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Improving outlook in both India and EU

EPR and higher RM cost impact to be offset by price hikes

* APTY’s 4QFY24 consol. EBITDA margin came in at 17.2% (+120bp YoY), adjusted for EPR expenses. Volumes saw marginal growth, with OEM volumes seeing a double-digit decline as APTY focused on profitability in the TBR OEM segments. EU margins came in at 19.1% (+100bp YoY), largely led by an improved mix, despite a volume decline in the underlying PCT industry. APTY has increased prices in May’24 to partially offset the impact of EPR and higher RM costs.

* We cut our FY25E consol. EPS by 6% to factor in increasing RM prices and EPR provisions, while we retain our FY26E EPS. Reiterate BUY with a revised TP of INR550 (based on 16x Mar’26E EPS).

Higher other income due to forex gain of INR400m

* Consol. revenue remained flat YoY at INR62.6b (in line), while EBITDA/adj. PAT grew ~8%/18% YoY to INR10.8b/INR4.65b (est. of INR11b/INR4.4b). FY24 consol. revenues/EBITDA/adj. PAT grew 3%/36%/78% YoY.

* Gross margins expanded 380bp YoY (+60bp QoQ) to 47.2% as RM basket remained stable sequentially.

* EBITDA grew 8% YoY to INR10.8b (est. INR11b). EBITDA margins expanded 120bp YoY to 17.2% (est. 17.7%), but affected by higher other expenses (+190bp YoY as % of sales) after adjusting EPR expenses of INR513.7m in exceptional items. Higher other expenses were due to higher advertising spending during the quarter

* Exceptional items of INR1.4b included EPR expenses of INR312.2m/ INR513.7m for FY23/9MFY24, VRS expenses of INR55.8m, and deferred tax liability of INR499m.

*  Aided by higher other income, adj. PAT grew 18% YoY to INR4.65b (est. INR4.4b). Higher other income was on account of forex gain of INR400m.

*  Standalone business revenue was in line with our estimate at INR43.9b (flat YoY). Gross margins expanded by 310bp YoY (-40bp QoQ) to 40.5% (est. 40%). EBITDA margin expanded by 80bp YoY to 16.8% (est. 17.5%), adjusted for EPR expenses.

* EU revenue grew 3% YoY to EUR182m (est. EUR182m). EBITDA margin expanded 100bp YoY to 19.1% mainly due to a better mix.

* Overall, consolidated net debt stood at INR25b as of Mar’24 (vs. INR30b in Dec’23 and INR43b as of Mar’23).

* FCFF for FY24 stood at INR27.7b (vs. INR13.7b in FY23) due to strong operating cash flow of INR34.4b (vs. INR21.4b in FY23). Capex for FY24 stood at INR6.7b (vs. INR7.6b in FY23).

* APTY declared a final dividend of INR6/share in FY24 (vs. INR4.3/share in FY23).

Highlights from the management commentary

* Replacement demand outlook: APTY expects a high single digit/low double digit growth in CV /PVs respectively and seeing some green shoots in agri segment.

* RM basket is expected to see a 4-5% escalation in 1QFY25 post stable 4Q.

* APTY has increased prices by 3% in May’24, partly offsetting RM and EPR expenses. It would further need a price hike of 2-2.5% in 1Q to negate the upcoming cost headwinds.

* EU demand outlook: The management expects FY25 to be better than FY24 on the back of sales mix improvement and cost optimization. Volume grew in double digits in Apr’24, indicating a strong start for FY25.

Valuation and view

* APTY offers the best blend of earnings growth, balance sheet deleveraging, improving capital efficiencies, and cheap valuations. APTY’s sustained discipline in prudent capital allocation and subsequent improvements in RoCE has been truly commendable.

* Given this and encouraging pricing discipline within the industry, we reiterate Buy on APTY with a price target at Rs.550 valued at 16x Mar’26E consolidated EPS.

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