Add Apollo Tyres Ltd for the Target Rs. 425 by Emkay Global Financial Services Ltd
We downgrade APTY to ADD from Buy and cut TP by ~26% to Rs425 (from Rs575), at 16x FY28E PER (17x earlier), given the downside risk to our earnings estimates if the RM basket remains elevated at current levels. APTY delivered a steady Q4, with consolidated revenue up 14% YoY, led by 15% revenue growth in APMEA/EU. Consolidated EBITDAM was down by 75bps QoQ to 14.6% on higher other opex (concentrated sponsorship-related spends). Standalone revenue was up 14% YoY; EBITDAM flat QoQ at 14.6%. APTY expects the current strong underlying demand to sustain in Q1FY27. However, it noted that new vehicle purchases would be impacted if fuel/commodity costs continue this inflationary trajectory. In India, commodity prices are up in mid-to-high teens in Q1, on sequential basis. APTY is taking 6-8% price hike in Q1 (3-5% taken in Apr-26) and guides for further hikes to offset this pressure. In EU, commodity prices are up in low-to-mid teens. However, APTY has announced only a 2% price hike so far (it is a price-taker on being a relatively small competitor). Benefits from restructuring of its EU operations would accrue from H2, per the company. Capacity utilization in India/EU is at 90%; capacity expansion is imminent to cater to current demand (FY27 capex at Rs35bn; flexible FY28 capex plan if demand softens). We cut FY27E/FY28E EPS by 32/22% to factor in a sharp rise in the RM basket and consequent margin pressure.
Revenue growth healthy; margins impacted by commodities
Consolidated revenue grew 14% YoY, led by 15% growth in APMEA/EU. Consolidated EBITDAM fell by 75bps QoQ to 14.6%, largely led by higher other expenses (due to sponsorship-related spends). APMEA EBITM was up by 60bps QoQ to 11.4%; EU EBITM was up by 100bps YoY to 10.1% (though down by 350bps QoQ as Q3 is seasonally strong for its EU business). Standalone revenue was up 14% YoY, while EBITDAM was flattish QoQ at 14.6% as 180bps gross-margin expansion was offset by higher other expenses
Earnings call KTAs
1) In Q4FY26, APTY saw strong double-digit growth YoY across both replacement and OEM segments. While underlying demand is strong across segments and channels in Q1FY27TD, the management highlighted that new vehicle purchases would be hit first if fuel and commodity prices continue the current inflationary trajectory.
2) EU is showing supportive signs, though outlook remains contingent on how the conflict situation evolves; US markets were weak in Apr-26; ATPY aims to sustain and accelerate topline momentum in both India and EU.
3) On commodities, India is seeing a mid-to-high teens QoQ cost impact in Q1FY27, being addressed through 6-8% price hikes in Q1 in two tranches (3-5% has been taken; balance pending); further price hikes are also anticipated, alongside a strong cost reduction drive.
4) In EU, the commodity impact is lower at low-to-mid teens, given lower natural rubber consumption, with a 2% price hike announced by APTY; as a smaller player, APTY is more of a price follower in the EU, though it believes that additional hikes will be needed.
5) Closure of the Enschede plant is expected to start reflecting in EU margins from H2FY27.
6) Capacity utilization is at 90% in both India and EU, with full utilization expected on the back of strong demand.
7) FY27 capex: Rs35bn, with Rs30bn in India and balance for EU; the FY27 capex program is largely committed; some flexibility in FY28 capex if demand softens.
8) APTY transitioned to the concessional tax regime (FY27 tax rate at 25% vs 34% earlier).
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