Apollo Tyres Ltd is grappling with acute margin pressure amid weak demand. Elevated raw material expenses and higher-cost inventory hurt the December quarter (Q3FY25) earnings. Raw material cost rose 15% year-on-year (y-o-y) and 2% sequentially in Q3 to ₹175 per kilogramme. Thus, the consolidated Ebitda margin fell 465 basis points y-o-y to 13.7%, missing consensus estimates.
Raw material cost is expected to be sequentially flat in Q4, the management said, adding that natural rubber prices have slightly eased. Some part of the high-cost inventory was consumed in Q3, and the remaining will be used in Q4. However, demand and the competitive environment in domestic business are not currently favourable enough to take more price hikes.
Earlier price hikes in truck and bus radial (TBR) and passenger car radial (PCR) segments and an improving product mix could aid margin recovery. Here, Apollo Tyres is exiting the low-margin 12-13-inch OEM (original equipment manufacturer) tyre segment and remains focused on the high-margin 16-inch+ category.
Note that the earnings of tyre companies are more sensitive to margin movement as they do not usually pass on the full impact of the increase/decrease in raw material costs in the replacement market. “We have cut our FY25-27 consolidated earnings per share estimates by 3-4% due to lower revenue growth (India) and Ebitda margin (India and Europe) assumptions,” said a Kotak Institutional Equities report on 8 February.
Margin call
While margins are expected to recover from Q4 due to correction in domestic and international rubber prices and normalization of inventory costs, Apollo’s margin performance could remain below Street expectations, as it will focus on recovering the lost market share in the replacement segment, Kotak cautioned. The management has reiterated its stance on balancing growth and profitability, but aggressive pricing by competitors is a concern.
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The demand outlook in Q4 is improving in India and Europe. Replacement demand rose 5% on-year in Q3 but was offset by a 10% drop in OEM. India’s business replacement momentum is expected to continue, and the European Union outlook is strong for both passenger cars and truck replacement segments.
Against this backdrop, Apollo’s shares have been down almost 17% in the past year, versus the 20% gain in the Nifty Auto. Underperformance in standalone revenue versus peers in recent quarters as it faces market share loss in PCR and TBR segments has been a worry for the stock. At FY26 price-to-earnings, the stock is trading at a multiple of 14.5X, showed Bloomberg data, which does not offer comfort given current business conditions.
