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Adverse sales mix and channel destocking hurt earnings

Earnings below our estimates

* APAT reported a weak operating performance, with an 18%/26% YoY decline in gross profit/EBITDA per MT in 2QFY23. Margin was adversely impacted by an adverse sales mix (8pp YoY decline in VAP mix), channel destocking, and higher cost of the Raipur plant.

* We retain our FY23E/FY24 earnings estimate on the back of a higher margin, with an increasing share of VAP and a ramp up of Raipur plant. We maintain our Buy rating.

Higher volume growth drives revenue

* Consolidated revenue grew 29% YoY to INR39.7b (in line) in 2QFY23, led by robust volume growth (up 41%) on the back of an aggressive sales push (by offering higher discounts).

* Gross profit/MT declined by 18% YoY and 22% QoQ to INR8,211, while EBITDA/MT contracted by 26% YoY and 16% QoQ to INR3,850 in 2QFY23 due to a lower mix of value-added products (down 8pp YoY to 54%), channel destocking, and higher cost of the new Raipur plant. EBITDA grew 4% YoY to INR2.3b (est. INR2.5b) in 2QFY23.

* Adjusted PAT grew 3% YoY to INR1.5b (est. INR1.5b considering minority interest, however, excluding minority interest on account of Apollo Tricoat merger, est. Adjuted PAT was INR1.67b)

* Revenue grew 32% YoY to INR74.1b in 1HFY23. EBITDA/PAT in the same period declined by 11%/8% YoY to INR4.3b/INR2.7b.

* Cash flow from operations stood at INR4.3b v/s INR2.6b in 1HFY22.

Highlights from the management commentary

* Capex: Planned cumulative capex stood at INR5b till FY25. This consists of residual capex at Raipur and setting up of a new factory in Dubai and Kolkata, which will boost capacity to ~4.5MMT.

* Margin: The management expects EBITDA/MT ~INR5,000 from its existing plant going forward. The same from Raipur/Dubai/Kolkata plant is guided at INR7,000-7,500/over INR10,000/~INR5,000.

* Guidance: It expects a blended EBITDA/MT of ~INR5,000/~INR4,500 in 2H/FY23. The management maintained its volume target of ~4MMT by FY25 (30% CAGR over FY22-25).

Valuation and view

* The addition of high- margin products from the Raipur unit and growing share of VAP is likely to result in an improvement in margin.

* We expect a revenue/EBITDA/PAT CAGR of 19%/26%/34% over FY22-24.

* We largely maintain our earnings estimates for FY23/FY24 on the back of a higher margin, with an increasing share of VAP and a ramp up at the Raipur plant. We maintain our Buy rating and value the stock at 33x Sep’24E EPS to arrive at our TP of INR1,340.

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