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Robust EU performance: Outlook remains 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.

* Q3FY22 revenue rose 9.9% YoY to Rs. 5,707cr, driven by growth in European operations.

* EBITDA margin was down by 680bps YoY to 13.0% mainly on account of higher raw material costs. Q3FY22 PAT fell 50.1% YoY to Rs. 224cr.

* Adoption of strategic initiatives at the product end, strong competitive positioning and recovery in Indian business will emerge as growth drivers. The company is well-positioned to meet the expected demand, and, hence, we provide Accumulate rating on the stock with a revised target price of Rs. 258 based on 11.5x FY24E adj. EPS.

Improved revenue from European operations drive growth

In Q3FY22, the company recorded revenue growth of 9.9% YoY to Rs. 5,707cr (+12.4% QoQ) driven by favorable performance of the European operations, price hikes and increased exports. Revenue of European business increased 11.0% YoY to Rs. 1,982cr, and volume was up by 14%. The present share of UHP tyres in Europe product mix is at ~43% vs 39% in Q2FY22; higher than the 40% target to achieve by 2026. However, on the domestic front, growth slowed down in the last two months of the quarter due to muted demand for CV tyres, elevated fuel costs, chip shortage and weak agri segment. Also, India price hikes in the replacement segment have been around 10%, as there is under-recovery of raw material costs.

High raw material costs impact margins

In Q3FY22, the company reported EBITDA of Rs. 743cr, a YoY decline of 27.9%. The decline in operating margins was mainly due to steep rise in raw material costs, constrained OEM demand and reduced demand in agri business. However, on a sequential basis, EBITDA increased by 16.4%, as strong operating performance in Europe mitigated the negative impact of India’s operations. Adj. net profit stood at Rs. 224cr in Q3FY22, up by 25.7% QoQ. The company announced another price hike of 2- 3% in Q4FY22, with prices largely to stabilize by end of Q1FY23.

Key highlights

* No major CAPEX was planned for Indian operations over the next three to four years, and FY23 CAPEX is expected to be Rs. 1,100 cr.

* Net Debt/ EBITDA stood at ~1.8x as of Q3FY22. Gross debt at Indian and consolidated level is at Rs. 5,000cr and Rs. 7,000cr respectively. Interest cost is expected to remain stable due to offset between increase in working capital borrowing and debt repayment.

* The Competition Commission of India (CCI) levied a fine of Rs. 1,788cr on five companies including Apollo Tyres for cartelization. Though this might impact the share price, the company denies of any such allegations.

Valuation

Profitability from the European operations is expected to remain high in the long-run driven by restructuring of operations, improved product mix and strong demand. Similarly, Indian business demand is set to recover in the replacement and OEM segment. This along with focus on digitalization, controlled capex, and cost optimization will support growth. Hence, we provide Accumulate rating on the stock with a revised target price of Rs. 258 based on 11.5x FY24E adj. EPS.

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