Near-term demand worries in replacements biz cloud Apollo Tyres' outlook

There could be some margin relief on account of falling input costs

Led by a strong operating performance, Apollo Tyres posted better than expected financials in the December quarter. Higher gross margins led to a surge in operating profit and the softening raw material basket is a positive for profitability going ahead. Despite the improved show, the stock is expected to be range bound given the subdued outlook for domestic and international replacement segments.

Though volumes in the December quarter for the standalone (India) business fell by 4 per cent, revenue growth came in at 12 per cent. This was driven by price hikes and product mix. Demand from auto makers remained strong with a 30 per cent YoY volume growth even as the replacement and export market were subdued falling by 8 per cent and 25 per cent, respectively. The company took a price hike of three per cent in the passenger car radial segment and has maintained its market share in the domestic market in the quarter.

The company’s European revenues grew 8 per cent and the gains (as was the case with Indian operations) came from a better mix (improved share of ultra high performance tyres) and price hikes. Demand, however, remained subdued with the European passenger car radial as well as the truck and bus radial volumes falling 14 per cent and 10 per cent respectively. This was on the back of high channel inventory, mild winters and economic slowdown.

The outlook on its two key markets remains mixed. Varun Baxi of Nirmal Bang Research expects the domestic replacement market to recover from the June quarter of FY24, while demand from domestic auto makers is expected to remain healthy. In the European market, the management is cautious about demand trends given the macroeconomic challenges. The brokerage has a buy rating as it expects return ratios to improve going ahead and the stock is reasonably valued.

In addition to demand, the street will track the margin trajectory. Higher gross margins in the December quarter led to a 25 per cent jump in standalone operating profit on a sequential basis. Margins were up 260 basis points q-o-q due to lower raw material prices, price hikes and cost control measures. The weak commodity prices are expected to be supportive of margins in the near term.

While Rishi Vora and Praveen Poreddy of Kotak Institutional Equities expect margins to continue to improve in the near term, re-opening of the Chinese economy can drive natural rubber prices, as China is one of the biggest importers of natural rubber. 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, they add.  The brokerage has a sell rating as it believes that the benefits from the correction in raw material prices are factored into the stock. At the current price, the stock is trading at 14.6 times its FY24 earnings estimates.