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Inline, with EU performing better than our estimate

EU demand outlook turns negative; gains from lower RM cost to accrue from 3QFY23

* APTY’s 2QFY23 performance was driven by price hikes in India and the EU, more than diluting the cost pressures. The performance of its India business was largely in line, led by OEM demand as replacement demand declined, while the EU business outperformed on market share gains. While replacement demand in its India business is picking up with good OEM demand, falling RM costs should aid operating margin. Its EU business will remain under pressure due to a market slowdown in all categories.

* We raise our FY23 EPS estimate by 11% to factor in lower depreciation and tax, but maintain our FY24 estimate. We maintain our Buy rating.

Price hikes drive performance, despite a weak volume growth

* Consolidated performance: Revenue grew 17% YoY to INR59.6b (inline). EBIDTA grew 12% YoY to INR7.1b (est. INR7b). Adjusted PAT grew 10% YoY to INR1.94b (est. INR1.745b), led by a lower tax outgo. Revenue/EBITDA/ adjusted PAT grew 23%/16%/26% YoY in 1HFY23. CFO declined by 82% YoY to INR1.46b (v/s INR8.15b in 1HFY22) due to an increase in working capital, leading to a cash FCFF outflow of INR2.3b (v/s an outflow of INR2.4b in 1HFY22), despite a lower capex of INR3.8b (v/s INR10.6b in 1HFY22).

* Standalone performance: Revenue grew 16.5% YoY to INR42.5b (inline), driven largely by prices. Gross margin improved by 10bp QoQ (-2.9pp YoY) to 29.6% (est. 30.5%), impacted by a weaker mix (higher OEM share). EBIDTA improved by 16% YoY to INR4.4b (inline). EBITDA margin stood at 10.3% (est. 10.1%, flat YoY). Adjusted PAT declined by 10% YoY and 23% QoQ to INR808m (inline).

* Performance in Europe: Revenue grew 31% YoY to EUR181m (est. EUR165m), driven by 10% volume growth and price/mix benefit. EBIDTA margin contracted by 2.3pp YoY to 15.3% (est. 15.25%) due to higher cost.

Highlights from the management commentary

* Outlook: The India business is seeing signs of a recovery in TBR replacement. PCR replacement is stable and OEM demand is good. India revenue in FY23 is expected to grow at 20%. In the EU, it expects a market slowdown in PCR, TBR, and the OHT segment. APTY expects to outperform the market with a focus on premiumization and market share gains.

* Raw material costs were higher by 3% QoQ in 2QFY23 in India, which was offset by price hikes of ~5% in the replacement market. It expects the RM basket cost to decline by 3% QoQ in 3QFY23.

* For FY23, it has hedged 80% of its energy requirements in its EU operation. It is also reasonably hedged for FY24.

Valuation and view

* Among its Tyre peers, APTY offers the best blend of earnings growth and cheap valuations. The stock trades at 16.6x/12.5x FY23E/FY24E consolidated EPS. We maintain our Buy rating with a TP of INR360 (~12x Dec’24E consolidated EPS).

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