement demand and easing of tyre import restriction are key risks.

* 2QFY23 - margin beat on strong price hikes: APTY reported standalone revenue of INR 42.5bn (+16%YoY, -4% QoQ), c.6% below JMFe due to lower than expected volumes. EBITDA for the quarter stood at INR 4.4bn (+16% YoY, +2%QoQ). EBITDA margin stood at 10.3% (flat YoY, +60bps QoQ), 20bps above JMFe. QoQ margin improvement was led by strong c.5% price hikes in replacement market. At the consol. level, APTY reported revenue of INR 59.6bn (+17%YoY, flat QoQ), tad below JMFe. EBITDA margin stood at 12% (-60bps YoY, +40bps QoQ), 30bps above JMFe. Sequential margin improvement was led by strong 5-12% price hikes in India and Europe that helped offset inflationary pressures. Adj. consol. PAT stood at INR 1.9bn (+9% YoY, +1% QoQ).

* India business: Domestic volume growth was c.1% YoY (-9% QoQ) in 2QFY23. OE/export demand grew double-digit while replacement demand was subdued owing to seasonality and excess rainfall. APTY lost market share in TBR tyres during 2Q. However, the price gap vis-à-vis competition has reduced post price hikes taken by competitors and APTY expects to recover lost market share going ahead. Overall, management expects steady volume performance going ahead led by strong OE demand for both CV and PV tyres and recovery in T&B replacement demand in 3Q.

* European business: In 2QFY23, the company's EU operations reported revenue of EUR 181mn (+31% YoY) driven by volume growth of 10%, better mix (+5%) and price hikes (+16%). The company undertook price increases to the extent of 5-12% during the quarter (PCR and TBR). The company highlighted that strong volume growth was led by market share gains in France and continued healthy demand in Spain, Germany and Netherlands. EBITDA margin stood at 15.3% (-230bps YoY) impacted by RM and energy inflation. Share of UUHP tyres stood at 42% in 2QFY23 (39% in 2QFY22) leading to better mix. European PCR tyre market is witnessing strong demand tailwind on account of Russia-Ukraine issue as imports of 10-12mn tyres from Russia remains restricted. APTY continued to gain market share across PCR, TBR and OHT segments. However, management remain cautious on demand moderation in Europe owing to macro challenges

* Margin outlook: RM cost increased c.3% QoQ during 2Q but is expected to decline by similar level in 3Q. In domestic replacement segment, the Company has taken a price increase of 5% while in the European market; price increase ranged between 5%-12% for PCR and TBR tyres. Management indicated that c.80% of energy costs for European operations remain hedged for FY23. Softening commodity prices going ahead is expected to aid margin performance as the company intends to retain the benefit.

* Capex/debt update: Current capacity utilization stands at over c.76%/ 89% for Indian and European operations. Capex guidance for FY23 stands at INR9bn/EUR40mn for Indian and Europe operations primarily for completing existing projects and towards debottlenecking / maintenance. Capex for 1H stood at INR 4bn and the company will remain judicious on capex spends given challenging macro environment. Net debt increased by INR 4bn to INR 55bn as at end of 2Q, primarily due to higher working capital. Gross debt increased by INR 4bn during 2Q to INR63bn (vs INR 59bn in 2Q).

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