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Lockdown impacts growth; Outlook intact

Apollo Tyres Limited manufactures tires and tubes for cars, trucks, farm equipment, and light commercial vehicles. The company markets its products with two global brands: Apollo and Vredestein in APMEA (Asia Pacific, Middle East and Africa) and Europe regions.

* Revenue grew 59.1% YoY in Q1FY22, driven by robust growth in APMEA and Europe region, however declined 8.8% QoQ sequentially, impacted by lockdowns imposed in India during the quarter.

* EBITDA margin contracted 380bps QoQ to 12.4%, due to higher input costs. Adj. PAT thereby fell 55.4% QoQ to Rs. 129cr.

* Despite setbacks faced during the quarter, company’s long-term growth outlook remains positive. Given growing demand in automotive sector and recovery in both OEM and replacement markets, we reiterate our BUY rating with a revised TP of Rs. 263 based on 14x FY23E adj. EPS

Muted domestic demand drags topline down sequentially

In Q1FY22, company recorded revenue growth of 59.1% YoY to Rs. 4,584cr (-8.8% QoQ) driven by sharp growth in APMEA +80.0% YoY to Rs. 3,272cr (-11.3% QoQ), as the company saw demand momentum in export turnover. However, the performance was impacted on sequential basis on the account of disruptions caused by lockdown in India amidst second wave of COVID. The prices in replacement business inched up ~3- 4% and company is making efforts on gaining new customers and deepening ties with existing customers in OEM business. Similarly, European sales grew 28.3% YoY to Rs. 1,409cr (+0.3% QoQ), as the company improved its market share in TBR and OHT segment. It also focused on UHP business to improve in sales mix and gaining traction in premium OEM. Replacement business also saw price increase of ~2% in PCLT and ~4% in Agri business segments.

Margins contract on sequential basis

In Q1FY22, EBITDA rose by 130.8% YoY to Rs. 567cr (-30.4% QoQ), supported with margin expansion of ~390bps YoY to 12.4%. However, on the sequential basis, margin declined by 380bps owing to higher raw material cost and staff expenses as a % of sales. Adj. net profit grew to Rs. 128cr vs Rs. 135cr loss in Q1FY21, however declined 55.4% QoQ. Management plans to focus on reducing fixed costs, continued investments in brand building and optimizing working capital.

Key highlights

* The company aims to double revenue to USD 5bn by FY2026, with EBITDA levels of +15%, ROCE of 12-15%, and Net Debt/EBITDA below 2x.

* Net debt increased to ~Rs. 4,800cr (vs. ~4,200cr in Q4FY21). Net Debt/EBITDA stood at 1.6x as of 30th June, 2021.

* Company continued to improve its distribution footprint, adding 750 dealers over the last 15 months, with 5x increase in rural touchpoints in India. Additionally, over 400 customers were added in the same timeframe in Europe.

Valuation

There is a demand recovery in both OEM and replacement market, with steady price increases in the replacement segment. Catering to export markets in Q1FY22 helped mitigate domestic lockdown impact. With focus on digitalization to bring in operational efficiencies and drive sales, controlling capex, and brand building, Apollo Tyres is well-placed to tap the recovery in demand. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 263 based on 14x FY23E adj. EPS.

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