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Aiming to elevate return profile over mid-term

Valuation and View

APTY in its analyst meet reiterated vision FY26 to achieve revenues of ~USD5b (v/s Rs3.1b in FY23), EBITDA margins of >15% (v/s ~13.5% in FY23), RoCE of 12-15% (v/s 10.1% in FY23). The management continues to hint towards moderate capex (~Rs11b of which Rs6.5b in India in FY24E). By FY26, APTY aims ROCE in the range of 12-15%. Net debt to EBITDA is expected to remain below 2x (1.4x in FY23). APTY is well placed with a strong competitive positioning, as well as ready capacities to benefit from a strong growth in TBR and PCR in the OEM and recovery in the replacement segment. EU operations on the other hand to see market outperformance, led by strategic initiatives (such as product focus and plant restructuring), improved cost competitiveness. With APTY’s continues to focus on profitability and capital allocation (sufficient capacity already in place), it is geared for the next leg of growth. With anticipation of RM basket decline led margins expansion, expected continued price discipline and rising share of premium products have led to re-ratings and earnings upgrades lately. As a result, APTY trades at 14.3x/12.7x FY25/25 bloom consol EPS (v/s 13.5x 10yr LPA), partly reflects the positives. Not Rated.

Key takeaways from interaction

* Vision FY26 key enablers – 1) Digitalization (drive business growth, efficiency improvement and risk mitigation) – Use of cloud computing increased to 80% in FY23 (v/s 10% in FY20), % of IT spends on new advanced tech increased to 32% in FY23 (v/s 8% in FY20). 2) Technology and innovation – significant increase in PCR/TBR SKUs for US market coverage over past 3 years. 3) Brand – Drive product mix enrichment (for Europe) and build premium brand across categories (for India). 4) People (attract, engage and retain best talents) and 5) Sustainability.

* Demand outlook FY24E – India: Expect APTY volume growth to be at mid-high single digit for with realizations are expected to remain stable. Replacement demand outlook remains mixed as TBR segment has started to recover and doing well (high single digit growth), while PCR replacement volume remains slightly muted. But given strong OEM sales in past 2-3 years, expect sharp recovery ahead. PCR OEM volumes are too seeing healthy uptick. Overall exports are expected to decline while the US exports see strong growth due to low base (FY23 sales were at USD120m vs USD58m in FY22).

* Demand outlook FY24E - Europe: Volumes in the EU market is seeing a decline of ~13-14%. While APTY continues to outperform. Expect near-term volume will be under pressure with FY24E volumes expected to be flattish with limited demand improvement visibility in 2HFY24E.

* Premiumization across India and Europe as witnessing consistent increase in share of higher trim sizes. Indian market is moving towards 14-16’inch sizes (v/s 13’inch was largest selling trim few years back). Similarly, Europe is 16’inch market. The ASP difference between 14-16’inch tyre would be as high as 15-20%, depending on SKUs in India. Apollo Alnac 4G and above brands are premium brands.

* Premiumization - Vredestein brand is witnessing a significant traction in India and the contribution would be single digits, though don’t expect the same to be large growth driver. The brand is competing with MNCs such as Bridgestone, Continental and Michelin.

* Seeing price discipline among peers - Despite RM cost are still ~15% above normalized level, the reported margins remained highest in 4QFY23.

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