Neutral APL Apollo Tubes Ltd For Target Rs. 1,157 - Sushil Finance
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Highlights from the Quarter:
* Volume Growth: The company reported total volumes at 423 Ktons compared to 552 Ktons in Q4FY22 and 373 Ktons in Q1FY22. Volumes saw an de growth of ~24% & growth of ~13% on QoQ and YoY basis respectively. The volumes were adversely impacted by the industry-wide channel destocking prompted by the correction in domestic HRC prices and lower share of value added products (VAP).
* Margin expectation: The management seem optimistic with respect to volume growth where they have target a volume growth to 2300 Ktons. They expect H1FY23 to report volumes to the tune of 1000 Ktons and balance on H2FY23. However, they expect margin pressure to sustain in H1FY23 and a prompt revival is expected in H2FY23
* Investment in Shankara Building Products: The company is one of the largest distributors and the investment was undertaken in Mar-22. The investment has a number of rationales from enabling higher volume handling, launch base of launch of new products, better pricing policy for the Southern markets and can help the company achieve market share expansion
OUTLOOK AND VALUATION
With a strong demand, the share of structured steel in India’s overall steel consumption pie is expected to increase significantly to 10% by CY30 from 4% in CY19. Overall, the structural steel tubes market is expected to increase by 17% CAGR over 2019-30E and reach ~22 MnTPA by CY30E. Demand drivers for structural steel tubes and weak competition given fragmented industry structure would help APL further expand its market share in the next few years. The increased volumes, new product additions and increased market share will additionally result in expansion of margins for the company compared to peers. Hence in FY24E, we expect the company to report a revenue of Rs. 16,980 cr with EBITDA and PAT margins at 8.7% and 5.8% with an expected EPS is Rs. 38.9. However, we have reduced the assigned PE multiple, owing to the high volatility in the markets and inflationary scenario in the Indian economy, to ~30X which gives us a target price of Rs. 1,157 with an upside of ~27% from the CMP within an investment horizon of 18-24 months.
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