Apollo Tyres has found itself in the spotlight for all the wrong reasons following a disappointing set of numbers for the June-ending quarter. The tyre manufacturer reported earnings that failed to meet street estimates, leading to a sharp decline in its share price.
On August 8, the stock plummeted nearly 7%, continuing a downward trend that has seen it drop 15% from its all-time high of ₹568 per share, which it reached just a few weeks ago on July 30. The recent sell-off has left the stock trading at an 8-week low, marking its worst monthly performance since June 2022, with a nearly 13% decline this month alone.
The June quarter proved particularly challenging for Apollo Tyres, largely due to persistent commodity headwinds and a concerning loss of market share in the truck segment. The company’s struggles have not gone unnoticed by investors or analysts, with many expressing concerns about the road ahead for the tyre giant.
The underperformance has prompted several brokerage firms to reassess their outlook on the stock, with Elara Capital downgrading it from ‘Neutral’ to ‘Sell’ and slashing its target price from ₹506 to ₹442 per share. Similarly, Kotak Institutional Equities maintained its ‘Sell’ rating, setting a target price of ₹410 per share, while Japanese brokerage firm Nomura also revised its target price downward to ₹496 from the previous ₹512 per share.
The numbers from the first quarter of the financial year 2025 paint a mixed picture. On a consolidated basis, Apollo Tyres’ revenue saw a modest 1% year-on-year increase, reaching ₹63.3 billion. However, the company’s performance in the European Union (EU) was less encouraging, with revenue declining by 1.5% year-on-year and 8% quarter-on-quarter to ₹17.1 billion.
The EBIT margin in the EU region also took a significant hit, shrinking by 554 basis points quarter-on-quarter to 4.3%. The consolidated EBITDA margin followed a similar trend, falling by 200 basis points quarter-on-quarter to 14.4%.
On a standalone basis, the company’s revenue grew by 4.7% quarter-on-quarter to ₹45.9 billion, a figure that lagged behind its competitors. CEAT, for example, posted a quarter-on-quarter growth of 6.3%, while MRF saw a more substantial 13.9% increase.
Year-on-year, Apollo Tyres’ standalone revenue growth of 4% was again outpaced by CEAT’s 8.5% and MRF’s 11.9%. The company’s decision to prioritize profitability over market share seems to have backfired, with the standalone EBITDA margin declining by 181 basis points quarter-on-quarter to 13.8%, compared to a 121 basis point dip for CEAT.
The company’s management acknowledged the challenges it faces, particularly in balancing profitability with market share. According to Elara Capital, Apollo Tyres has struggled to maintain its market position while attempting to navigate the difficult commodity landscape.
Despite implementing price increases that exceeded the industry average, the company’s standalone year-on-year EBITDA growth of 20% was significantly lower than CEAT’s 1% and MRF’s 2%.
Looking ahead, natural rubber prices, a key input for tyre manufacturers, are expected to remain elevated until the fourth quarter of FY25. Apollo Tyres has indicated that it may need to implement further price hikes, potentially as much as 4%, to offset rising raw material costs. However, such increases could prove difficult to pass on to consumers, delaying any meaningful margin recovery.
Kotak Institutional Equities has highlighted that Apollo Tyres faces dual challenges in its domestic market, with ongoing market share losses and commodity headwinds continuing to pose significant risks.
The company’s efforts to recover lost ground in the truck and bus segment are likely to be hindered by its more cautious approach to pricing, particularly in light of the sharp rise in natural rubber prices. While Kotak expects some margin improvement in the second half of FY25, it remains skeptical about whether the company will be able to meet market expectations, particularly as it grapples with the twin pressures of maintaining profitability and regaining lost market share.
The near-term outlook for Apollo Tyres remains challenging, with investors and analysts alike keeping a close eye on the company’s performance in the coming quarters. As the tyre industry continues to face a tough operating environment, Apollo Tyres will need to navigate these choppy waters carefully if it hopes to regain the confidence of the market and its shareholders.
