Apollo Tyres Ltd.’s ride in CY24 so far has been tough. Its stock is up a mere 6%, significantly behind the Nifty Auto Index’s 26% returns. The company’s poor September quarter (Q2FY25) results indicate this wide gap is unlikely to be bridged soon. The company struggled with weak margins and muted demand in Q2FY25, leading to a spate of earnings downgrades.
The consolidated Ebitda margin fell sharply by 480 basis points (bps) year-on-year to 13.6%, missing the consensus estimate of 14.8%. A steep increase in raw material prices in India played spoilsport here, with the standalone Ebitda margin at 12.1%, lower than the consensus estimate of 13.2%. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
The management said raw material basket cost increased by 8% sequentially in Q2FY25 and is expected to rise by another 1% in Q3FY25. Plus, other expenses rose due to higher freight rates and advertising expenses. To mitigate cost pressures, Apollo Tyres took a 2%/3% price increase in the truck and bus radial/passenger car radial (PCR) segment during Q2FY25.
With the recent correction in natural rubber and crude prices, the management expects raw material basket costs to decline from Q4 onwards. Plus, a favourable product mix is also expected to support margin performance going ahead. The management reiterated its continued focus on driving profitable growth.
Challenges ahead
But caution prevails. For the ninth consecutive quarter, Apollo Tyres’ underperformance in domestic revenues versus peers (CEAT and MRF) continues, said a Kotak Institutional Equities report on 14 November.
Market share loss in the PCR segment and the strategic decision to exit low-margin OEM business weighed on revenue trajectory. While the recent correction in rubber prices could result in profitability improvement from Q4FY25, margin recovery will remain below Street expectations in the domestic business, Kotak added.
The brokerage house cut FY25-26 consolidated earnings per share estimates by 2-8%.
The management said it was reworking its pricing strategy to gain back the lost market share. Volume growth in Q2FY25 was flat, but demand is expected to improve in H2FY25. In India, while replacement demand is expected to improve, OE demand is expected to remain muted in the near term, the management said. Plus, recovery in operating performance is expected to be driven by European operations.
Meanwhile, the capital expenditure guidance for FY25 is maintained at ₹1,000 crore. Consolidated net debt increased to ₹2,990 crore as of September 2024 from ₹2,530 crore in March due to higher working capital requirements, but it is expected to ease going ahead. On the valuations front, the stock is trading at FY26 price-to-earnings of 15x, showed Bloomberg data. Valuation multiple is relatively cheaper than some peers, but hardly appealing.
