Apollo Tyres stock plummets 15% in 10 sessions, hits 8-week low: Is the downtrend here to stay?

Tyre companies reported a weak set of numbers for the June-ending quarter, with several missing street estimates, including Apollo Tyres. The June quarter proved challenging for the company due to commodity headwinds and a loss in market share in the truck segment.

This disappointment led to a nearly 7% drop in Apollo Tyres' stock following its results announcement on August 8, propelling it to correct by 15% from its all-time high of ₹568 per share, which it reached on July 30. Notably, the recent sell-off has caused the stock to decline by nearly 13% this month, marking its worst monthly performance since June 2022. At current levels, the stock is trading at an 8-week low. 

In light of the company's June quarter numbers, brokerages are forecasting further downside. Elara Capital downgraded the stock from 'Neutral' to 'Sell' and lowered its target price from ₹506 to ₹442 per share.

Similarly, Kotak Institutional Equities maintained its 'Sell' rating with a target price of ₹410 per share. Meanwhile, Japanese brokerage firm Nomura adjusted its target price to ₹496 from the previous ₹512 per share.

Wielding a double-edged sword

In Q1, the company's consolidated revenue saw a modest 1% year-on-year (YoY) increase to ₹63.3 billion. However, European Union (EU) revenue declined by 1.5% YoY and 8% quarter-on-quarter (QoQ) to ₹17.1 billion, with the EBIT margin shrinking by 554 basis points QoQ to 4.3%. The consolidated EBITDA margin also fell by 200 basis points QoQ to 14.4%.

On a standalone basis, revenue grew by 4.7% QoQ to ₹45.9 billion, which is lower compared to CEAT's 6.3% QoQ growth and MRF's 13.9% QoQ growth. The company’s YoY standalone revenue growth of 4% lagged behind CEAT’s 8.5% and MRF’s 11.9%, as the company prioritized profitability over market share. The standalone EBITDA margin dropped by 181 basis points QoQ to 13.8%, a steeper decline than CEAT’s 121 basis point dip.

According to Elara Capital, the company is struggling to strike a balance between profitability and market share. Despite raising prices more than the industry average, its standalone YoY EBITDA growth of 20% was significantly lower than CEAT’s 1% and MRF’s +2%.

Additionally, natural rubber prices are expected to remain elevated until Q4 FY25, according to management. Elara Capital noted that the company would need another 4% price hike to offset raw material costs, but such steep increases could be challenging, delaying margin recovery.

"Historically, tyre stock prices peak close to margin peaks, and subsequent margin downgrades tend to be sharp, as we are currently witnessing. We have cut our FY25E EPS by a significant 25% and FY26E–27E EPS by 9–13%. We expect a tepid 1%/6% EBITDA/PAT CAGR for FY24–27E," stated Elara Capital.

Kotak's view

Kotak Institutional Equities highlighted that dual challenges persist for Apollo Tyres in its domestic business, with ongoing market share losses and commodity headwinds. While the company plans to refocus on recovering lost market share, Kotak believes that margin recovery will lag behind expectations, particularly when compared to its peers. This is attributed to the segment leader's aggressive pricing strategy, characterized by lower price increases in the truck and bus segment.

The near-term outlook remains challenging, as a sharp rise in natural rubber (NR) prices is expected to pressure profitability. The company will need to strike a balance between growth and profitability. Given the continuous market share erosion, Kotak anticipates that Apollo Tyres may adopt a more cautious approach to price hikes compared to its competitors in the upcoming quarters.

While Kotak expects margins to improve in the second half of FY25, it believes that the margin recovery will still fall short of market expectations as Apollo Tyres intensifies its efforts to regain lost market share in the replacement segment.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.