Apollo Tyres Ltd. printed a splendid margin performance in Q2 led by strong margin expansion in domestic and European business. Despite flat revenue growth QoQ, margin expanded 163 basis points QoQ to 18.5%.
Management expect replacement demand to improve sequentially. Despite uptick in raw material prices, Apollo Tyres is confident to maintain healthy margin led by better product mix and tight cost control.
European business is bottoming out and expect good recovery in H2, Channel inventory is normal in provision coverage ratio while bit higher in off-highway tyre segment.
Near term focus would be on cash flow generation, deleveraging balance sheet and profitability. We expect strong operating margin, market share gain in PCR both India and Europe, light capex and debt reduction are key positives for earnings.
We increase earnings per share estimates by 42/30% for FY24/25E factoring in strong margin expansion along with debt reduction and value the stock Rs 469(16 times September-25E EPS).
Change our rating from ‘Reduce’ to ‘Accumulate’.