Apollo Tyres Q2 FY26: Strong Margin Recovery Drives Profit Surge Despite Muted Revenue Growth

The quarter's performance represents a tale of operational recovery masking underlying challenges. Whilst Apollo Tyres achieved its highest-ever quarterly operating profit of ₹1,020.74 crores and record operating margins, the company continues to grapple with year-on-year profit erosion, particularly evident in the nine-month performance where profits declined 22.27%. The dramatic sequential turnaround from Q1's dismal showing suggests temporary headwinds may be easing, but sustained momentum remains uncertain.

Financial Performance: Margin Expansion Drives Sequential Recovery

Apollo Tyres' Q2 FY26 financial performance showcases a company regaining operational momentum after a challenging first quarter. Net sales climbed 4.12% sequentially to ₹6,831.09 crores, whilst year-on-year growth of 6.12% indicates modest top-line expansion. The real story lies in margin improvement—operating profit excluding other income surged to ₹1,020.74 crores, marking the company's highest quarterly operating profit on record, with margins expanding 171 basis points quarter-on-quarter to 14.94%.

The profit trajectory reveals significant volatility. Profit before tax recovered sharply to ₹386.08 crores from a mere ₹38.36 crores in Q1 FY26, translating to a tenfold sequential increase. However, the year-on-year comparison shows PBT declining 3.24% from ₹398.92 crores. The PAT margin of 3.78% represents a substantial 358 basis points improvement from the previous quarter's 0.20%, though it remains below the 4.62% achieved in Q2 FY25.

Cost management emerged as a critical driver of profitability improvement. Employee costs remained relatively stable at ₹878.57 crores, representing 12.86% of sales. Interest costs declined marginally to ₹101.05 crores from ₹100.59 crores, whilst depreciation increased slightly to ₹383.40 crores. The company's ability to expand operating margins despite modest revenue growth suggests improved pricing power and operational efficiency, though sustainability remains a key question given the year-on-year profit decline.

A concerning aspect of the quarter's performance is the tax rate volatility. Q2 FY26 saw a tax rate of 33.16%, down from an unusually elevated 66.42% in Q1 FY26 but higher than the 25.43% in Q2 FY25. This fluctuation, combined with the sharp sequential profit recovery, raises questions about the normalised earnings power of the business and whether Q2's performance represents a sustainable trajectory or a temporary reprieve.

Operational Excellence: Record Margins Mask Profitability Concerns

Apollo Tyres achieved a significant operational milestone in Q2 FY26, with operating profit to interest coverage reaching a record 10.10 times, substantially higher than the 8.62 times recorded in Q1 FY26 and 7.33 times in Q2 FY25. This improvement reflects both enhanced operational profitability and disciplined financial management. The company's operating profit to net sales ratio of 14.94% marks the highest level in recent quarters, demonstrating improved pricing power and cost optimisation in a competitive tyre market.

However, beneath these operational achievements lies a more complex picture. The company's return on equity stands at a modest 8.41%, indicating below-average capital efficiency compared to industry standards. Whilst Apollo Tyres has demonstrated healthy long-term growth with sales expanding at a 12.12% compound annual rate over five years and operating profit growing at 32.37%, the recent quarterly performance suggests this momentum may be faltering. The nine-month FY26 profit decline of 22.27% to ₹784.61 crores represents a material setback that cannot be ignored.

Balance sheet quality presents a mixed picture. Shareholder funds increased to ₹14,765.70 crores in March 2025 from ₹13,902.18 crores the previous year, reflecting retained earnings accumulation. Fixed assets declined marginally to ₹15,436.32 crores from ₹16,092.89 crores, suggesting limited capacity expansion. Current assets grew to ₹9,815.33 crores, providing adequate liquidity, whilst current liabilities increased to ₹7,360.31 crores. The working capital cycle appears stable, though the cash flow statement reveals concerning trends with operating cash flow declining to ₹1,823 crores in FY25 from ₹3,439 crores in FY24.

Margin Dynamics: Raw Material Relief Drives Profitability

The tyre industry operates in a cyclical environment heavily influenced by raw material costs, particularly natural rubber and crude oil derivatives. Apollo Tyres' margin expansion in Q2 FY26 appears driven primarily by favourable input cost trends rather than structural improvements. The operating margin of 14.94%, whilst impressive, compares unfavourably to the 16.43% achieved in Q4 FY24, suggesting the company remains vulnerable to commodity price fluctuations.

Gross profit margins tell a similar story. At 11.26% in Q2 FY26, gross margins improved substantially from 6.34% in Q1 FY26 but remain below the 12.03% achieved in Q2 FY25. This volatility underscores the company's limited pricing power and its dependence on external factors beyond management control. The inability to sustain margins at FY24 levels, when the company achieved a 15.19% gross margin in Q4, raises questions about competitive intensity and the company's strategic positioning.

