Q3FY24 Review: Apollo Tyres: Margins stay elevated on low input costs

9 Feb 2024 , 01:23 PM

Apollo’s Q3 results, while strong, came largely in line with analysts of IIFL Capital Services estimates. Standalone revenue growth stayed weak due to muted volume growth, but margins came in strong on low input costs. EU operations have been clocking YoY decline, but the rate of decline is moderating. Here again, margins saw a spike due to input costs and seasonality (Q3 is strong for winter tyres). Consol. Ebitda growth has averaged 50% YoY for 4 quarters; analysts of IIFL Capital Services expect Q4FY24 at 5-7% growth and then see it tapering off further in FY25 as high margins enter the base. Mgmt. mentioned that capacity utilisation is sub-80%; hence capex is likely to stay low in FY24/FY25, boosting FCF and accelerating debt reduction. Analysts of IIFL Capital Services upgrade Ebitda estimates by 3% (low RM). The stock has re-rated substantially, from 10-12x to 18x in the last 12 months. Their TP of ₹540 is based on 17x 2YF EPS. 

Q3 results largely in line with est.: 

Standalone rev grew 2% YoY, but Ebitda growth was 43% YoY due to sharp YoY improvement in margin. In EU manufacturing operations (Vredestein), revenue (in EUR) declined 2% YoY (better than -6% YoY in H1FY24). Here again, sharp improvement in margins led to 29% Ebitda growth (EUR). Consol. Ebitda growth was 32% (largely in line with est.) and PAT growth was 84% YoY. 

Revenue growth to stay at single-digit: 

Standalone business is seeing some growth in after-market, but OEM and export rev are down YoY. Volume growth in Standalone was mid-single digit, offset partly by YoY decline in ASP. Mgmt. expects mid-single vol. growth to continue in nearterm. In EU, EUR-denominated rev has been declining YoY but favourable exchange (EUR-INR) meant that INR-denominated revenue grew. Going forward, EUR-based revenue will start growing but currency benefit will turn neutral. Overall, analysts of IIFL Capital Services forecast 6-7% Consol. rev growth in FY25/FY26. 

Margins to stay above-average till input costs stay low: 

Historically, the domestic tyre industry has seen cyclicality in earnings. In the current upcycle, input cost basket has stayed benign for more than 4 quarters; hence, margins may stay elevated in the near-term. If input costs rise, margins may move back to lower levels. Even if margins sustain at current levels, YoY Ebitda growth will start coming off as high margins enters the base. Analysts of IIFL Capital Services expect 5-7% Ebitda growth in Q4FY24.