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During 3QFY24, Apollo Tyres reported consol. EBITDAM of 18.3%, 50bps above JMFe. This was led by lower than expected RM costs. Operating performance was healthy across India and European (EU) operations. Domestic replacement demand is expected to be muted in the near-term. Demand in the International markets has started to recover, albeit gradually. Pricing environment in domestic replacement market is largely stable. Focus on favourable mix and tight cost control is expected to support margin performance. Capex intensity is expected to be low in the medium-term. We have increased our earnings estimate for FY25- 26E by 4-5% driven by healthy margin performance. Consistent focus on driving profitable growth, deleveraging and improving ROE is expected to drive re-rating going forward. Maintain BUY and ascribe a 15x PE (14x earlier) to arrive at Mar’25 TP of INR 560.

* 3QFY24 - Strong operating performance: APTY reported standalone revenue of INR 43.3bn (+2%YoY, -2% QoQ), broadly in-line with JMFe. EBITDA for the quarter stood at INR 7.8bn (+43% YoY, -7%QoQ), 3% above JMFe. EBITDA margin stood at 18.1% (+520bps YoY, -100bps QoQ), 30bps above JMFe. YoY margin improvement was led by lower RM costs and cost control measures. At the consol. level, APTY reported revenue of INR 65.9bn (+3%YoY, +5% QoQ) broadly in-line with JMFe. Consol. EBITDAM stood at 18.3% (+410bps YoY, -20bps QoQ), 50bps above JMFe. Adj. consol. PAT stood at INR 5.1bn (+75% YoY, +5% QoQ), c.7% above JMFe.

* India business: Domestic volumes increased by mid-single digit YoY (flattish QoQ) during 3Q. Replacement and exports segments grew by mid-to-high single digit YoY while OEM volumes were flattish YoY. Category wise – T&B grew by 3% YoY while PCR grew by 7% YoY. APTY’s market share in PCR segment remains stable. However, its TBR market share declined by few bps over last few quarters. The management indicated that domestic replacement demand is expected to be muted in the near-term. Pricing environment has been stable and the company is focused on driving profitable growth going forward. With respect to international markets, the company expects gradual recovery in exports barring for near-term volatility owing to Red-Sea crisis.

* European business: In 3QFY24, the company's EU operations reported revenue of EUR 176mn (-2% YoY; +4% QoQ). PCR tyre industry vols were flat YoY in EU. However, all season tyres continued to outperform with double-digit YoY growth. APTY gained market share in EU across segments (PCR, TBR and Agri). EBITDA margin stood at 20.3% (+490bps YoY) led by higher operating leverage, lower RM costs & favourable mix. Share of UUHP tyres stood at 45% in 3QFY24 (vs. 40% in 2Q). In terms of outlook, recovery in PCR tyre industry is expected to be gradual and APTY continues to focus on cost control measures and market share gains to drive healthy performance.

* Margin outlook: Gross margin improved by c.100bps QoQ owing to consumption of low cost inventory. RM basket increased by c.2% QoQ during 3Q and is expected to remain steady during 4Q. APTY expects pricing discipline in the industry to continue (barring for negligible discounts). Focus on cost control measures and favourable product mix is also expected to support margin performance. The company re-iterated its continued focus on driving profitable growth.

* Capex/debt update: Capacity utilization currently stands at c.75% for both Indian and European operations. Capex guidance for FY24 is maintained at INR c.11bn primarily towards de-bottlenecking, digitization and maintenance. Overall, the company expects capex intensity to remain low in the medium-term. Consol. gross debt decreased by INR 5bn to INR 43bn during 3QFY24 and Net Debt / EBITDA declined to ~0.7x (~1x during 2Q). Pre-tax ROCE for 9MFY24 (annualised) stood at ~16.5% (at the higher end of its medium-term guidance of 12-15%).

* Other Highlights: Vredestein brand continues to gain traction in domestic luxury car segment giving strong competition to MNC peers. Vredestein branded tyres are priced at ~10% premium to APTY branded tyres and with a slight discount to the MNC brands.

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