Industry Leadership: How Apollo Tyres Compares to Peers

Within the tyre and rubber products sector, Apollo Tyres occupies a middle position, ranking third by market capitalisation at ₹33,673 crores. The company's valuation metrics reveal a discount to premium peers but a premium to value-oriented competitors. At a price-to-earnings ratio of 32.50 times, Apollo trades below industry heavyweight MRF's 37.38 times and in line with Balkrishna Industries' 32.90 times, suggesting the market views the company as a mature, moderately-valued player rather than a growth leader.

Return on equity comparisons highlight Apollo's efficiency challenges. At 8.41%, the company's ROE lags significantly behind Balkrishna Industries' 17.08%, JK Tyre's 13.69%, and CEAT's 10.51%. This underperformance reflects Apollo's higher capital intensity and lower profitability, raising questions about management's capital allocation decisions. The company's price-to-book ratio of 2.31 times, whilst lower than most peers, appears justified given the ROE differential—investors are paying less for each rupee of book value because that book value generates inferior returns.

Apollo's competitive positioning reveals both strengths and weaknesses. The company maintains one of the lowest debt-to-equity ratios at 0.24, providing financial flexibility that peers like JK Tyre (0.86) and CEAT (0.48) lack. Additionally, Apollo offers the highest dividend yield at 0.93%, appealing to income-focused investors. However, the company's inferior ROE and moderate P/E multiple suggest the market perceives limited growth potential relative to more profitable competitors like Balkrishna Industries.

The peer comparison underscores a critical challenge: Apollo Tyres must either improve operational efficiency to justify higher valuations or accept its position as a moderately-valued, dividend-paying incumbent. The company's inability to match Balkrishna's 17.08% ROE or even CEAT's 10.51% indicates structural inefficiencies that management has yet to address. Until ROE improves materially, Apollo will likely continue trading at a valuation discount to quality peers.

Valuation Analysis: Fair Value with Limited Upside

At the current price of ₹530.20, Apollo Tyres trades at a price-to-earnings ratio of 32 times trailing twelve-month earnings, marginally below the industry average of 33 times. This valuation appears broadly fair given the company's operational profile—moderate growth, below-average profitability, and manageable leverage. The stock's price-to-book ratio of 2.31 times reflects a reasonable premium to book value, though the company's 8.41% ROE suggests this premium may be generous.

Enterprise value metrics provide additional context. Apollo's EV-to-EBITDA multiple of 10.64 times and EV-to-EBIT multiple of 18.56 times indicate the market is paying a moderate price for the company's earnings power. The EV-to-sales ratio of 1.43 times aligns with industry norms for a capital-intensive manufacturing business. However, the EV-to-capital-employed ratio of 2.06 times, combined with a return on capital employed of 11.34%, suggests the company generates adequate but unexceptional returns on invested capital.

The stock's technical positioning offers mixed signals. Trading at ₹530.20, Apollo sits 4.84% below its 52-week high of ₹557.15 but 44.08% above its 52-week low of ₹368.00. The stock trades above all major moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—indicating positive momentum. However, the recent 1.12% decline suggests profit-taking after a strong run, with the stock up 22.52% over three months but flat year-to-date at just 0.12%.

Dividend considerations add modest appeal. Apollo's latest dividend of ₹5.00 per share translates to a 0.93% yield, higher than most peers. With a dividend payout ratio of 22.13%, the company retains adequate earnings for reinvestment whilst rewarding shareholders. The ex-dividend date of July 11, 2025, means investors purchasing at current levels will need to wait for the next dividend declaration. For income-focused investors, this yield provides some downside protection, though it's insufficient to drive total returns alone.

Shareholding: Institutional Exodus Raises Concerns

Apollo Tyres' shareholding pattern reveals a troubling trend of institutional divestment, raising questions about confidence in the company's near-term prospects. Promoter holding has declined dramatically from 1.16% in March 2025 to a negligible 0.05% in September 2025, reflecting continued stake reduction by the founding family. Whilst low promoter holding isn't inherently negative for a mature, professionally-managed company, the continued decline suggests promoters may be monetising their stake rather than demonstrating long-term conviction.

Foreign institutional investors have steadily reduced exposure, with FII holdings declining from 14.55% in September 2024 to 11.90% in September 2025. This 265 basis points reduction over four quarters indicates waning international investor interest, possibly reflecting concerns about India's tyre sector outlook or company-specific challenges. The sequential decline of 37 basis points from June to September 2025 suggests this trend remains intact, with FIIs continuing to lighten positions.

