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Muted volume and margin contraction hurt earnings

Earnings below our estimate

* APL Apollo Tubes (APAT) reported muted sales volume of 679KMT (up 4% YoY and 12% QoQ) in 4QFY24, led by channel de-stocking due to steel price corrections. Further, EBITDA/MT declined ~17% YoY to ~INR4,132, due to higher rebates and discounts offered by APAT to counter the inventory destocking.

* We cut our FY25E earnings by 8% due to lower EBITDA/MT (reduced by 4%), while largely maintaining our earnings for FY26E. We value the stock at 32x FY26E EPS to arrive at a TP of INR1,800. Reiterate BUY.

Higher discounting hurts operating margins

* Consolidated revenue grew 8%/14% YoY/QoQ to INR47.7b (est. INR42.1) in 4QFY24, led by volume growth (up 4% YoY and 12% QoQ to 679KMT) and improved realization (up 3% YoY and 1% QoQ to INR70,230/MT).

* VAP mix stood at 60% in 4QFY24 vs. 54% in 4QFY23 and 59% in 3QFY24, underpinned by a gradual ramp-up of the Raipur and Dubai plants.

* Gross profit/MT declined 7% YoY and 5% QoQ to INR9,330, led by higher rebates and discounts offered by APAT to counter the inventory destocking (due to falling steel prices).

* EBITDA/MT dipped 17% YoY and 11% QoQ to INR4,132 in 4QFY24. EBITDA declined 13% YoY (flat QoQ) to INR2.8b (est. INR3.1b).

* Adj. PAT declined 16% YoY, while it rose 3% QoQ to INR1.7b (est. INR1.95b).

* Net debt as of Mar’24 increased to INR7.8b from INR5.2b as of Mar’23.

* For FY24, APAT’s revenue/EBITDA/Adj. PAT grew 12%/17%/14% YoY to INR181b/INR11.9b/INR7.3b.

Highlights from the management commentary

* Demand scenario: The company witnessed decent demand in Apr-May’24 despite the election environment. It expects a healthy momentum in FY25 as well, especially post-election, as all the projects will ramp-up.

* Guidance: Going forward, the company expects ~20-25% volume CAGR for the next three years. The Raipur/Dubai plants are likely to witness ~70-75%/50% capacity utilization in FY25.

* Exports: APAT witnessed an export volume of ~110KMT in FY24. With the Dubai plant likely to generate ~150KTPA of sales volume in FY25, APAT expects an export of ~200-250KTPA during the year.

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 revenue/EBITDA/PAT CAGR of 26%/37%/45% over FY24-26. We value the stock at 32x FY26E EPS to arrive at a TP of INR1,800. Reiterate BUY.

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