Buy Apollo Tyres Ltd For Target Rs.490 by Motilal Oswal Financial Services Ltd
Earnings hit by commodity inflation Pricing action to support margins in the near term
* Apollo Tyres (APTY)’s 2QFY27 earnings came in below our estimates at INR3.1b (-24% YoY) because of weakness in the Europe business coupled with a 420bp YoY contraction in EBITDA margin due to severe commodity headwinds. Despite subdued market conditions, the PCR business continued to gain share in Europe while calibrated pricing actions have been taken across segments to partially offset the raw material inflation.
* We factor in a steady 10% revenue CAGR on a consolidated basis over FY25-28E. While margins are likely to be under pressure in FY27, we expect them to recover in FY28, led by the normalization of cost pressure and restructuring benefits. The stock’s valuations at 17.9x/ 13.7x FY27E/FY28E EPS appear attractive, especially when compared with those of peers. We reiterate our BUY rating on APTY with a TP of INR490 (valued at 16x FY28E consol. EPS).
Highlights from the management commentary
* India operations revenue grew 26%, supported by broad-based growth across OEM and replacement channels. OEM volumes led the growth, registering over 25% YoY growth, followed by low double-digit growth in the replacement segment, while exports remained largely flat.
* European operations remained under pressure, with revenue declining 12% YoY, primarily due to weakness in the truck and agricultural segments, a subdued regional demand environment, and temporary supply disruptions arising from the manufacturing transition following the Enschede plant closure.
* Raw material costs increased by ~25% since Apr’26, representing one of the steepest and fastest inflation cycles experienced by the company in recent years. Management expects the overall raw material basket to increase by a further mid-to-high single-digit percentage between 2Q and 3QFY27, indicating that the commodity inflation cycle is yet to fully stabilize.
* The company has implemented cumulative price hikes of 13-15% across categories by the end of Oct’26, against an estimated 16-17% increase required to offset raw material inflation, with the full impact expected to flow through in 3QFY27. Further hikes may be considered depending on commodity trends and competitive conditions.
* Consolidated net capex stood at ~INR15b during 1HFY27, broadly in line with the company's full-year capex plan. Investments are directed towards capacity expansion, technology, product development, and digital transformation.
Valuation and view
We factor in a steady 10% revenue CAGR on a consolidated basis over FY25-28E. While margins are likely to be under pressure in FY27, we expect them to recover in FY28, led by the normalization of cost pressure and restructuring benefits. The stock’s valuations at 17.9x/ 13.7x FY27E/FY28E EPS appear attractive, especially when compared with those of peers. We reiterate our BUY rating on APTY with a TP of INR490 (valued at 16x FY28E consol. EPS).
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