What all will sustain upside in Apollo Tyres stock?

Investors are rejoicing its decent Q1FY23 results and the management commentary on easing cost inflation. This comes against the backdrop of tyre manufacturers seeing their margins skid in the recent quarters, hurt by elevated input costs.

In Q1, the cost of the company’s raw material basket rose 7-8% sequentially and, to tackle this, it hiked prices by 3-8% in the domestic market and 6-9% in European markets. In Q2FY23, its commodity basket could inch up further by about 3% sequentially, keeping margins under pressure, and then peak out, the management said.

The company is on a price hiking spree to protect margin erosion. In July, it raised prices by 3% across categories, the management told analysts.

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Although its consolidated Ebitda margin at 11.6%, fell by 75 basis points year-on-year in Q1FY23, thanks to price hikes and operating leverage, this metric beat the estimates of analysts. Correction in crude oil and natural rubber prices bodes well for tyre companies. “Margins are close to bottoming out, as the impact of peak crude price will be captured in Q2. Starting Q3, tyre makers will start benefitting from moderation in input costs (rubber, crude). Meanwhile, the industry continues to display good pricing discipline with regular price hikes, even if slightly behind the cost curve," said analysts at IIFL Securities Ltd in a report on 17 August.

Besides margin, a sustained upside in the stock from the current levels will also depend on how demand pans out. In the past one year, shares of Apollo Tyres have risen by 17% versus 9% appreciation in the Nifty 500 index. The management expects overall demand to moderate in Q2 versus Q1 on seasonality.

Apollo Tyres reiterated its FY23 capital expenditure guidance of ₹900 crore for the India business and $40 million for the European business. The company is focusing on improving the return on capital employed before any major expansion, which according to analysts is positive.

Kotak Institutional Equities analysts said the company’s return ratios remain poor at 8-10%, which, despite achieving over 80% utilization levels, remains a concern. “Also, recessionary risks persist in European markets, which could overall put pressure on the operating performance of its subsidiaries," they said in a report.

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