Apollo Tires Ltd. share scaled to a new 52-week high 343.50 on Friday, reacting to its strong December quarter (Q3FY23) earnings. on consolidated revenue 6420 crore, which was higher than analysts’ estimates. But investor mood soon turned gloomy after management indicated a cautious near-term demand outlook. On Tuesday, the stock declined by 3.10% in intraday on NSE.
Management said in an earnings call held on Monday that while OEM demand in the Truck, Bus & Radial (TBR) and Passenger Car Radial (PCR) segments remains healthy, replacement and export demand is expected to remain weak. In the near future. The company is facing sluggish demand in key export markets of Europe due to economic slowdown amid geopolitical tensions. Hence, replacement demand in this sector is expected to remain muted for the next two quarters.
For now, investors can take solace from the declining trend in raw material prices. Management said that in the third quarter, raw material costs decreased approximately 6% sequentially and are expected to be down approximately 5% sequentially in the fourth quarter due to commodity deflation. This augurs well for the margin recovery of the company. According to analysts at Nirmal Bang Institutional Equities, historically, margin expansion has been a major earnings lever for Apollo Tires as the company does not pass on the full impact of raw material increase/decrease to the replacement segment.
Talking about the value addition, the management said that it is now the price leader in the PCR category as well, with a 3% price increase in Q3, which was ahead of the industry. Remember, in India, even in the TBR segment, the company drove prices ahead of the industry by increasing prices by 8% in Q1 and 5% in Q2.
According to analysts at Kotak Institutional Equities, though Apollo Tires has maintained pricing discipline over the past few quarters, the continued slowdown in the domestic replacement segment does not augur well, and could result in increased competitive intensity. “The company has performed well in terms of profitability as compared to its peers; However, we believe all the positives are priced in on the CMP,” the Kotak report said.
In the last one year, Apollo Tires stock has rallied 45%, easily outperforming the Nifty Auto index, which has given 15% returns.
Meanwhile, another important note for Apollo Tires investors was the company’s capex guidance for FY23 900 crores for Indian operations and 40 million Euros for Europe. This will be used to carry out ongoing projects and maintenance activities. However, the management said it would spend capex judiciously and could utilize around 75% of the targeted capex in both India and Europe.
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