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Excellent turnaround; Maintain Buy
APL Apollo Tubes (APT) reported its Q4FY19 numbers which were ahead of our estimates. It reported a robust revenue growth of 37.8% YoY led by strong volume growth of 39% in Q4FY19. The margins came in better than expected at 6.6% (down 13bps YoY) mainly due to higher share of high margin products during the quarter. Led by strong volume growth, decent operational performance, lower depreciation cost and lower tax rate, net profit grew by 44.7% YoY. The company has delivered a strong turnaround performance despite challenges faced both on the demand as well as margins front. Going forward, we continue to remain positive on APT’s long term growth prospects on account of good traction in volume growth and commissioning of DFT lines which would enhance its margin performance in coming quarters. Maintain Buy with a revised target price of Rs. 1,799.
Q4FY19 Result Update:
* APT’s net revenue grew at a strong pace of 37.8% YoY to Rs. 2,091 cr on the back of 39% increase in volumes The volume growth was mainly led by Hollow Sections which grew by 45% whereas Pre-Galvanized Tubes and Black Round Pipes also registered a healthy growth of 38% and 34%. The total volumes for the quarter stood at 4.18 lakh tons. The realizations were marginally impacted across product portfolio. For FY19, despite challenges faced in the sector, the company managed to deliver a healthy volume growth of 19% led by market share gains of ~200bps.
* The operating profit grew by 35.2% YoY, while margins contracted marginally by 13bps to 6.6%. This was higher than our estimates due to higher share of high margin products during the quarter. EBITDA /ton during Q4FY19 stood at Rs. 3,384 as compared to Rs. 3,475 in the same quarter previous year. Despite strong revenue growth, the operating profit grew at meagre 5.9% in FY19, as the profitability was impacted due to inventory loss (Rs. 41.7 cr) in Q3FY19.
* Led by strong volume growth, decent operational performance, lower depreciation cost and lower tax rate, net profit grew by 44.7% YoY. Other key highlights: i) the company will continue to focus on branding efforts in order to increase its visibility; b) the board of directors approved the acquisition of production unit located at Hyderabad, one of the unit of Taurus Value Steel & Pipes, a subsidiary of Shankara Building Products for consideration of Rs. 70 cr, iii) the company would increase its focus on high margin products which would lead to improvement in margin trajectory.
Outlook & Valuation:
We believe the strong volume growth could continue for the company led by market share gains, increased branding efforts by the company and continued demand from infrastructure, construction, automobiles, energy and agriculture sectors. Hence, we have raised our revenue forecast for FY20 and FY21 on the back of a strong 34.1% growth in FY19 and managements optimism on volume outlook. We also expect margin trajectory to improve going forward led by increasing share of high margin products and higher operational efficiencies. We estimate APT’s revenue/EBITDA/ PAT to grow at 19.5%/25.6%/28.8% CAGR over FY19-21E. Hence, we maintain Buy on the stock with a revised target price of Rs. 1,799.
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