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Heavy structural tubes to drive volumes/margins

APL Apollo (APL) continues to chart a lead role in catalysing steel tubes market in India. Strong growth guidance (4mtpa by FY25E) along with increasing value added mix (70-75% by FY25E) along with intense efforts towards market creation are clear earnings triggers. Underlying business RoCEs are already at 50%, and should reflect in the print as 4mtpa volume runrate is achieved. We expect APL’s market share gains to accelerate with the commissioning of the new Raipur plant. Current business environment is offering a countercyclical investment opportunity, in our view, with 20-25% gap between flat and long steel products hindering volume growth for APL, an environment which is expected to normalise in the medium term. We maintain BUY with a target price of Rs1020/share.

* Revenues drive beat in Q2FY22 as margins normalise.

Sales volume declined 11% YoY, due to decline in the general structure volumes. While management mentioned that there has been continous sequential improvement in value mix, the heightened difference between long and flat products (HRC being ~25% expensive than rebar) is creating a demand/margin stress for ERW pipe manufacturers like APL. This is also normalising margins and offering a countercyclical investment opportunity, before the gap dissipates and APL starts gaining on volumes and margins take support from value addition.

* Greenfield Raipur plant to drive RoCEs > 50%.

Management highlighted that the core business RoCEs are already at 50% and will reflect in the print as utilisation is achieved in the base business and as the greenfield Raipur plant ramps up. The total investment in the Raipur plant, including working capital investments is ~Rs10bn and the volumes are expected to see gradual ramp-up from Q4FY22. Colour coated tubes from the Raipur plant will be targetted toward residential building applications.

* Significant margin potential.

Distribution reach and widest assortment of SKUs have allowed APL to catalyse market growth and keep gaining market share. In keeping with this practice, APL continues to focus on new branding as it tries to capture the relevant market for heavy structural tubes (replacing aluminium profiles, steel angles, channels, etc.) and continues to tinker with SKUs with potential margin scatter of Rs2,000 to Rs30,000/te. We believe this will continue to hold APL in good stead as it attempts to catapult volumes to 4mtpa in a market which is currently sized at 4mtpa. And, management appears confident to achieve the same while maintaining net working capital at ~ 8-10 days.

* Soon to announce a dividend policy.

APL reiterated its decision to soon announce a dividend policy in keeping with the strong volume growth and FCF profile.

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