Apollo Tires investors seek solace in strong demand outlook amid cost pressures

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

There is good news for investors as far as its European business is concerned. The company saw a 4% growth in volumes during the quarter with a capacity utilization of 86%. Management said healthy demand momentum will continue with increase in premiumisation. Management said the PCR segment grew in the low double digits and the growth in TBR coincided with the market share.

Management’s comments on the strong demand outlook are comforting, in the backdrop of the Company’s ongoing battle with cost inflation. Its gross margin fell 160 basis points sequentially to 32.6% in Q2FY22, which was higher than projected cost inflation. Therefore, the company is taking measures to check margin decline through price increases. Management said that in Q2FY22, raw material cost inflation was 5% sequentially and a minor inflation is expected in 3QFY22. Apollo Tires increased the price by 3-7% in 2QFY22 and further increased by 3-5% in October-November. Investors must believe that the company had increased prices by around 3-4% in 1QFY22. According to the management, this will require a further 3–5% price hike to offset the impact of cost inflation and is confident of passing it gradually.

“At fully expanded capacity by the end of FY 2012, its PCR/TBR utilization is estimated to be 71%/62%. We estimate CAGR of 11% in FY 2011-23E, led by strong growth in TBR & PCR segment and 6% CAGR improvement in price realizations. We anticipate revenue CAGR of ~17% during FY 2011-23. APTY has multiple levers to support margins in its India business and mitigate the impact of raw material cost inflation,” analysts at Motilal Oswal Financial Services Ltd said in a report. CAGR stands for Compound Annual Growth Rate (CAGR) low. .

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