Buy Apollo Tyres Ltd For Target Rs.520 by Motilal Oswal Financial Services Ltd
Input costs likely to stabilize from Q4
Healthy replacement demand outlook, both in India and Europe
* Apollo Tyres (APTY) posted a weak 3QFY25, with EBITDA margin down 460bp YoY to 13.7% (vs. est. 14.6%), driven by pressure in the standalone business, although Europe margins improved QoQ. While OEM demand continues to be weak, demand is likely to be driven by healthy replacement demand, both in India and Europe.
* Given the under-recovery in commodity prices and higher other expenses, we cut our FY25E/FY26E consol. EPS by 4%/9%. APTY offers the best blend of earnings growth, balance sheet deleveraging, improving capital efficiencies, and cheap valuations. We reiterate our BUY rating on APTY with a TP of INR520 (valued at 17x Dec’26E consol. EPS).
European performance continues to improve
* Consol. revenue grew ~5% YoY to INR69.3b (est. INR67.7b), while EBITDA/adj. PAT declined ~22%/33% YoY to INR9.5b/INR3.4b (est. INR10b/ INR4.1b). 9MFY25 revenue grew 3%, while EBITDA/adj. PAT declined 20%/30%.
* Overall volume growth was marginal, with healthy replacement demand being offset by OEM weakness. In India, replacement volumes grew 5% YoY, while OE volumes declined 10% YoY. Exports remained flattish.
* Gross margins contracted 510bp YoY/330bp QoQ to 41.5% (est. 44.9%), driven by higher RM prices and the impact of carrying forward higher-cost inventory from the previous quarter.
* This resulted in ~22% YoY decline in EBITDA at INR9.5b (est. INR9.9b). EBITDA margin contracted 460bp YoY (+10bp QoQ) to 13.7% (est. 14.6%).
* Weak operating performance, coupled with lower other income, resulted in a PAT miss to INR3.4b (-33% YoY, est. INR4.1b).
* Standalone business (India): Revenue grew 5% YoY, while EBITDA/PAT declined ~36%/59% YoY. EBITDA margin contracted to 11.1% during the quarter (vs 18.1% in 3QFY24 and 12.1% in 2QFY25, est. 11.5%).
* EU revenue grew ~4% YoY to EUR183m, with an EBITDA margin of 17.7%, down 260bp YoY.
* Reifen - Revenue grew 76% YoY to EUR88m with EBITDA margin at 7% (vs 5.5% in 3QFY24).
Highlights from the management commentary
* India outlook: Replacement demand is expected to remain positive in 4Q, with the potential for further growth beyond current levels. OEM volumes remained weak, particularly in CVs, due to lower vehicle production and an unfavorable mix (higher bus sales). The CV segment is expected to recover in 4Q, with improving demand for TBR CV tires. Election-related volatility impacted demand this year, but OEMs are seeing early signs of recovery, according to the management.
* Market share & product strategy: APTY gained market share in the PCR and agri replacement segments in India in Q3. The company is exiting the 12-13 inch tire market with OEMs and continues to focus on the high-margin 16-inch+ segment.
* EU outlook: Demand recovery is expected to continue, driven by strong replacement demand for both PCR and truck tires. There are no signs of demand tapering off, and the UHP/UUHP segments are expected to grow faster. While volume growth in the PCR segment lagged in the industry, APTY outperformed in profitable segments like winter tires and UHP.
* FY25E capex is expected to moderate to ~INR7.5b. With PCR utilization reaching 85%+ in India and 90%+ in Europe, the company has planned growth capex for both regions. FY26E capex is estimated at INR15b, including INR7b for maintenance and INR8b for expansion, leading to a 7-8% PCR capacity increase in India and a slightly higher expansion in Europe.
Valuation and view
* We cut our FY25E/FY26E consol. EPS by 4%/9% to factor in the increase in RM costs and higher operating expenses.
* APTY’s prudent capital allocation and the subsequent improvement in RoCE have been truly commendable. APTY offers the best blend of earnings growth, balance sheet deleveraging, improving capital efficiencies, and cheap valuations (~15.4x FY26E/13.6x FY27E consol EPS). We reiterate our BUY rating on APTY with a TP of INR520 (valued at 17x Dec’26E consol. EPS).
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