Stock Of The Day: Apollo Tyres Gains On Positive Outlook—Analysts Views, Key Levels To Watch

Shares of Apollo Tyres Ltd. rose nearly 8% on Thursday as brokerages see a revival in India's demand after the elections and the European Union's outlook appears to be more positive.

The company's fourth-quarter profit was hit due to an exceptional item and provisions towards Extended Producer Responsibility totaling Rs 99 crore.

The tyre-maker's net profit declined 14% year-on-year to Rs 354 crore in the quarter-ended March 2024, according to an exchange filing issued on Tuesday. This compares with the Rs 457-crore consensus estimate of analysts polled by Bloomberg.

• Revenue up 0.2% to Rs 6,258 crore (Bloomberg estimate: Rs 6,424 crore).

• Ebitda rose 3% to Rs 1,028 crore (Bloomberg estimate: Rs 1,133 crore).

• Ebitda margin expanded to 16.4% versus 16% (Bloomberg estimate: 17.6%).

• Net profit down 14% to Rs 354 crore (Bloomberg estimate: Rs 457 crore).

Shares of the company rose 6.61% to Rs 505 apiece after having hit an intraday high of 7.2%, compared to a 0.21% gain in the benchmark Nifty 50 as of 10:15 a.m.

• Support Levels: Rs 459 (Two-day low)

• Resistance Levels: Rs 518.8 (Two-week high)

The company has taken a total hit of Rs 99 crore, which includes Rs 31 crore as exceptional item for FY23 and Rs 68 crore as part of other expenses under the Extended Producer Responsibility provision, similar to Ceat Ltd. and MRF Ltd. This led to a decline in the fourth-quarter profit and miss analysts' estimates.

The Ministry of Environment, Forest and Climate Change notified regulations on EPR for waste tyres. It is a recurring expense henceforth. Under the said regulation, tyre companies are required to meet specified waste recycling targets from the financial year-ended 2023. These obligations are to be fulfilled by purchasing certificates from recyclers, who are registered with the Central Pollution Control Board. This has been a key impact to the profit this quarter for tyre-makers, who have reported results until now.

The underlying demand for Apollo Tyres has been strong, both domestically and internationally. The margins grew by 44 basis points to 16.4%, while for the full financial year they were up a whopping 404 basis points to 17.5%. The company's efforts on cost optimisation, operating leverage, and lower debt levels have only led to these levels in the past 4–5 quarters.

Their international operations were strong, led by Europe, with double-digit growth in exports and mid-single growth in replacement segments, particularly truck and bus radial tyres (+7%) and passenger car volumes (+10%). The only contention was the double-digit decline in OEM volumes.

The company's Ultra High-Performance (UHP) tire mix has improved by 400 bps to 47% in this quarter from 43% in 4QFY23, resulting in 7% volume growth and a 100 bps Ebitda margin improvement.

Citi has maintained a 'buy' with a target price of Rs 570, implying a 21% upside from current levels. Despite acknowledging that the results fell slightly short of their expectations, they anticipate a revival in India's demand for growth following the elections. Another positive, according to them, is that the European Union's outlook appears to be more positive.

Emkay has a 'buy' call with a target price of Rs 600, implying an upside of 26%. They see replacement, exports, and European demand outlooks improving with a stronger mix. They are positive due to the ongoing price increase, including 3% by the company in May. Recently,  they have also seen a 15-20% drop in raw material prices from recent highs. The volume outlook in key segments is improving, with high-single-digit/low-double-digit growth in the truck and bus radial and passenger car replacement markets.

Among other things, Nomura also mentioned that April demand has been strong, and they expect high single-digit volume growth in FY25.