BackApollo Tyres stock skids on cautious demand outlook
Apollo Tyres continues to witness sluggish demand in key export markets of Europe due to the economic slowdown amid geopolitical tensions.
PremiumThe stock of Apollo Tyres Ltd hit a new 52-week high of ₹343.50 on Friday, reacting to its robust December quarter (Q3FY23) earnings. Consolidated revenue at ₹6420 crore was ahead of analysts' estimates. But the mood among investors quickly turned sombre after the management indicated a cautious near-term demand outlook. On Tuesday, the stock declined by 3.10% intraday on the NSE.
In an earnings call held on Monday, the management said, while OEM demand continues to remain healthy both in truck, bus and radial (TBR) and passenger car radial (PCR) segments, the replacement and export demand is expected to remain weak in the near term. The company continues to witness sluggish demand in key export markets of Europe due to economic slowdown amid geopolitical tensions. So, the replacement demand in this region is expected to remain muted for the next two quarters.
For now, investors can seek solace from the declining trend in raw material costs. In Q3, raw material cost declined by around 6% sequentially and in Q4 it is expected to reduce by around 5% sequentially, owing to commodity deflation, the management said. This bodes well for the company’s margin recovery. According to analysts at Nirmal Bang Institutional Equities, historically, margin expansion has been a bigger earnings lever for Apollo Tyres as the company does not pass on the full impact of raw material increase/decrease in the replacement segment.
Speaking of price hikes, the management said that it is now a price leader in the PCR category as well, with a 3% price hike in Q3, which was ahead of the industry. Remember, in India, in the TBR segment as well, the company raised prices ahead of the industry by taking price hikes of 8% in Q1 and 5% in Q2.
According to analysts at Kotak Institutional Equities, although Apollo Tyres has maintained pricing discipline over the past few quarters, a persistent slowdown in the domestic replacement segment does not bode well, and may result in increased competitive intensity. “The company has done well compared with peers in terms of profitability; however, we believe all the positives are priced in at the CMP," said the Kotak report.
In the last one year, the Apollo Tyres stock rallied 45%, comfortably surpassing the Nifty Auto index, which gave 15% returns.
Meanwhile, another key takeaway for Apollo Tyres investors was that the company’s capex guidance for FY23 stood at ₹900 crore for Indian operations and EUR40 million for Europe. This will be utilised for completing existing projects and maintenance activities. However, the management said it would be incurring capex judiciously and could end up utilising around 75% of targeted capex both in India and Europe.
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