Apollo Tires Ltd stock gained over 10% in the last two trading sessions after announcing its June quarter (Q1FY23) earnings on Friday after market hours. Shares continued to rally on Wednesday and hit a 52-week high 261.90 each on NSE.
Investors are enjoying management’s comments on its good Q1FY23 results and moderating cost inflation. This comes against the backdrop of declining margins of tire makers in recent quarters, which have been hurt by increased input costs.
In Q1, the company’s raw material basket costs rose 7-8% sequentially and to tackle this, it increased prices by 3-8% in the domestic market and 6-9% in the European markets. Management said that in Q2FY23, its commodity basket could grow by about 3% sequentially, keeping margins under pressure, and then peak.
The company is increasing the prices to avoid the fall in margins. In July, it raised prices by 3% across all categories, management told analysts.
Although its consolidated Ebitda margin at 11.6%, declined 75 basis points year-on-year in Q1FY23, driven by price increases and operating leverage, this metric beat analysts’ estimates. Fall in crude oil and natural rubber prices augurs well for tire companies. “Margins are close to bottom out as peak crude price effect will be captured in Q2. From the third quarter, tire makers will start getting the benefit of reduction in input cost (rubber, crude). Meanwhile, the industry continues to display good pricing discipline with regular price hikes, albeit slightly behind the cost curve,” said analysts at IIFL Securities Ltd. in a report dated August 17.
Apart from margins, the continued rally in the stock from current levels will also depend on how the demand is met. In the past one year, the shares of Apollo Tires have gained 17% versus 9% in the Nifty 500 index. Management expects overall demand to decrease in Q2 versus Q1 on seasonality.
Apollo Tires reiterates its FY23 capital expenditure guidance: 900 crores for India business and 40 million dollars for European business. The company is focusing on improving the return on capital employed before any major expansion, which is positive according to analysts.
Analysts at Kotak Institutional Equities said the company’s return ratio is poor at 8-10%, which remains a cause for concern despite achieving an utilization level of over 80%. “In addition, the risk of a recession in European markets remains, which could put pressure on the operating performance of its subsidiaries,” he said in a report.
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