Buy Apollo Tyres Ltd for the Target Rs 528 by Motilal Oswal Financial Services Ltd
Decent performance despite surge in input costs Europe restructuring benefits to flow in from FY28
* Apollo Tyres (APTY)’s 1QFY27 earnings came in ahead of our estimates at INR3.3b, driven by higher-than-expected other income. Due to RM cost inflation, consol. EBITDA margins dipped 150bp to 11.7% (in line with est.).
* We factor in a steady 8% revenue CAGR on a consolidated basis over FY25- 28E. While margins are likely to be under pressure in FY27, we expect them to revive fully in FY28, led by the normalization of cost pressure and the restructuring benefits in Europe. The stock’s valuations at 16.2x/ 13.5x FY27E/FY28E EPS appear attractive, especially when compared to those of peers. We reiterate our BUY rating on APTY with a TP of INR528 (valued at 16x FY28E consol. EPS).
Highlights from the management commentary
* The company further strengthened its leadership position in the replacement market, with TBR replacement market share exceeding 30% and PCR replacement market share of ~21%.
* Demand momentum remained robust in July, with healthy demand across channels and product categories, providing confidence that the positive trend will continue in 2QFY27.
* In the long term, management remains confident of delivering high-teen EBITDA margins for the Europe business once the ongoing restructuring initiatives are fully completed.
* Based on the prevailing cost environment, management estimates that cumulative price hikes of 15-16% would be required to fully offset cost inflation. So far, price hikes of ~11% have been implemented, indicating that one or two additional rounds of pricing may still be necessary.
* Management reiterated its FY27 capex guidance of around INR30b.
Valuation and view
We factor in a steady 8% revenue CAGR on a consolidated basis over FY25-28E. While margins are likely to be under pressure in FY27E, we expect them to revive fully in FY28E, led by the normalization of cost pressure and the restructuring benefits in Europe. The stock’s valuations at 16.2x/13.5x FY27E/FY28E EPS appear attractive, especially when compared to those of peers. We reiterate our BUY rating on APTY with a TP of INR528 (valued at 16x FY28E consol. EPS)
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