Apollo Tyres Ltd – Profitability led by mix and pricing efficiency

Sector Outlook – Positive

APL’s revenue grew by 3% YoY to Rs. 6,595 crores due to strong pricing and lower raw material costs. European revenue slightly decreased, while replacement and export volumes in India grew. Europe’s EBITDA margin improved due to a higher mix of winter tires and lower raw material costs. 

The company’s overall EBITDA margin expanded to 18.3%. Despite a weak demand environment, adjusted PAT increased by 75% YoY to Rs. 520 crores. However, standalone PAT decreased by 13% YoY due to higher taxes and lower other income. Overall, APL performed well despite challenging market conditions.

Concall Highlights

• APL expects export sales to improve in the coming quarters, even though domestic demand may stay low.
• In Europe, APL anticipates slight growth in passenger car radial (PCR) tires soon and a better performance in the second half of 2024 due to a better product mix and market share gains.
• APL saw an increase in total sales volumes, driven by growth in the replacement and export segments, while original equipment manufacturer (OEM) volumes stayed the same.
• Volumes were stable compared to the previous quarter, with a slight increase in exports balancing out a small decrease in OEM volumes. Replacement volumes remained unchanged.
• The truck and bus segment grew by 8% year-over-year, while the passenger car radial segment grew by 4%.
• APL improved its product mix in the PCR segment, reducing the share of 12-13 inch tires to less than 25%.
• Market share stayed the same in the PCR segment but decreased slightly in the truck and bus segment.
• The introduction of the Vredestein brand has strengthened APL’s position in premium/luxury categories.
• APL’s pricing for PCR tires is higher than domestic competitors but lower than international competitors.
• Raw material costs increased in the third quarter of the fiscal year 2024 but are expected to stay the same in the fourth quarter.
• Freight costs have gone up due to issues in the Red Sea, and APL expects to pass these costs on to distributors.
• APL is investing in digital technologies like artificial intelligence and machine learning to improve efficiency and increase capacity. By 2025, they aim to increase the capacity of PCR tires to 73,000 per day from 68,000.

Valuation and Outlook

Apollo Tyres Ltd.’s Q3FY24 results show an increase in profitability mainly due to a higher EBITDA margin, despite weak domestic demand. However, sustaining peak profitability may be challenging due to muted domestic market demand and the risk of industry-wide price cuts. The company is focusing on fiscal discipline, with lower-than-average annual capex of Rs. 1,100 crores for FY24. 

With plant utilization rates at 75% in both India and Europe, Apollo Tyres plans to expand capacity through staggered brownfield expansions and de-bottlenecking. Moderate capex and strong profitability are expected to boost free cash flow generation. Revenue growth is expected to be in the mid-single-digits in the coming years, driven by growth in India and Europe, improved pricing, and product mix dynamics, leading to a high double-digit CAGR in EBITDA.