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Healthy performance improvement in India and Europe

Demand outlook remains positive in India, muted in Europe

* Apollo Tyres’ (APTY) 2QFY26 consolidated PAT (adjusted for one-offs) at INR3.9b was broadly in line with our estimate of INR3.7b. While EBITDA margins for both India and Europe beat our estimates, the PAT upside was limited by a higher-than-expected tax rate.

* Given the better-than-expected performance in 2Q and an expectation of benign input costs going forward, we increase our EPS estimates by 4%/7% over FY26/FY27E. We factor in a 170bp expansion in APTY’s margin during our forecast period, driving a 22% PAT CAGR over a corrected base. Valuations at 16.6x FY27E appear attractive, especially when compared to those of peers. We reiterate our BUY rating on APTY with a TP of INR603 (valued at 18x Sep’27E consol. EPS).

Healthy performance improvement in India and Europe

* Consolidated revenue grew ~6.1% YoY to INR68.3b (below the estimate of INR70b).

* Gross margin grew 50bp YoY (+120bp QoQ) to 45.3% (above the estimate of 44.8%), primarily due to cooling rubber prices.

* EBITDA grew 16.3% YoY to INR10.2b, beating our estimate of INR9.6b. Consequently, margins beat our estimate, coming in at 14.9%, an increase of 130bp YoY. The margin beat was driven by better than expected margins at both India and Europe.

* However, due to a one-time expense of INR1.8b on associated costs for the closure of its Netherlands plant, reported PAT came significantly lower than our estimate at INR2.6b. However, adjusted for this one-time expense, PAT came in at INR3.9b, which was broadly in line with our estimates.

* S/A business revenue was in line with estimates at INR47.1b, growing ~6% YoY (flat QoQ). EBITDA margin grew 220bp YoY to 15.3%, beating our estimate of 14%, mainly due to lower RM and other costs.

* EU revenue grew 4% YoY to EUR177m in 2Q. Margins, while up 190bp QoQ, declined 210bp YoY and remained below management’s target levels.

* Net debt in 2Q stood at INR26b, flat compared to FY25 levels, while net debt/EBITDA came in at 0.8x.

* Capex for 1H stood at INR5b, and FCF stood at INR3b.

Highlights from the management commentary

* Overall, the company anticipates volume growth to continue, supported by a strong export recovery and balanced growth in both replacement and OEM channels, wherein replacement is expected to record a mid to high single-digit volume growth in 2H. Volumes will be supported by higher demand following GST rate cuts. On the OEM side, management is seeing a pickup in demand from CV OEMs compared to PV OEMs post-festive season.

* Given the benign RM environment and an improving mix towards replacement and exports, the company expects profitability to improve in 3Q.

* Despite the weak environment, management expects low single-digit growth to return in Europe as markets gradually stabilize.

* Consol. net debt stood at INR26b, flat vs FY25, while net debt-to-equity stood at 0.8x. India’s net debt stood at INR27b, flat vs Mar’25, while net debt/EBITDA stood at 1.1x.

Valuation and view

Given the better-than-expected performance in 2Q and an expectation of benign input costs going forward, we increase our EPS estimates by 4%/7% over FY26/FY27E. We factor in a 170bp expansion in APTY’s margin during our forecast period, driving a 22% PAT CAGR over a corrected base. Valuations at 16.6x FY27E appear attractive, especially when compared to those of peers. We reiterate our BUY rating on APTY with a TP of INR603 (valued at 18x Sep’27E consol. EPS).

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