Apollo Tyres’ investors seek solace in robust demand outlook amid cost pressures

In a post earnings conference call, the management said strong demand momentum is visible across key segments/channels, and demand from truck and bus (T&B) OEMs is also showing signs of recovery. The management highlighted that the truck-bus bias (TBB) category is growing faster than the truck-bus radial (TBR) in the replacement category on account of lower costs. However, the management expects the TBR segment to also pick-up on the back of growth in OEMs. On a standalone basis, the company’s volumes grew 13% year-on-year (y-o-y) in the September quarter.

As far as its European business is concerned, there is good news for investors there as well. The company saw volumes grow 4% y-o-y during the quarter at a  capacity utilisation of 86%. The management said healthy demand momentum would continue with an increase in premiumisation. The PCR segment grew in the low double-digits, and growth in TBR came with market share gains, the management added.

In the backdrop of the company’s ongoing battle with cost inflation, the management’s commentary on robust demand outlook is comforting. Its gross margin declined 160 basis points sequentially in Q2FY22 to 32.6% impacted by higher-than-estimated cost inflation. So, the company is taking measures to contain margin erosion via price hikes. In Q2FY22, raw material cost inflation stood at 5% sequentially and a smaller inflation is expected in 3QFY22, the management said. Apollo Tyres took a price increase of 3–7% in 2QFY22 and another 3–5% over October–November. Investors would reckon that the company had raised prices by around 3–4% in 1QFY22. According to the management, it would need another 3–5% price hike to offset the impact of cost inflation and it is confident of passing it on gradually.

“On fully expanded capacity by FY22-end, its PCR/TBR utilization is estimated at 71%/62%. We estimate an 11% volume CAGR over FY21–23E, led by strong growth in the TBR and PCR segments and a 6% CAGR improvement in price realizations. We estimate a ~17% revenue CAGR over FY21–23. APTY’s India business has several levers to support margins and dilute the impact of raw material cost inflation,” analysts at Motilal Oswal Financial Services Ltd said in a report. CAGR is short for compounded annual growth rate.

Meanwhile, the company’s capital expenditure for FY22 remains unchanged at ₹2,000 crore at the consolidated level with no change in the guidance. Its net debt stood at ₹5,000 crore, up from ₹4,800 crore in 1QFY22 on higher inventory. “Driven by better margins and asset turnover, we expect return on equity to be in double digits (10%) by FY24E. With strong free cash flows, we expect Net debt/Ebitda to reduce from 1.7times in FY22E to 0.8times in FY24E,” analysts at Emkay Global Financial Services Ltd said in a report.