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Strong revenue growth dilutes cost inflation

Need 3–5% price hike to offset cost inflation; EU ops on strong footing

* Apollo Tyres (APTY)’s 2QFY22 operating performance was in-line, supported by volume recovery and price hikes. Demand recovery as well as consistent price hikes would drive margin recovery in India. EU profitability is expected to sustain, driven by operational restructuring.

* We cut our FY22E consol. EPS by ~20%, factoring in RM cost inflation, but we largely maintain our FY23 estimates. We maintain a Buy rating.

Raw material cost inflation hurts margins

* Consolidated performance: Revenue grew 18% YoY (11% QoQ) to INR50.8b (v/s est. INR48.7b). EBITDA declined 10% YoY (+13% QoQ) to INR6.4b (v/s est. INR6.6b). Adj PAT grew 37% YoY/QoQ to INR 1.77b (v/s est. INR1.8b).

* Standalone revenue growth was strong at 25% YoY (13% QoQ) to INR36.5b (v/s INR33.8b), driven by 13% volume growth.

* The gross margin declined 160bp QoQ (9.7pp YoY) to 32.6% (v/s est. 35%), impacted by higher-than-estimated cost inflation. The EBITDA margin declined 8.6pp YoY (-10bp QoQ) to 10.3% (v/s est. 11.7%). Adj PAT declined 59% YoY (31% QoQ) to INR900m (v/s est. INR1b).

* Revenues for Europe operations grew 6% YoY (+21% QoQ) to EUR138m (inline), driven by 4% YoY volume growth. The EBITDA margin expanded 830bps YoY (+130bp QoQ) to 17.6% (v/s est. 16.5%), driven by the mix

Highlights from management commentary

* India demand: Strong demand momentum is seen across key segments/channels, and demand from Truck and Bus (T&B) OEMs is also showing signs of recovery. Truck-Bus Bias (TBB) is growing faster than Truck-Bus Radial (TBR) in the Replacement category on account of lower costs; however, TBR should also pick up on the back of growth in OEMs.  RM cost inflation: It stood at 5% QoQ in 2QFY22; smaller inflation is expected in 3QFY22.

* Pricing action: It took a price increase of 3–7% in 2QFY22 (3–4% in 1QFY22) and another 3–5% over Oct–Nov’21. It would need another 3–5% price hike to offset the cost inflation to date. The pricing environment is conducive, and the management is confident of passing on the cost inflation gradually.

* EU demand outlook: Healthy demand momentum would continue with an increase in premiumization. It gained market share in the TBR and OffHighway Tyres (OHT) segments as well as across segments.

* Capex for FY22 remains unchanged at INR20b at the consol. level (INR11b complete up to 1HFY22), with no change in the guidance.

* Net debt stood at INR50b (v/s INR48b in 1QFY22) on higher inventory

Valuation and view

* APTY offers the best blend of earnings growth and cheap valuations. The stock trades at 15.4x/9.7x FY22E/FY23E consolidated EPS. We maintain BUY, with TP of INR280 (~12x Sep’23E consol. EPS).

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