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Strong business moat will enable the company to scale its business, its product offerings and its margins

APL Apollo is India’s leading steel tubes manufacturer with 2,600 KTPA capacity with growth of ~18% over the last decade. The growth in production has been ~24% CAGR over the last 11 years with a 50% market share in structural steel tubes. Capacity expansions have been via both, the organic & inorganic routes, while volume growth is driven by launch of new products buoyed by strong distribution and branding efforts. Share of value added products has now risen to 57% in FY21 (40% in FY16) and is driving overall margin expansion. Acquisition of Apollo Tricoat in FY18 played a significant role in improving the company’s product profile and margins.

Increased demand and industry expansion for Structural Steel Pipes to drive business growth for the company

Outlook for the structural steel-tubes industry in India remains strong, driven by government push for infrastructure, revival in real estate, and increased acceptance of steel over traditional materials. India’s National Steel Policy, 2017, aims for 300 million TPA of production capacity by 2030-31. The Indian market holds tremendous potential for structural steel as the government goes on an overdrive for infrastructure and real estate which throws up immense opportunities for structural steel products.Demand from rural areas &smaller towns (56%of sales in 9MFY22) has been strong and is likely to sustain.

Core catalyst for growth to be provided by sectors like real estate and infrastructure, where airports development and warehousing to provide additional impetus

More than 90% of the company’s overall revenue is primarily from 2 sectors i.e. Housing and Infrastructure. Therefore, increased need for housing in the metro cities due to large influx of the immigrant population has resulted in government increasing the FSI of various areas and promote G + 20 floors type of building which can provide a huge growth potential for the Structural Steel Products (SSP). Additionally, Infrastructure sector in India has an aim to attract Rs. 100 Tn investment by 2024-25 and majority of the amount will be spent on housing, Infrastructure, Warehousing, airports development and modernization and these industries require SSP through out the year, thus providing significant opportunities for the company. Emerging products such as Apollo Chaukhat and Apollo Column should also drivevolumegrowth over FY22E-23E.

Organic and Inorganic expansion to ramp up the volumes and the profitability of the company

The company had incurred a Capex of ~Rs. 5.5 Bn over FY17 to FY19 to expand its production capacity and add more SKUs to its product portfolio. The company has plans for organic expansion where the total manufacturing capacity will be increased to 3 MTPA by end of FY22 and inorganic expansion by way of acquiring Shankara’s Hyderabad unit and APL Tricoat. Additionally, the company has plans to increase the total manufacturing capacity to 4 MTPA by FY25E via a brownfield expansion.

OUTLOOK & VALUATION

We believe that APL Apollo Tubes Ltd’s growth prospects are considerably bright with strong business moat and superior financial quality of the company. The company has a strong proven track record of ~28% Sales CAGR in the last decade and for the period FY22E to FY23E we expect the company’s sales to grow at a double digit CAGR with higher profitability due to increased product offering by way of organic and inorganic expansion. Additionally, the expansion of the industry in the next 7-10 years would provide considerable opportunities to the company as they boast more than 50% market share in the structural steel pipes business. For FY22E & FY23E, we expect the company to deliversales growth of ~15% & ~18% respectively. For FY23E, EBITDA and PAT margins are expected to be 8.7% and 6.0% & EPS of Rs. 27.5. We have given a premium valuation to the company due to its robust sales growth, margins expansion over the previous years, capex plans, debt reduction and improving product mix. These factors can further improve the profitability and revenue growth of the company. Thus, we reinstate coverage of APL Apollo Tubes ltd with a Target price of Rs. 1,153 at 42X FY23E EPS which provides an upside of ~33% withinan investmenthorizonof 12 to 18 months.

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