IGI Logo

APTY Q2 margins were up by 163bps QoQ to 18.5% (vs. Emkay: ~16.6%) amid better mix, softer RM prices and cost controls. The tyre space is still in a sweet spot, given that the industry is buoyed by structural tailwinds (restricted imports, greater export competitiveness, premiumization in the underlying OEM space, and calibrated capex-spends ensuring sustained high utilization levels), with stable demand prospects - leading us to believe that current strong profitability levels would sustain, and so also for APTY. We raise FY24E/25E/26E EPS by ~13%/~10%/~9%, building in the ‘higher for longer’ margin. We upgrade APTY to BUY from Hold, with revised TP of Rs470/sh at unchanged 12.5x multiple on FY26E basis (rolled over; previous TP: Rs375). Key risk: recent slight dip in revenue market share; macro challenges in Europe.

Apollo Tyres: Financial Snapshot (Consolidated)

Q2FY24 above estimates; margin expansion QoQ across operations

Consolidated revenue grew 5% YoY (volume-led) to Rs62.8 bn (in-line); revenue growth on YoY basis was led by APMEA (largely India; up 5%). Consolidated EBITDA grew 63% YoY to Rs11.6 bn (~9% above estimates) and EBITDA margin expanded by 163bps QoQ to 18.5% (Emkay: 16.6%). This was on the back of gross-margin expansion of ~70bps and lower ‘other expenses’ (down by ~100bps QoQ) amid better mix and cost controls. On sequential basis, EBIT margin in APMEA expanded by 143bps to 15%, with similar margin expansion (of 150bps QoQ) in Europe, to 5.3%. Overall, adjusted PAT stood at Rs4.9 bn, above estimates on higher-than-expected EBITDA (Emkay: Rs3.9bn)

Earnings call KTAs

1) India replacement demand expected to pick up in H2 vs. H1, driven by both – CVs and PVs, with double-digit YoY replacement volume growth seen to endure; while exports fell 40% YoY in Q2, they picked up ~7% QoQ. 2) Europe demand slump has bottomed, with sequential improvement expected from current levels; PCR inventory is at normal levels, with Agri inventory slightly elevated. 3) Capacity utilization for trucks/PCR stands at 75/80%, with overall utilization at ~73% due to capacity enhancement from debottlenecking; Company expects current capacities to be sufficient for catering to medium-term growth, and would stay in capex-light mode for a couple of years. 4) RM costs can increase ~2-3% QoQ in Q3; APTY would attempt to offset the rise via better product mix, cost optimization and price hikes, if needed; crude oil prices ranging at USD80-85/bbl represent comfortable levels. 5) Pricing environment for the industry is largely stable; Company recently undertook a slight price cut in the truck bias segment, in response to competition, though pricing action would differ for each segment, as also the relative competitiveness within. 6) PCR industry’s product mix is evolving; 14-inch tyres form over 30% of the market now vs. similar contribution from 12-inch tyres ~15 years ago; APTY is the leader in SUV tyres. 7) APTY will continue investing in R&D (up to 3% of sales) and brand-building activities. 8) APTY maintains its strong RoCE focus (H1 annualized RoCE at ~16% vs. 12-15% target); may revise the target RoCE range later.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf

& SEBI Registration number is INH000000354