Apollo Tyres: IIFL Investor Conference

16 Feb 2024 , 10:58 AM

Analysts of IIFL Capital Services hosted management of Apollo Tyres at IIFL’s Enterprising Bharat – 15th Global Investors’ Conference. Mgmt. expects mid-tohigh single-digit volume growth for India in FY25. In recent months, T&B has been slow; this may continue till Q1FY24. The pricing environment is very stable; this is driven by tyre-makers focusing on margins, FCF and ROCE. Margins have sustained at highs for a longer duration in this cycle than its previous upcycles; high margins are likely to sustain in Q4FY24-Q1FY25. Mgmt. mentioned that there is no need for any major growth capex in FY24 and FY25. Even beyond that, mgmt. guided for bite-size capex and modular expansion. In Europe, PCR segment volumes have become flattish after declining YoY in past quarters. OHT and T&B demand is still soft. Margin underperformance of Europe operations in H1FY24 was due to negative operating leverage; this reversed in Q3 with jump in revenue. 

Mid-to-high single-digit volume growth in FY25; high-margins to sustain at least for 2 quarters: 

The volume growth in FY25 is expected to be in mid-to-high single-digit range. Replacement segment is stable but OE segment may see deceleration in FY25. Mgmt. mentioned that the T&B segment has been weak in recent months; this is expected to continue till Q1FY25 (elections). Ebitda margins have sustained at highs longer in this cycle compared to previous up-cycles, as commodity prices have stayed benign. Mgmt. expects current high margins to sustain at least in Q4FY24/Q1FY25. 

Pricing discipline by tyre-makers, FCF generation are structural positives: 

Mgmt. highlighted that 3 out of 4 large tyre-makers in India have commented regarding focus on margins, FCF and ROCE. Hence, pricing discipline in the industry is for real. Industry margins have moved up structurally with higher peaks and troughs vs. past cycles. There is no major growth capex requirement in FY24/FY25. Even beyond FY25, capex is likely to be bite-sized and modular. As a result, positive FCF is likely to sustain. 

Europe – worse is behind:

Volume growth in EU has been weak but PCR (largest segment for Apollo) is seeing signs of stabilisation after declining YoY for few quarters. OHT and T&B is still soft. Margins were subdued in H1FY24 due to negative operating leverage on low revenues. Margins bounced back in Q3 with improvement in revenue. The Red Sea issue has resulted in higher freight rates; mgmt. does not see this as a significant concern.