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Muted earnings as volume growth offset by margin contraction

Earnings below our estimates

* APL Apollo Tubes (APAT) reported healthy sales volume of 721kmt (up 9% YoY/6% QoQ) in 1QFY25, led by the ramp-up of its Raipur and Dubai plants. However, EBITDA/MT fell ~10% YoY to ~INR4,183, due to high operational expenses (high employee, freight, power cost and ad spending in 1Q).

* We cut our FY25E/FY26E earnings by 13%/12%, primarily due to lower EBITDA/MT (reduced by 8% for both years). We value the stock at 35x FY26E EPS to arrive at a TP of INR1,720. Reiterate BUY.

Higher operational expenses hurt margins

* Consolidated revenue grew 9% YoY/4% QoQ to INR49.7b (est. INR50b) in 1QFY25, led by volume growth of 9% YoY/6% QoQ to 721kmt.

* VAP mix stood at 60% in 1QFY25 vs. 57%/60% in 1QFY24/4QFY24. VAP mix improved YoY, led by the ramp-up of the Raipur and Dubai plants.

* Gross profit/MT stood at INR9,772 (up 4% YoY/5% QoQ), led by favorable product mix. EBITDA/MT stood at INR4,183 down 10% YoY (up 1% QoQ) due to high employee, freight and power costs and high ad spend on branding in 1Q. EBITDA fell 2% YoY (up 8% QoQ) to INR3b (est. INR3.3b).

* Adjusted PAT was flat YoY but up 13% QoQ to INR1.9b (est. INR2b).

Highlights from the management commentary

* Demand scenario: Demand in 2Q is expected to remain under pressure. Dealers are wary of restocking due to falling steel prices (can fall further by 3,000-4,000/MT in 2Q). 2HFY25 is expected to be solid.

* Guidance: APAT has lowered its volume guidance to 3.2mtpa in FY25. It targets ~20-25% volume growth in FY26 and aims to reach 5mmt by FY27. In FY25, the company targets to match EBITDA/MT of FY24. It expects net debt to be near zero by the end of FY25.

* Market share: APAT is expected to gain market share from secondary scrap steel manufacturers amid the narrowing pricing gap (~5%) in primary and secondary steel. If HR Coil prices stabilizes at ~INR45- 48K/MT, then the company is confident of gaining this market share.

Valuation and view

* The incremental capacity from the upcoming plants and debottlenecking, along with the addition of high-margin products from the Raipur and Dubai units, should result in strong volume growth and margin expansion going forward.

* We expect a CAGR of 23%/28%/36% in revenue/EBITDA/PAT over FY24- 26. We cut our FY25E/FY26E earnings by 13%/12% primarily due to lower EBITDA/MT (reduced by 8% for both years). We value the stock at 35x FY26E EPS to arrive at a TP of INR1,720. Reiterate BUY.

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