Accumulate APL Apollo Tubes Ltd for Target Rs 2,312 by Elara Capital
Margins stable despite weak volumes
APL Apollo Tubes (APAT IN) reported EBITDA of ~INR 4.1bn, up ~11% YoY, marginally below our estimate of ~INR 4.3bn, but broadly in line with consensus. The miss was primarily attributable to an ~INR 254/tonne rise in employee costs following the annual wage revision. The key positives in Q1 were:
(1) gross profit/tonne improved by INR 1,125 QoQ and INR 2,010 YoY, driven by better price positioning
(2) management reiterated its ~20% EBITDA growth guidance for FY27 despite subdued volume performance in Q1FY27.
Going forward, we expect volume growth to accelerate as the pricing gap between primary and secondary steel pipes has narrowed down from the peak. We expect this gap to contract further by the end of FY27, supported by a recovery in sponge iron demand in H2FY27 on the back of seasonal demand. In addition, capacity expansion in newer geographies, pent-up demand from the Middle East, and channel restocking shall support volume growth. Further, the company’s strategy to increase the share of value-added products from ~65% currently to 75–80% in the next two years should reduce earnings cyclicality. Thus, we reiterate Accumulate. We also raise our target price to INR 2,312 (from INR 2,213), rolling forward our valuation to 35.0x June 2028E P/E (from March 2028E previously).
Volume decline amid demand and supply disruptions: APAT’s volumes declined ~6% YoY and ~19% QoQ to ~0.74mn tonnes, impacted by:
(1) ~25,000 tonnes of lost volumes at its UAE operations due to the geopolitical crisis
(2) lower sales of the SG premium brand owing to a wider price gap between primary and secondary steel pipes
(3) ~25,000 tonnes of lost rustproof pipe volumes due to gas shortages
(4) channel destocking amid high inflation. Despite weak volumes, realization increased ~16% YoY and ~11% QoQ to INR 73,013/tonne, EBITDA/tonne increased ~18% YoY and remained largely flat QoQ at INR 5,522
Ongoing expansion to raise value-added share to ~75-80% by FY28: APAT is expanding its structural steel capacity from 5mn tonnes to 8mn tonnes by end-FY28 through a mix of greenfield and brownfield projects. The expansion includes 2mn tonnes across East (Gorakhpur and Siliguri), South (Malur), and West India, enhancing geographic reach and proximity to demand centers. In addition, 1mn tonnes of debottlenecking capacity will be created through plant modernization and replacement of conventional mills with faster, more efficient systems. Post commissioning, management expects the share of value-added products to increase from ~65% at end-Q1FY27 to ~75–80% by end-FY28,
Reiterate Accumulate with a higher TP of INR 2,312: With the pricing gap between primary and secondary steel narrowing down from its recent peaks, early signs of recovery in demand have emerged in Q2. Management indicated that July volumes rose ~20% MoM and is targeting ~1.0mn tonnes of sales in Q2FY27, implying ~17% YoY growth. We expect volume growth to accelerate further as newly commissioned capacities ramp up. Accordingly, we reiterate Accumulate. However, we trim our earnings estimates by ~2% for FY27E and ~1% each for FY28E-29E, factoring in weak Q1 volume. We raise our TP to INR 2,312 from INR 2,213, rolling forward our valuation to 35.0x June 2028E P/E (from March 2028E). Key risks to our outlook are a demand slowdown and delay in capacity additions.
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SEBI Registration number is INH000000933
