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Sound prospects ahead

APL Apollo’s (APL) performance undershot consensus estimates. Key takeaways: 1) Margin was impacted by channel destocking leading to higher discounts to distributors; 2) firm focus on maintaining market share led to shipments growth of 42% YoY to 602kt; 3) adverse product mix with lower share of value-added products; 4) sound working capital management resulted in higher cashflow from operations in H2FY23 despite lower earnings; and 5) slower than expected ramp up of Raipur plant (currently at break-even level). Going ahead, management has targeted both volume growth and EBITDA/te improvement. We don’t foresee volume guidance of 4mnte for FY25 at risk. Besides, APL’s market share is likely to improve further with the commissioning of new Raipur plant. Factoring in structural improvement in profitability and volume growth, we value APL on 35x FY24E EPS (2 deviations above the past two year mean). Our TP works out to Rs1,225. We reinitiate coverage on APL with BUY.

* Strong volumes growth; however, EBITDA/te declined across products. Q2FY23 volume rose 42% YoY to 602kt. Volumes growth was largely led by commodity grade products (general structures). EBITDA/te had declined across products during Q2 due to channel destocking, higher discounts to distributors. Poor revenue mix and delayed commissioning of Raipur debottlenecking has further impacted EBITDA on an overall basis. We expect EBITDA/te to improve in H2FY23 taking clue from management guidance.

* Near-term outlook muted, guidance of ~4mnte volume by FY25 remains intact. The Raipur plant has started operations. In Q2FY23, the plant contributed volumes of ~12kte, which is expected to improve to ~70kte in Q3FY23 and ~100kte in Q4FY23. For FY24, the management has guided volumes of ~600-700kte and for FY25 volumes should reach to 1mnte for Raipur plant. On an overall basis, the company has guided volumes of 4mnte by FY25 which will be contributed by debottlenecking of its existing facility, Raipur plant, Dubai plant and Kolkata plant.

* Value-added products from Raipur plant. Raipur plant will cater to 100% valueadded product segment which will have EBITDA/te of Rs7,000/te as per the management commentary. New products from Raipur include: i) World’s 1st thicker colour-coated products, ii) world’s 1st colour coated structural steel tubes, iii) India’s 1st 500x500mm dia structural steel tubes, iv) India’s 1st and world’s 2nd 1,000x1,000mm dia structural steel tubes, v) India’s 1st CRCA black annealed tube and vi) India’s 1st galvalume tubes.

* Outlook: Improvement in store. We expect APL’s performance to improve on twin planks of volume growth and margin improvement. We reinitiate coverage on APL with BUY rating and target price of Rs1,225 based on 35X FY24E P/E.

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