Q2FY24 Review: Apollo Tyres: Strong Q2, but margins set to come off

9 Nov 2023 , 10:19 AM

Apollo’s Q2 Consol. Ebitda came in 10% higher than analysts of IIFL Capital Services estimate driven by better margins (lower input costs). Consol. rev growth was muted (+5% YoY) despite 12% translation gain from higher EUR-INR (applicable to EU Subs). Demand in India is showing some strength, but exports are weak. EU is currently declining but even when it recovers, analysts of IIFL Capital Services forecast single-digit growth, in line with long-term rate of growth. Hence, they forecast single-digit consol. revenue growth for Apollo in FY24/FY25. Current India margins are at historical highs but likely to come off as RM basket will increase 2-3% in Q3. In H1FY24, Apollo surpassed its ROCE target of 12-15%. FCF outlook is positive with high margins and control on capex. Single-digit revenue growth and peaked margins imply muted EPS growth beyond FY24. Analysts of IIFL Capital Services FY24-26 earnings estimates are largely unchanged. Retain ADD, with TP of Rs405. 

Q2 Consol. Ebitda 10% above est. on higher margin: 

Standalone rev grew 4% YoY (in line), entirely led by volumes. Domestic revenue growth was double-digit, but exports saw sharp fall (-25%). Ebitda margin improved 130bp QoQ to 19.1% (125bp beat), a historic high. Vredestein rev (in EUR terms) declined 7% YoY. Vredestein Ebitda margin improved 70bp QoQ to 14.1%. Consolidated rev grew 5% (in-line). Ebitda grew 63% YoY and 10% QoQ and came in 10% above analysts of IIFL Capital Services estimate. 

Analysts of IIFL Capital Services forecast single-digit Consol. rev growth in FY24/FY25: 

With the benefit of price hikes behind us, revenue growth in India would be restricted to volumes and hence, single-digit growth. EU revenues are currently declining; even when it recovers, growth may be single-digit in line with long-term growth rates. Hence, analysts of IIFL Capital Services forecast single-digit consol. revenue growth for Apollo in FY24/FY25. 

Peaking of margin implies muted earnings growth in FY25/FY26: 

Apollo’s India Ebitda margin in Q2FY24 is above long-term average and its Ebitda/ton is at a historic high. Analysts of IIFL Capital Services expect margins to come off from Q3, given that RM has inched up. Once margins peak out, earnings growth would become lacklustre, mirroring sub-10% revenue growth. Analysts of IIFL Capital Services forecast 5% EPS Cagr over FY24-26. FCF generation is likely to be strong due to high margins and low capex. ROCE has improved due to higher margins and low growth in ‘capital employed’ as debt is coming off. However, low earnings growth beyond FY24 may keep the stock range-bound.