Apollo Tyres reported a 37% year-on-year decline in its consolidated net profit for the second quarter of FY24, primarily due to weak demand in the Indian market and increased raw material costs. Despite this, the company’s European operations exceeded expectations, driven by strong demand and favorable pricing. The company also highlighted the positive impact of softening rubber prices, a key raw material, which is expected to improve margins in the coming quarters. While the domestic market remains sluggish, particularly in the commercial vehicle segment, Apollo Tyres maintains a positive outlook, citing an anticipated uptick in replacement demand in India.
Key Insights:
- Mixed Performance: Apollo Tyres’ Q2 results present a mixed picture. While the headline numbers fell short of expectations, the strong performance of the European business segment offers a silver lining.
- Europe Outperforms: The European operations acted as a buffer against the weak domestic performance. This highlights the benefits of the company’s diversified geographical presence.
- Raw Material Costs: The decline in rubber prices is a significant positive development. This should ease margin pressures and contribute to improved profitability in the future.
- Domestic Challenges: The Indian market continues to pose challenges due to weak demand, especially in the commercial vehicle segment. However, the company anticipates a recovery in the replacement market, which could drive future growth.
Investment Implications:
- Cautious Optimism: While the Q2 results were subdued, the positive outlook for the European business and the softening of rubber prices offer reasons for cautious optimism.
- Monitor Domestic Recovery: Investors should closely monitor the recovery in the domestic market, particularly in the commercial vehicle and replacement segments, as this will be crucial for Apollo Tyres’ future growth in India.
- Valuation: Given the current market conditions and the company’s performance, investors should carefully evaluate the valuation and consider the potential upside against the risks associated with the domestic market slowdown.
