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Profitability remains high 

APL Apollo (APAT) recorded in line EBITDA of Rs1.94bn (CentrumE: Rs1.94bn), down 27% QoQ on account of lower volumes (down 23% QoQ) as customers defer purchase and destock in anticipation of fall in prices. APAT increased discounts in order to sell its products during the quarter which impacted its profitability. As a result, it recorded EBITDA/t of Rs4,587, down 5% QoQ. This performance is commendable as it comes at the backdrop of sharp decline in steel prices which would have hurt its inventory valuation. We believe volumes will start moving up from Q2FY23 with end of de stocking period. The success of value added products from upcoming Raipur plant (1.5mtpa) by Q2FY23 end will decide the future trajectory of its earnings. We factor in 20% volume CAGR over FY2224E at average EBITDA/t of ~Rs5,000. We value APAT at 30x FY24E EPS to arrive at a TP of Rs941. Reiterate ADD.

Volume declines lead to EBITDA de growth QoQ; EBITDA/t down QoQ to Rs4,587 

APAT reported sales volume of 423kt, down by 23% QoQ as customers defer purchase in anticipation of lower prices. The share of VAP increased marginally to 61% vs 60% in Q4FY22.  APAT  has  to  provide  higher  discounts  to  boost  sales  during  Q1FY23.  The highlight of the quarter is that despite sharp drop in steel prices (fell by ~Rs15,000/t by June end),  APAT  did  not  get  hit  on  its  inventory  much.  As  a  result,  APAT  reported EBITDA/t of Rs4,587 (down by Rs237/t QoQ) and EBITDA of Rs1.94bn, down 27% QoQ. Management  is  confident  of  achieving  EBITDA/t  of  Rs4,5005,500  from  existing operations and can move ahead with volumes coming in from upcoming Raipur plant

Full expansion of 1.5mt VAP products at Raipur by 1HFY23 

APAT is on the verge of commissioning value added structural tubes capacity of 1.5mtpa at  Raipur  (estimated  capex  of  ~Rs8bn,  Rs2bn  remaining  to  be  spent)  which  will  be completed in phases by 1HFY23. With this expansion, APAT will be a 4mtpa structural tubes  producer.  This  would  help  it  to  generate  20%  volume  CAGR  over  FY22 24. Management guides 4mt volume in FY25, implying ~32% volume CAGR over FY2225 on a high base, seems very optimistic. These are value added products and can fetch higher margins (Rs6,000 8,000/t EBITDA). With this, APAT targets to increase share of VAP from 60 65% to 75%+ in the next 3 years. Besides this, APAT finalised land in Dubai (0.3mtpa capacity) and is in process of finalising land at Kolkata (0.2mtpa capacity) for setting up plants at estimated capex of Rs1.5bn.

Reiterate ADD with TP of Rs941; awaiting success of Raipur expansion  

We expect volume  to ramp up in Q2FY23 after subdued Q1FY23 as destocking period ends. H2FY23  should  see  volume  coming  from  its  Raipur  plant wherein Management guides EBITDA/t of>Rs6,000. We expect APAT to record 20% volume CAGR over FY22 24E to 2.5mt in FY24E. As most of its products at Raipur is launched for the first time, we await  to  see  the  acceptability  of  the  product. We  reiterate  ADD  with  target  price  of Rs941. Promoter family is venturing into NBFC by acquiring stake in Moongipa Securities and planning to invest ~Rs3bn as equity. This venture will be used for bill discounting in steel  sector  and  even  APAT  distributors  which  gets  difficulty  in  receiving  credit  from Banks can take advantage from this. Though management clarified that APAT does not has any stake in this but can be used for business development.

Valuations

We value APAT at 30x FY24E EPS to arrive at a TP of Rs941.  Reiterate ADD.

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