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Subdued volumes due to channel destocking

Earnings in line with our estimate

* APL Apollo Tubes (APAT) reported muted sales volume at 604KMT (flat YoY, down 11% QoQ) in 3QFY24, led by channel de-stocking in anticipation of steel price corrections (down 12% from the peak level). However, EBITDA grew ~2% YoY to ~INR2.8b, led by 3% YoY growth in EBITDA/MT on account of an improved value-added product (VAP) mix at ~59% in 3QFY24 v/s 56% in 3QFY23.

* We largely maintain our FY24/FY26 earnings estimates but reduce our FY25 estimates by 12% in anticipation of a slow ramp-up of new capacities. We value the stock at 32x Dec’25E EPS to arrive at a TP of INR1,770. Reiterate BUY.

Improving gross margins support operating performance in a volatile environment

* Consolidated revenue declined 3% YoY/10% QoQ to INR41.8b (est. INR42.3b) in 3QFY24, led by subdued volumes (flat YoY/down 11% QoQ to 604KMT) and a decline in realization (down 3% YoY/up 1% QoQ to INR69,200/MT).

* Gross profit/MT grew 6% YoY and 2% QoQ to INR9,812, led by a decline in raw material prices and improved VAP share. VAP mix stood at 59% in 3QFY24 vs. 56% in 3QFY23 and 55% in 2QFY24, underpinned by a gradual ramp-up of the Raipur plant.

* EBITDA/MT grew 3% YoY but declined 4% QoQ to INR4,631 in 3QFY24. EBITDA grew 2% YoY (declined 14% QoQ) to INR2.8b (in line).

* Adjusted PAT declined 2% YoY/18% QoQ to INR1.65b (in line).

* Net debt as of Dec’23 increased to INR4b vs. INR2.4b as on Mar’23. ? For 9MFY24, revenue/EBITDA/adj. PAT grew 14%/31%/28% YoY to INR133.5b/INR9.1b/INR5.6b.

Highlights from the management commentary

* Demand scenario: Volume off-take was softer due to a delay in the commissioning of new plants (Raipur and Dubai), weak demand in the building material segment, and volatile steel prices. APAT has witnessed a recovery in demand in Dec’23 and Jan’24.

* Guidance: The management has maintained its sales volume target of ~5MMT by FY26 (with ~70% share of VAPs). It expects to grow revenue by ~20-25% p.a. which can further accelerate provided tailwinds within the industry.

* Exports: APAT targets to increase exports to ~1MMT by FY26 (~0.5 MMT in Dubai and ~0.5MMT exports from India). It plans to open warehouses in four key international locations.

Valuation and view

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

* We expect a CAGR of 36%/52%/60% in revenue/EBITDA/PAT over FY23-26. We value the stock at 32x Dec’25E EPS to arrive at our TP of INR1,770. Reiterate BUY.

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