Margin benefits to dip for Apollo Tyres

Apollo Tires Ltd is riding high on the tailwinds of lower input costs. In the September quarter (Q2FY24), consolidated Ebitda margin rose 160 basis points (bps) sequentially and 650 bps year-on-year to 18.5%. Natural rubber, synthetic rubber and carbon black are the main inputs for tire makers. In addition, other costs were 2% lower year on year.

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(Graphic: Mint)

The performance of Apollo India’s business was much better than in Europe both in terms of margin and revenue. Business India revenue growth was soft at 3.6% year on year. Total volume was up 5% and both OEM and replacement segments grew in healthy double digits. But the sharp 40% drop in the number of exports was a let down. Apollo believes that, sequentially, exports have improved slightly, although the environment in key export markets remains challenging.

In European operations, revenue declined 6% amid a 7% year-over-year drop in the PCLT (passenger car & light truck) market primarily due to high channel inventory and a mild winter. Apollo expects the European business to remain sluggish in the short term and will continue to focus on cost containment measures.

Overall, the result is a 63% increase in Apollo’s consolidated Ebitda at a time when revenue growth was only 5% 6,280 crore.

Amid a strong margin outlook, Apollo shares are up an outstanding 41% over the past year.

The stock trades at about 14 times estimated earnings for FY25, Bloomberg data showed. In particular, margin tailwinds are now receding. According to Motilal Oswal Financial Services, the Q2 margin fully reflects the benefits of low raw material costs. “Therefore, we expect it to moderate in the remaining quarters, as the raw material basket expands along with weakness in EU operations,” Motilal analysts said in a November 8 report.

In Q3, Apollo expects the price of its crude basket to inch up 2-3% compared to Q2. However, some analysts are optimistic about the deleveraging outlook. Nuvama Research believes that modest caps and strong profitability will help generate free cash flow 1,900 crore per annum over FY24-26 (estimated), thereby reducing net debt from 6,100 crore in FY23 to 2,700 crore in FY26.

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