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Inventory losses; higher discounting hurts margins

* APL Apollo Tubes (APAT) reported the fourth consecutive quarter of weak operating performance (EBITDA/MT down 62% YoY in 2Q) on account of inventory loss of ~INR1.5b (led by a fall in steel prices) and higher discounting during the quarter. Revenues grew marginally at 3% YoY led by volume growth (up 12% YoY), which was partially offset by a decline in realizations (down 8% YoY).

* With higher inventory loss being booked in 2Q, we see a lower possibility of any major inventory loss in 2H. Additionally, the company will benefit from the improving VAP mix and favorable operating leverage, resulting in a sequential recovery in margins.

* We cut our FY25E/FY26E earnings by 10%/6%, primarily due to lower EBITDA/MT (reduced by 9%/5% for FY25E/26E). We value the stock at 35x Sep’26E EPS to arrive at a TP of INR1,750. Reiterate BUY.

Muted revenue growth on account of declining realizations

* Consolidated revenue grew 3% YoY while declined 4% QoQ to INR47.7b (est. INR52.6b) as volume growth (up 12%/5% YoY/QoQ to ~758KMT) was offset by a decline in realization (down 8%/9% YoY/QoQ to INR62,958). VAP mix stood at 55% in 2QFY25 vs. 55%/60% in 2QFY24/1QFY25.

* Gross profit/MT declined 27%/28% YoY/QoQ to INR7,016, while EBITDA/MT fell 62%/56% YoY/QoQ to INR1,821 (est. INR2,299) on account of higher discounting (INR493/MT), inventory losses (INR1,981/MT), and unfavorable product mix during the quarter. EBITDA declined 58%/54% YoY/QoQ to INR1.4b (est. INR1.7b).

* Adjusted PAT declined 73% YoY and 72% QoQ to INR538m (est. INR890m).

* In 1HFY25, APAT’s revenue grew 6% YoY to INR97.5b, while EBITDA/Adj. PAT declined 30%/38% YoY to INR4.4b/INR2.5b; implied revenue/EBITDA/Adj. PAT growth in 2HFY25 is expected to be 33%/31%/37%, led by strong volume growth coupled with expansion of margins. CFO for 1HFY25 stood at INR1.3b vs. INR5.2b in 1HFY24.

Highlights from the management commentary

* Demand scenario: The company expects a better volume offtake in 2HFY25 as the inventory with channel partners is very low. It has already rolled back the additional discounting and expects ~10% QoQ volume growth for the next few quarters going ahead.

*  Guidance: APAT maintains its volume guidance of clocking ~4MMT/5MMT sales volume in FY26/FY27. EBITDA per ton is expected to reach ~INR5,000 over the next couple of quarters (touching ~INR5,000 by 4QFY25), and is likely to maintain it over FY26 on a conservative basis.

*  Capex: The company has proposed to build three new Greenfield plants, which will add ~610KMT of manufacturing capacity. It expects to incur a capex of INR3-3.5b over the next 6-7 months to reach a manufacturing capacity of ~5MMT.

Valuation and view

* With lower channel inventory and higher demand for primary steel products (led by the narrowing gap in primary and secondary steel prices), APAT is likely to witness continued strong volume growth. We expect margins (EBITDA/MT) to improve sequentially, led by the operating leverage and higher mix of VAP in 2HFY25.

* We expect APAT to clock a CAGR of 20%/22%/28% in revenue/EBITDA/PAT over FY24-27. We value the stock at 35x Sep’26E EPS to arrive at a TP of INR1,750. Reiterate BUY.

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