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Weak quarter; cost pressures loom

India revenue growth underperforms; good EU margin

Apollo Tyres (APTY IN) Q4 consolidated revenue was flat YoY and down 5% QoQ to INR 62.6bn, due to weak EU and India revenue. EU revenue was flat YoY while it declined 16% QoQ to INR 18.6bn with an EBIT margin contracted 220bp QoQ to 9.8%. Consolidated EBIDTA margin dipped 190bp QoQ to 16.4%. Standalone revenue grew 1.3% QoQ to INR 43.8bn vs 1% QoQ growth of CEAT and 2.8% QoQ growth of MRF. Apollo’s YoY standalone revenue growth (+1%) underperformed CEAT (+4%) and MRF (+9%) as the company focuses on profitability over market share. Standalone EBITDA margin dipped 250bp QoQ to 15.6%, higher than that of CEAT, down 90bp. Q4FY24 margin was hit by ~100bp due to provisioning of EPR liability

Robust exports volume growth in the quarter

Overall volume was up 4% QoQ and flat YoY, with exports and replacement volume growing in the double digits YoY, although partly offset by a 10% QoQ drop in OEM volume due to weakness in the TBR segment. CV replacement grew in the double digitsin Q4. Management expects domestic replacement volume to do well, led by the TBR segment, which is set to grow in the double digits; the company expects EU volume to be better in FY25. Blended RM cost was flat in Q4 but may see an uptick of 4-5% in Q1FY25

Valuation: downgrade to Reduce with a lower TP of INR 506

We believe FY24 will post peak margin for APTY and the tyre sector. The likelihood of earnings downgrades going forward are higher for the tyre sector with cost pressures looming which will restrict PAT CAGR for the sector to single digits over FY24-27E; thereby restricting further multiple upgrades. We built in a 4% revenue CAGR during FY24-26E, led by improvement in EU volume and stable domestic replacement demand. With capex intensity behind us, cumulative FCF generation is likely to be at INR 66bn during FY24-26E. We expect margin to dip from 17.5% in FY24 to 16.7% in FY25E and 16.9% in FY26E, given bottoming of RM cost, increased competition and factoring in the impact of the EPR regulation. We downgrade to Reduce from Accumulate with a revised TP of INR 506 from INR 558 on 15x (unchanged) FY26E P/E.

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