Apollo Tyres vs CEAT: Which tyre maker should you pick after stellar Q4 earnings?

Falling raw material costs and improved demand have led major tyre companies to deliver solid numbers for the March quarter. Analysts suggest that price hikes have also contributed to the companies' improved margins.

The industry struggled with high raw material costs due to the increase in rubber and crude oil prices over the last few quarters. However, prices have started to cool off recently, which has enabled companies to reduce their raw material costs in Q4FY23, resulting in gross margin expansion.

Further, investors reacted positively to the strong Q4 numbers, which pushed stocks to new levels. Since their Q4 announcement, shares of CEAT have created new highs, with each passing day rewarding their shareholders with handsome returns.

In addition, domestic brokerage firms also maintained a positive outlook on the sector. Apollo Tyres and CEAT, two major players in the Indian tyre industry, have reported strong Q4FY23 results that have exceeded market expectations. Both companies have recorded impressive growth in net profit.

Healthy volume growth

In the fourth quarter of FY23, CEAT reported a QoQ volume growth of 5% in the replacement segment, 8% in the OEM segment, and 15% in the export segment, resulting in an overall volume growth of 7%. Replacement volumes recovered after a seasonally weak Q3 FY23.

In the replacement market, the company's TBR (truck and bus radial) tyres have done particularly well, followed by farm tyres. In the original equipment manufacturer (OEM) market, commercial vehicles, especially in the farm and speciality segments, have done well, followed by two-wheelers.

On the other hand, Apollo Tyres experienced volume growth in the OEM segment, specifically in commercial vehicle and agriculture tyres. However, replacement segment demand was weak, and exports remained sluggish.

Compared to the same period last year, Apollo Tyres' volumes remained flat in Q4FY23. This was due to a 20% YoY increase in OEM segment volumes, which was offset by a 30% YoY decline in export segment volumes.

Overall, the company's performance was driven by domestic market growth and a recovery in demand for the CV and agriculture sectors.

Meanwhile, CEAT witnessed a 10.91% YoY growth in operating revenue in Q4 FY23, thanks to healthy volumes. The company's sales increased to Rs 2,875 crore as compared to Rs 2,592 crore in the same quarter of the previous fiscal year.

In comparison, during Q4FY23, Apollo Tyres recorded a nearly 12% rise in sales, which increased from Rs 5,578 crore in Q4FY22 to Rs 6,247 crore in Q4FY23.

Lower RM costs boost operating profits

CEAT reported a drop in raw material costs in Q4FY23 to Rs 1,721.9 crore from Rs 1,785.2 crore in Q3FY22. This helped the company to expand its gross margin by 658 basis points YoY to 40.1% and 556 bps QoQ.

In addition, the operating profit margin expanded by 553 bps YoY to 13.1% in Q4 and sequentially the margin expanded by 458 basis points.

The company's operating profit in Q4 has grown by Rs 92.4% YoY to Rs 375 crore, compared to an operating profit of Rs 195.2 crore in the same quarter of the previous fiscal year.

Similarly, Apollo Tyres also reported a drop in raw material costs in Q4FY23 to Rs 3,537 crore from Rs 3,875.4 crore in Q3FY23, resulting in a gross margin of 43.4%, which grew by 360 basis points YoY and 370 basis points QoQ.

It reported an EBITDA margin of 16% in the fourth quarter of FY23, an increase of 480 basis points compared to 11.2% in the same period last year and an increase of 180 basis points compared to the previous December quarter.

The company's operating profit in Q4FY22 came in at Rs 998 crore, a YoY growth of 59.42%.

Bottom Line Performance

CEAT reported a significant increase in net profit for Q4 FY23. The net profit has grown by 428% YoY, reaching Rs 132 crore compared to Rs 25 crore in the corresponding quarter of the last fiscal year.

On the other hand, Apollo Tyres has also reported a surge in consolidated net profit for the March quarter. The net profit has increased over three-fold to Rs. 427 crore. The company reported had a net profit of Rs 113 crore in Q4FY22.

Both companies have reported a significant increase in net profit for Q4 FY23. However, the growth rate for CEAT is much higher than that of Apollo Tyres.

Brokerage Views

"Apollo Tyres has reported above-estimated performance in Q4FY2023 and is looking to sustain higher EBITDA margin, as it has been focusing on premium products and is aiming for profitable volume growth," said brokerage firm Sharekhan.

"The company has been gaining market share in European markets, it has shared a sluggish outlook for European markets in the near term and is hoping for recovery from H2FY2024. While ATL has been continuously focusing on premium products and improvement in the product mix, the soft raw-material cost trend along with its own cost-control initiatives are likely to support it in sustaining a high EBITDA margin," said the brokerage firm.

The brokerage has maintained its 'buy' rating on the stock with a revised price target (PT) of Rs 429 apiece in expectation of a 140 bps EBITDA margin expansion in the next two years. It also has its dominant position in the domestic TBR segment and focus on profitability over plain vanilla volume growth, said Sharekhan.

ICICI Securities also kept its 'buy' rating on Apollo Tyres and revised the DCF-based target price to Rs 424 apiece from Rs 400 earlier. However, Elara Capital has downgraded the stock to Accumulate from 'buy' earlier but raised the target price to Rs 425 apiece.

Meanwhile, Anand Rathi maintained a 'buy' rating on CEAT and revised its target price to Rs 2,170 apiece. Phillip Capital maintained its 'Neutral' rating on the stock with a target price of Rs 1,800 apiece.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.