APL Apollo Tubes Ltd For Target Rs. 1,909 By Elara Capital Ltd
Oasis of growth
APL Apollo Tubes (APAT IN) registered a strong recovery in Q3FY25 after a weak Q2, primarily on the back of robust volume growth. As a result, EBITDA jumped ~24% YoY/150% QoQ to ~INR 3.5bn, largely-in-line with our/Consensus estimates of ~INR 3.5bn/3.4bn, respectively. Net debt stood at ~INR 1.0bn versus INR 3.0bn as of endQ2FY25 and net cash of ~INR 0.2bn as of end-FY24. We believe APAT’s earnings growth is an oasis within the Metals and Building Products industry, which is struggling with weak demand and margin pressure, and this should favorably impact APAT’s valuations. Therefore, we upgrade APAT to Buy from Accumulate with a higher TP of INR 1,909 from INR 1,682.
Market share gain from secondary firms bolsters volume: Sales volume jumped ~37% YoY/9% QoQ to ~0.8mn tonnes. The management expects volume growth to be healthy going ahead, driven by increased acceptance of primary steel pipes, improved exports volume, focus on increasing volume of round pipes, ramp-up in innovative products from its Chhattisgarh based Raipur unit, narrowing of price gap between primary and secondary steel pipes and completion of ongoing capacity expansion projects. Management expects to achieve sales volume of 3.1-3.2mn tonnes in FY25, followed by 4mn tonnes in FY26 and 5mn tonnes in FY27.
Reduction of inventory doubles EBITDA/tonne QoQ: Realization declined ~5% YoY but grew ~4% QoQ to INR 63,596/tonne. Operating cost was down ~5% YoY but was largely flat QoQ at INR 61,424/tonne. EBITDA/tonne declined ~10% YoY but surged ~129% QoQ to INR 4,173, largely-in-line with our estimates of INR 4,213. As per management, there is a potential operating leverage benefit of INR 400-500/tonne in the next one year and any improvement in demand from current levels could further enhance APAT’s margin profile in the future.
On track to reach 5mn tonnes capacity by FY26: APAT’s capacity is expected to reach 5mn tonnes by FY26 from 4.3mn tonnes at present through greenfield expansions of: 1) 0.3mn tonnes in New Bengaluru, Karnataka, 2) 0.2mn tonnes at Siliguri, West Bengal, and 3) ~0.1mn tonnes in Gorakhpur, Uttar Pradesh along with brownfield expansion of 90,000 tonnes.
Revise to Buy with a higher TP of INR 1,909: Expect APAT’s earnings to improve further by ~18% QoQ and ~50% YoY in Q4FY25E, driven by market share gain, pent-up demand from value added products and operating leverage. We revise APAT to Buy from Accumulate.
As we roll-over to March 2027E from September 2026E, our TP is raised to INR 1,909 from INR 1,682, on 30x (unchanged) March 2027E P/E. We largely retain our estimates. Fluctuation in steel prices, a slowdown in demand and increased competition are key risks to our call.
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