Buy Apollo Tyres Ltd for the Target Rs. 520 by Motilal Oswal Financial Services Ltd
India business impresses; Europe disappoints
Margins likely to improve with a reduction in input costs
* Apollo Tyres (APTY)’s 1QFY26 consolidated performance was in line with our estimates. However, while standalone performance was much ahead of our estimates, the European business margin was weaker than expected.
* On account of its weak performance in Europe, we reduce our EPS estimates by 10%/6% over FY26/FY27E. We factor in a 60bp improvement in APTY’s margin during our forecast period, driving a 21% PAT CAGR over a corrected base. Valuations at 15.2x FY27E appear attractive, especially when compared to peers. We reiterate our BUY rating on APTY with a TP of INR520 (valued at 18x Jun’27E consol. EPS).
India business impresses, but Europe disappoints
* APTYs’ 1QFY26 consolidated performance was in line. However, while standalone performance was much ahead of our estimates, the European business was weaker than expected.
* Consolidated revenue grew ~4% YoY to INR65.6b (in line). Revenue was led by low to mid-single-digit growth in the replacement and OEM segments, offset by a decline in export volumes. * The company’s EBITDA margin remained flat YoY at 13.2% (in line). EBITDA contracted 4.6% YoY (up ~4% QoQ) to INR8.7b (in line).
* In 1Q, Apollo booked exceptional expenses related to the restructuring costs of INR3.7b at its Netherlands unit. Adjusted for these costs, PAT declined 15% YoY to INR2.8b (est. INR3.1b), primarily due to lower-thanexpected other income.
* Standalone business revenue was in line at INR47.2b, up ~3% YoY and QoQ each. Gross margin contracted 380bp YoY (+220bp QoQ) to 36.7% (est. 35%). Employee costs experienced a sudden jump on account of new talent acquisition, bonus payouts, and a new ESOP scheme for senior management. EBITDA margin spiked 240bp QoQ (down 20bp YoY) to 13.6% (above our estimate of 12%), due to lower input costs.
* The EBITDA margin of the European business hit a multi-quarter low of 10.8% (down 290bp YoY) on account of weak demand and higher inflationary pressure, both on commodities and employees.
* Net debt during the period came down by INR3.9b to INR21b, with net debt/EBITDA improving to 0.7x, aided by controlled capex and a focus on free cash flow.
Highlights from the management commentary
* India business grew in line with the industry, with OE business growing at low single digits and the replacement segment growing at mid-single-digit levels. Management is hopeful of demand revival in the festive season. Revenue growth guidance remains at high single digits for FY26E.
* Europe witnessed a seasonal decline in revenue. Despite weak sentiments, APTY’s PCLT segment outperformed the market. Management expects a pick-up in demand momentum in the coming quarters.
* Gross margin may improve in future quarters on account of reduced RM costs; however, exchange rate uncertainty remains a major factor to monitor.
* APTY refrained from providing margin guidance due to uncertain macroeconomic conditions. There is no change from the previous capex guidance of INR15b, which includes INR7b for maintenance and INR8b for expansion.
Valuation and view
On account of its weak performance in Europe, we reduce our EPS estimates by 10%/6% over FY26/FY27E. We factor in a 60bp improvement in APTY’s margin during our forecast period, driving a 21% PAT CAGR over a corrected base. Valuations at 15.2x FY27E appear attractive, especially when compared to peers. We reiterate our BUY rating on APTY with a TP of INR520 (valued at 18x Jun’27E consol. EPS).
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