Apollo Tyres: At the mercy of margin amid muted demand

Apollo Tyres saw its replacement and export volumes grow in mid-single digit year-on-year in Q3. (Image: Pixabay)
Apollo Tyres saw its replacement and export volumes grow in mid-single digit year-on-year in Q3. (Image: Pixabay)

Summary

  • If the demand weakness continues, risk of price cuts by the industry will increase, which would weigh on Apollo Tyres' margins, analysts say

Apollo Tyres Ltd managed to sail through the December quarter (Q3FY24), but bleak demand prospects led investors to book profit in its shares. The stock slipped about 5% on Friday – a swift fall from the 52-week high of 557.90 seen the previous day.

In India, the company saw its replacement and export volumes grow in mid-single digit year-on-year in Q3, while OEM volumes were flat. It lost market share marginally in the domestic truck and bus, radial (TBR) segment.

 

Going ahead, domestic volume growth is expected to be muted in the near-term, at best in mid-single digits, the management said in the earnings call. Moreover, disruptions from the Red Sea crisis may hit exports to European markets. Freight rates have surged by 30-40% due to the Red Sea situation.

The outlook on margins was relatively optimistic. Sequentially, raw material basket rose 2% and is expected to remain broadly similar in Q4. Improved price positioning, better product mix and tight cost control measures should aid margin show. In Q3, the consolidated Ebitda margin fell sequentially to 18.3%.

“If the demand weakness continues, risk of price cuts by the industry will increase, which would weigh on margins," said Kotak Institutional Equities in a report. Mean reversion of margins remains the biggest risk at the current juncture, it added.

In Q3, Apollo Tyres did not take any price action and is likely to largely keep status quo for now. Thus, if margin suffers earnings growth trajectory could be derailed. After all, the sharp re-rating in tyre stocks has been driven by benefits of benign input costs.

Over the past year, Apollo’s stock has rallied 53%. In comparison, peers such as Ceat and JK Tyres & Industries Ltd have seen a sharper surge as easing input costs drove steep re-rating for the sector.

“In the current upcycle, input cost basket has stayed benign for more than four quarters; hence, margins may stay elevated in the near-term," said analysts at IIFL Securities. Even if margins sustain at current levels, year-on-year Ebitda growth will decrease if high margins become baseline, added the IIFL report.

Meanwhile, the management has maintained its capex guidance for FY24 at 1100 crore. With capacity utilization in Europe and India at mid-to-high 70% levels, no new major capex would be announced in the near term. This approach bodes well for its returns ratios and could help in debt reduction. But valuations are pricey with the stock trading at almost 16 times estimated earnings for FY25.

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