Domestic mutual funds have similarly reduced exposure, with holdings declining from 18.68% in September 2024 to 17.67% in September 2025. The 78 basis points sequential decline from June to September 2025 is particularly notable, occurring during a period when the stock rallied 22.52% over three months. This suggests mutual funds used the price strength to exit positions, a bearish signal indicating professional investors view the rally as a selling opportunity rather than a buying catalyst.

The sole bright spot comes from insurance companies, which increased holdings from 6.43% in September 2024 to 9.54% in September 2025, a substantial 311 basis points increase. The sequential addition of 113 basis points from June to September 2025 indicates insurance companies view Apollo as a value opportunity. However, this positive development is insufficient to offset the broader institutional exodus. With 41.40% total institutional holdings, Apollo maintains reasonable institutional participation, but the negative trend warrants concern about future selling pressure.

Stock Performance: Short-Term Strength, Long-Term Concerns

Apollo Tyres' stock performance presents a study in contrasts across different timeframes. Over the past three months, the stock has surged 22.52%, substantially outperforming the Sensex's 4.66% gain and generating 17.86% alpha. The one-month return of 10.21% versus the Sensex's 2.83% further demonstrates recent momentum. However, the year-to-date performance tells a different story—Apollo is essentially flat at 0.12%, significantly underperforming the Sensex's 7.95% gain and generating negative alpha of 7.83%.

Longer-term returns provide context for the company's investment merits. Over one year, Apollo has returned 11.53% versus the Sensex's 8.73%, generating modest positive alpha of 2.80%. The three-year return of 85.68% versus the Sensex's 36.88% appears impressive, delivering 48.80% alpha. Five-year returns of 221.72% versus the Sensex's 93.30% showcase even stronger outperformance. However, investors should note that much of this outperformance occurred during the post-COVID recovery period when cyclical stocks rebounded sharply.

Risk-adjusted metrics reveal important considerations. Apollo's one-year absolute return of 11.53% comes with volatility of 26.44%, resulting in a risk-adjusted return of 0.44. This compares unfavourably to the Sensex's risk-adjusted return of 0.71 with volatility of just 12.26%. The stock's beta of 1.35 indicates high volatility—Apollo tends to move 35% more than the broader market. This high-beta characteristic makes the stock suitable for aggressive investors comfortable with volatility but potentially unsuitable for conservative portfolios.

Technical indicators paint a bullish near-term picture. The stock trades above all key moving averages, from the 5-day average of ₹524.94 to the 200-day average of ₹456.80, indicating positive momentum across all timeframes. The overall technical trend classification of "Bullish" since November 12, 2025, suggests near-term momentum favours buyers. However, the stock's position just 4.84% below its 52-week high of ₹557.15 limits upside potential unless fundamental improvements justify higher valuations.

Investment Thesis: Quality Concerns Temper Valuation Appeal

Apollo Tyres' investment proposition centres on its classification as a "Good" quality company with "Attractive" valuation trading at a moderate 32 times earnings. The company's quality assessment reflects healthy long-term growth metrics—12.12% sales CAGR and 32.37% EBIT CAGR over five years—combined with manageable leverage and improving debt metrics. However, this quality grade masks concerning weaknesses, particularly the company's weak 8.41% return on equity and modest 10.28% return on capital employed, both indicating suboptimal capital efficiency.

The financial trend analysis reveals mixed signals. Whilst Q2 FY26 achieved several record metrics—highest operating profit, highest operating margin, and highest EBIT-to-interest coverage—the nine-month profit decline of 22.27% cannot be ignored. The company's "Positive" short-term financial trend classification appears overly optimistic given the year-on-year profit erosion. Investors should question whether Q2's sequential recovery represents genuine improvement or merely a rebound from an abnormally weak Q1.

Technical trends provide near-term support, with the stock classified as "Bullish" and trading above all major moving averages. The delivery volume analysis shows healthy participation, though the trailing one-month average of 4.74 lakh shares represents a 20.3% decline from the previous month's 5.94 lakh shares, suggesting reduced investor interest despite the price rally. This divergence between price strength and declining volumes warrants caution—it may indicate the rally is driven by short-covering or momentum rather than genuine accumulation.

The proprietary Mojo score of 78 out of 100 places Apollo in the "BUY" category, with the recommendation stating it's a "good investment opportunity" for fresh purchases. However, investors should critically evaluate this rating given the fundamental challenges. The score appears to heavily weight near-term technical momentum and attractive valuation whilst underweighting the concerning trends in profitability, institutional shareholding, and return on equity. A more conservative interpretation would suggest Apollo merits a "HOLD" rating for existing investors and cautious consideration for fresh positions.

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