Q1FY24 Review: Apollo Tyres: Revenue growth subdued; margins peaking

14 Aug 2023 , 12:59 PM

Apollo’s Q1 Consol. Ebitda was in line with analysts of IIFL Capital Services estimate with standalone 4% above and Subs 8% below. Volumes declined in both Standalone and Europe. They expect YoY volume growth to improve over the course of FY24. However, with loss of YoY pricing benefit in coming quarters, revenue growth is likely to remain at mid-single digit. Apollo’s India Ebitda/ton is at historic high; it may sustain in Q2 but may moderate over the mediumterm. This will keep EPS growth muted in FY25 and beyond. They largely retain estimates. Retain ADD with TP of Rs425. 

Q1 Ebitda in line with estimate: 

Consol. revenue grew 5% YoY, driven by growth in Reifen (tyre distribution business) and favourable EUR-INR. Standalone revenue was flat YoY, while EU (Vredestein) was down 5% YoY (EUR terms). Standalone Ebitda margin improved 820bps YoY and 190bps QoQ to 17.8%, and drove a 4% Ebitda beat. Vredestein Ebitda margin contracted 100bps YoY and 470bps QoQ to 13.4%, and led to 8% Ebitda miss. Consol. Ebitda was in-line. 

Revenue growth likely to be muted in FY24: 

Q1FY24 saw volume decline in both Standalone (-5% YoY) and Vredestein (-5% in PCR, -30% in TBR). In Standalone, replacement volume grew 3%, OEM was flattish and exports declined 30%. Mgmt guided to exports remaining weak even in Q2. Analysts of IIFL Capital Services expect Standalone business to clock YoY volume growth in coming quarters, but expect YoY price benefit to ease. As a result, revenue growth would be about 5% in FY24. They expect Vredestein to clock YoY revenue decline (EUR terms) on a full-year basis in FY24. Overall, with EUR-INR benefit and growth in low-margin distribution business, they expect consol. rev growth of 6% in FY24. 

Margins at above-normal levels, may not sustain: 

Apollo’s India Ebitda margin in Q1FY24 is above the long-term average and its Ebitda/ton is at a historic high. Analysts of IIFL Capital Services expect India margins to sustain at current levels even in Q2; however, long-term sustainability is in doubt. Once margins peak out, earnings growth become lacklustre, mirroring sub-10% revenue growth. Analysts of IIFL Capital Services forecast 8% EPS Cagr over FY24-26. FCF generation is likely to be strong due to high margins and low capex. Tyre stocks are inherently cyclical, generating high returns when margins recover from sub-normal levels to above-normal. Analysts of IIFL Capital Services turned NEUTRAL on the domestic Tyre sector few months back, after being very positive since mid-2022.