Apollo Tyres' grip remains strong in Q1 on easing commodity prices

Near term volume outlook is muted, though, given seasonality and macro EU concerns

The stock of Apollo Tyres was up 4 per cent on Wednesday –- to end the day at Rs 260.15 apiece -- on robust results for the June quarter of the 2022-23 financial year (Q1FY23). Expectations of sustained volume growth and margin tailwinds too supported the stock. While most brokerages are positive on the growth front, they have a mixed view on valuations. Going ahead, its volume trajectory in the India business, given seasonality and the extent of margin recovery, will be key metrics the Street will watch out for.

Buoyed by a strong showing in the standalone as well as European operations, the tyre maker’s revenue and operating performance exceeded Street estimates. Consolidated revenue was up 30 per cent year-on-year (YoY) to Rs 5,942 crore. Revenue from standalone operations, which account for three fourths of the total, were up 38 per cent, backed by strong volumes and improved realisations. European business too had a strong quarter, registering a 32 per cent growth on the back of double-digit growth in volumes.

In the India business, volumes were up a healthy 21 per cent over Q1FY22 and 7.5 per cent on a sequential basis. Replacement segment benefitted from a recovery in demand which was led by passenger car and truck & bus radials. The company expects the near-term growth for the domestic market to be impacted by seasonality, especially in truck tyres and due to inflationary pressures. The company has, however, guided for a 20 per cent YoY growth in the replacement market for FY23.

Varun Baxi of Nirmal Bang Research expects the company to outpace industry growth, led by higher share of truck and bus tyres (65 per cent) and passenger car radials (21 per cent) in the mix and growing exports. Also, the outlook for European operations remains positive as the European tyre market is showing strong growth momentum and has helped Apollo gain market share in the above 17-inch tyre segment, which accounts for 43 per cent of sales.

Margins for the consolidated operations were 75 basis points lower as compared to Q1FY22 at 11.6 per cent due to sharp rise in raw material, energy and freight costs. The margins were up 30 basis points sequentially. The sequential gains were led by strong revenue growth and price hike of 8 per cent in the truck and bus radials. The company also raised prices by 3.4 per cent in other segments of the India replacement market.
 

Following the Q1 hike, the company had taken a further hike of 3 per cent in July. While standalone margins, at 9.7 per cent, were better than estimates, profitability at the European operations too were resilient at 14.4 per cent even as energy prices and raw material costs surged.

 “Margin performance has been resilient owing to the company’s ability to take gradual price hikes. With the softening commodity prices going ahead, we expect margin recovery to sustainable levels during the second half of FY23,” say Ronak Mehta and Vivek Kumar of JM Financial.   

Given that companies normally do not pass on the full benefit of the correction in input cost (crude oil derivatives account for 40 of raw material cost), margin gains could be higher if there is a sharp correction.

Though cost pressures are easing, Kotak Institutional Equities highlights twin concerns of poor return ratios of 8-10 per cent, despite achieving 80 per cent plus utilisation levels and the recessionary risks in EU markets. On EU outlook, Nomura Research believes that the focus on improving asset turnover and healthy free cash flows by the management should drive debt reduction and improve return on capital employed from 8 per cent in FY23 to 12 per cent in FY25.

While most brokerages are positive on the outlook and believe valuations are at attractive levels, Kotak Institutional Equities and Anand Rathi Research have a ‘sell’ rating. While the former cites an inferior return profile over the capex cycle, the latter believes the stock is fully valued. Given some uncertainties and a 23 per cent rally over the last month, investors should await a consistent trend of volume/margin gains before considering the stock.