Buy Apollo Tyres Ltd for the Target Rs.600 By Emkay Global Financial Services Ltd
Steady Q2; H2 growth/margin outlook improving
Apollo Tyres (APTY) posted modest revenue growth (up 6% YoY) to Rs68.3bn, aided by growth across APMEA/EU (+5.5/+13.5% YoY). However, EBITDA grew stronger, by 16% YoY to Rs10.2bn led by dual benefit of gross-margin expansion (up by 170bps QoQ) and operating leverage. The mgmt remains optimistic on a healthy H2, led by GST-driven demand uplift (Oct has also seen uptick in demand) and favorable macros/revival in infra spends. Margin is expected to rise further in Q3, on stable RM prices (with some downward bias) and closure of Enschede plant (by Jun-26), unlocking structural cost benefits. We raise FY26E/27E/28E EPS by 6% each, led by improving profitability, operating efficiencies, and phased flow-through of European restructuring benefits. We maintain BUY on APTY, given healthy H2 outlook across India/EU, and mix-led (better TBR vs PCR pickup) and restructuring-led margin tailwinds in EU. We raise our TP by ~14% to Rs600 (from Rs525), basis 17x Sep-27E PER.
Robust margin performance amid modest top-line growth
Consol revenue grew 6% YoY to Rs68.3bn, with revenue growth led by growth across segments, with APMEA up 5.5% YoY and Europe at 13.5%. Consol EBITDA grew ~16% YoY/~18% QoQ to Rs10.2bn, ~8.5% above Consensus (~Rs9.4bn) and 7% above Emkay estimate (~Rs9.5bn). EBITDAM expanded by 90bps QoQ to 14.9%, largely due to 170bps QoQ gross margin expansion and lower staff costs. On a sequential basis, EBITM in Europe business margin was up by ~180bps to 4.4% (down by 150bps YoY); APMEA was up by 220bps QoQ (340bps YoY) to 10.9%. Overall, APAT stood at Rs4.4bn, up 45% YoY.
Earnings call KTAs
1) The management expects healthy H2 momentum aided by GST cut and revival in macro/infra spending. GST cuts have had a positive affect on consumption since Sep-25, improving sentiment across the replacement and OEM channels, while Oct-25 saw further demand acceleration. 2) Channel inventory is stable; restocking has already happened in Oct, with demand-led stocking done at dealers. 3) India: Volume growth in Q2 was in a mid-single digit, led by farm and 2W/3W tyres, while TBR/PCR growth was muted. GST removal had a mixed impact, with Replacement growing at only ~2% (expected to rise to a mid-single digit in H2 on pent-up demand) while OEM grew ~4%, with early signs of pickup (stronger in TBR vs PCR). The mgmt expects Q3 revenue to be in line or better than in Q2, aided by seasonal demand + GST-led sentiment. 4) Europe: EU revenue at €177mn, up 4% YoY, driven entirely by volumes (no pricing). However, demand remains weak across categories. UHP tyre-mix improved to 49% (vs 46% Q2FY25). On the Enschede plant closure: Settlement with the Works Council finalized; €17mn exceptional charge (below EBITDA). Plant is expected to shut by Jun-26, and deliver meaningful structural margin benefits (cash cost ~€55mn with 2Y payback). 5) PCR expansion: AP plant expansion to be completed by end-FY27. Hungary's PCR expansion to ramp up from FY27. 6) Price trends: Natural Rubber Rs210, synthetic Rs175, carbon black Rs115, steel cord Rs155. Q3 RM costs are expected to be stable-to-slightly down which, along with better replacement demand, should aid margin improvement.
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