Margin benefits to dip for Apollo Tyres

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Apollo’s India business performance was comparatively better than that of Europe on both margin and revenue fronts. India business revenue growth was soft at 3.6% year-on-year. Overall volumes grew by 5% with growth in both OEM and replacement segment in healthy double-digits. But the steep 40% drop in export volumes was a letdown. Apollo maintains that sequentially, there has been a marginal improvement in exports, although the environment in key export markets remains challenging.

In European operations, revenue fell by 6% amid the 7% year-on-year drop in the PCLT (passenger car & light truck) market mainly due to high channel inventory and mild winters. Apollo expects the European business to stay sluggish in the near term and that it will continue to focus on cost containment measures.

Overall, the upshot is that Apollo’s consolidated Ebitda jumped by 63% at a time when revenue growth was just 5% at ₹6,280 crore.

Amid a strong outlook for margin, Apollo’s shares have risen by an outstanding 41% in the past one year.

The stock trades at about 14 times estimated earnings for FY25, showed Bloomberg data. Notably, margin tailwinds are reversing now. According to Motilal Oswal Financial Services, Q2 margin fully reflects the benefits of low raw material costs. “Hence, we expect it to moderate over the next few quarters, as the raw material basket inches up along with weakness in EU operations,” said Motilal’s analysts in a report on 8 November.

In Q3, Apollo expects the price of its raw material basket to inch up 2-3% compared to Q2. Even so, some analysts are optimistic about the deleveraging outlook. Nuvama Research believes that moderate capex and strong profitability shall aid free cash flow generation of ₹1,900 crore per year over FY24-26 (estimated), leading to net debt reduction from ₹6,100 crore in FY23 to ₹2,700 crore in FY26.