Apollo Tyres: Rev growth to slow; margins, FCFF look good

26 Jun 2023 , 10:37 AM

Recommendation: Add; Target Price: Rs 420

 

Analysts of IIFL Capital Services attended ‘Apollo Tyres – Corporate Day 2023’ over the weekend. Mgmt. emphasised on its strategy to focus on margins, ROCE and cash-flows, even if they come at the cost of slight mktshare loss (as was seen in FY23). Mgmt reiterated its Vision FY26 (USD5bn revenue, >15% Ebitda margins, 12-15% ROCE). Analysts of IIFL Capital Services believe Apollo would achieve its margin and ROCE target, if current input cost scenario and/or industry pricing discipline continues. If input costs were to spike and/or if price competition restarts, margins may come off from the current above-average levels. FY26 revenue target of USD5bn looks tough (Analysts of IIFL Capital Services forecast ~USD4bn). We maintain our earnings estimates and retain ADD.

Near-term revenue outlook is soft: 

Mgmt. expects India revenue growth of high single-digit in FY24, driven entirely by volumes. Outlook for exports from India is soft due to global slowdown. Volumes and revenue in EU are expected to be flattish in FY24. Exports to US may grow due to low base. Overall, analysts of IIFL Capital Services believe these imply a mid-to-high single-digit revenue growth in FY24 (in line with their current estimates). In this context, Vision FY26 revenue target of USD5bn looks tough, as the company would end FY24 with revenue of USD3.2-3.3bn. Analysts of IIFL Capital Services revenue forecast for FY26 is about USD4bn.

Margins and FCFF to stay strong, as long as input costs do not spike: 

Domestic Tyre industry has seen sharp improvement in margins in recent quarters, due to fall in commodity prices. Pricing discipline in the industry has been good. In the near-term, margins are likely to hold up. If input costs were to spike and/or if price competition restarts, margins may come off. End of high-capex phase in FY22 and low volume growth imply that capex needs are likely to be muted in FY24 and possibly even in FY25. As a result, FCF is likely to be strong.

Current forecasts reflect normalised earnings potential: 

Apollo’s Ebitda margin in Q4FY23 was above long-term average and its Ebitda/ton in India was at a historic high. Analysts of IIFL Capital Services recently turned NEUTRAL on the domestic Tyre sector, after being very positive since mid-2022. Tyre stocks are inherently cyclical, generating high returns when margins recover from sub-normal levels to above-normal. Once margins peak out, earnings growth become lacklustre, mirroring sub-10% revenue growth.