Apollo Tyres' stock racing ahead on improving outlook, growth in EU

While volumes are rising, there are interesting structural changes taking place in the sector

There are interesting structural changes in the tyre industry. After eight years of flat realisations, realisations rose 24 per cent between FY 2019-20 and 2021-22. This should push up EBITDA and reduce capex as per cent of revenue provided raw material costs come down.

Apollo Tyres in particular, has seen growth in the EU business due to cutback in Russian exports. In addition, there are hopes the domestic automobile industry will see a pickup once demand improves and supply issues with chips eases. In that case, OEM volumes in India will increase. Hence, despite higher input costs, the company could see a rebound.

Apollo’s Q1 performance beat the street. The India business saw volume growth and price hikes which offset cost inflation, while the EU business improved. The India business could be subdued due to seasonal factors in Q2 but EU demand should remain strong. The raw material costs are expected to peak in Q2 but the price hikes will help margins improve especially in the second-half.

The company’s revenue grew 30 per cent year-on-year (YoY) to Rs 5,940 crore while EBITDA rose 22 per cent YoY to Rs 690 crore. But the EBITDA margin contracted 75 basis points (bp) YoY (though it grew 40 bp quarter-on-quarter or QoQ) to 11.6 per cent. PAT, adjusted for extraordinary items, grew 48 per cent YoY to Rs 190 crore. The domestic standalone revenue grew 38 per cent YoY to Rs 4,440 crore. There was QoQ margin improvement of 30 bp and EBITDA rose 29 per cent YoY to Rs 430 crore. PAT grew 52 per cent YoY to Rs 100 crore.

The EU revenue rose 32 per cent YoY to Euro 151 million due to 18 per cent YoY volume growth. The EBITDA margin contracted 190 bp YoY (it was down 100 bp QoQ) to 14.4 per cent, hurt by raw materials (RM) cost increase and energy inflation.

Management guidance was that there was domestic demand uptick led by volume growth YoY across all segments but demand may be subdued in Q2 due to seasonality. An RM rise of another 3 per cent is likely in Q2 (compared to 7-8 per cent RM inflation in Q1), but costs are expected to stabilise and moderate in the second half.

The company pushed through 8 per cent price hikes in the Indian TBR (Truck bus and radial) segment and 3-4 per cent hikes in other segments of the Indian replacement market. It has hiked prices again by around 3 per cent in July 2022. In the EU, the PCR (passenger car radial) market grew 5 per cent in Q1, but Apollo’s EU volumes grew 18 per cent as it gained market share.

The management expects double-digit demand growth (around 20 per cent in the replacement market) in FY2022-23 led by steady domestic demand, good exports and strong EU demand due to import restrictions from Russia.

Capex intensity is reducing which could mean sharp EPS gains if margins also improve.  The current capacity utilisation stands at over 85 per cent and capex guidance for 2022-23 stands at Rs 900 crore and Euro 40 million for Indian and Europe operations, respectively. The company intends to increase productivity by 10-15 per cent via induction of machine learning/IOT. Net debt increased by Rs 400 crore to Rs 5,100 crore at Q1, but Gross Debt declined by Rs 300 crore to Rs 5,900 crore.

The stock has risen from Rs 225 to Rs 275 in the last month. Most analysts have buy recommendations with target prices ranging from Rs 310 to Rs 324.