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APTY’s Q3 margins remained steady QoQ at 18.3%, led by European operations in a seasonally-strong quarter. APTY’s calibrated capex approach and commentary around focus on profitability and return ratios, reinforces our arguments about structural tailwinds in tyres (restricted imports, greater export competitiveness, premiumization in underlying OEMs, and controlled capex ensuring sustained high utilization). These, along with stable demand prospects, would help sustain current strong profitability levels for the industry and APTY – thereby driving strong cash flows, further deleveraging, and improvement in return ratios. This prompts revision in our TP multiple to 16x (14.5x earlier; we raise FY24E EPS by ~3% on Q3 margin beat, with our aheadof-consensus FY25E/FY26E estimates unchanged). We maintain BUY with revised TP at Rs625 (Rs550 earlier). Key risk: recent slight dip in market share.

European operations drive margin beat

Consolidated revenue grew 2.7% YoY to Rs66bn (in line); growth on YoY basis was led by Europe (up 6%; APTY outperformed in a flattish market), with APMEA (largely India) up 3%. The replacement and export volumes were up mid-single digit YoY with flattish OEM volumes. EBITDA margin dipped 15bps QoQ to 18.3% (Emkay est.: 17.9%; Consensus est.: 17.6%) on ~90bps higher gross margins (partly due to inventory effect). On QoQ basis, EBIT margins in APMEA declined 177bps to 13.2%, with Europe margin expansion placed at 673bps to 12%; Europe margins on YoY basis were also stronger, up 409bps. Adjusted PAT stood at Rs5bn (above estimates). Gross debt stood at Rs43bn vs. Rs56bn in Mar-23. Annualized RoCE stands at 16.5%.

Earnings call KTAs

i) Maintains cautiously optimistic outlook for the medium term and, at best, expects midsingle digit volume growth in India. APTY has maintained market share in PCR and experienced marginal loss in the truck segment, with current utilization levels in mid-tohigh 70s. ii) In Europe, the company expects marginal growth in passenger cars in the near term, with significant improvement seen H2CY24 onwards; APTY has gained market share across cars, trucks, and agri categories, with share of ultra-high performance tyres now at 45%. iii) Freight rates increased 30-40% in the short term, due to the Red Sea issue; transit times are higher by 14-15 days. However, this is not seen affecting Q4 performance as of now. iv) Domestic product mix continues to improve; share of 12- and 13-inch tyres are under 25% vs. over 50% few years back. Now, 14-inch tyres are APTY’s largest-selling SKUs. In CVs, sale of higher-tonnage vehicles are improving profitability. v) Near-term RM outlook is flattish with some increase seen afterwards; no price action planned as the industry pricing environment is stable. vi) Company could undershoot FY24E capex guidance of Rs11bn by Rs1-1.5bn and would remain in capex-light mode for next couple of years. It is well placed to cater to growth from current capacities with AI/ML helping efficiency improvements (e.g., PCR capacity to increase to 73K units/day vs. 68K/day now); overall focus would remain on cash flows and return ratios.

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