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Navigating market challenges

APL Apollo Tubes (APAT) ended FY24 with a healthy sales volume growth of ~15% YoY, despite the relatively subdued volume growth of just 2% YoY in 2HFY24. In this report, we have highlighted the current demand trend in the domestic structural tubes industry based on our channel checks. We have also underscored the company’s strategy to foray into various international geographies.

* Based on our channel checks, we anticipate that the overall demand scenario will continue to remain weak due to a slowdown in construction activity. The demand is likely to weaken further during the general election period owing to a delay in government projects and infrastructure spending.

* A majority of the dealers are operating with minimum inventory levels in anticipation of weak demand and due to the high cost of holding.

* We expect demand to recover strongly post-general elections (from 2QFY25) aided by the resumption of infrastructure spending and restocking of inventory by the dealers.

* In addition, APAT will capitalize on the significant global opportunity in the longer run to maintain its high growth momentum. Accordingly, it has recently commissioned its manufacturing plant in Dubai and plans to open warehouses in four key cities around the globe (Liverpool, Melbourne, Antwerp, and Houston).

* With these, the company is establishing its footprint in the global market to seize the opportunity. Going forward, international sales will be one of the key growth drivers for the company. ? Considering the weak sales volume in 2HFY24 and the muted demand outlook in the near term, we cut our FY24E EPS by 5%. Consequently, we reduce our FY25/ FY26 EPS estimates marginally by 4% each. We value the stock at 32x FY26E EPS to arrive at our TP of INR1,800. Reiterate BUY.

Near-term pain likely; long-term growth trajectory remains intact

* APAT ended FY24 with a healthy volume growth of 15% YoY to ~26.2MTPA, despite the relatively subdued volume growth of just 2% YoY in 2HFY24, which was affected by channel destocking in 3Q and persistent demand weakness in 4Q.

* Sales volume was flat in 3QFY24 owing to channel destocking on account of the likely steel price correction (down 12% from the peak level) and weak retail sales within the construction industry. Further, sales volume inched up only 4% YoY in 4QFY24 as the unfavorable demand scenario continues.

* However, with the ramping up of the Raipur plant, the share of value-added products has been improving (~59% in 2HFY24 vs. ~56% in 1HFY24).

* We recently conducted channel checks with dealers across India, covering the key markets of Maharashtra, Delhi NCR, Chhattisgarh, and Tamil Nadu, et al.

* We anticipate that the overall demand scenario will continue to remain weak due to a slowdown in construction activity. The demand is likely to weaken further during the general election period owing to a delay in government projects and infrastructure spending (refer to Exhibit 3).

* Accordingly, most of the dealers are operating with minimum inventory levels in anticipation of weak demand. Further, high interest costs make it unviable to carry higher inventory due to the high cost of holding.

* However, we expect demand to recover strongly post-general elections (from 2QFY25) aided by the resumption of infrastructure spending and restocking of inventory by the dealers.

* Further, with the commissioning of the Kolkata plant in FY25E and the ramping up of the newly commissioned Dubai and Raipur plants, we expect APAT to post a strong comeback in 2HFY25 with robust volume growth and improved EBITDA/MT (led by a higher share of value-added products).

* Thus, while the near-term pain for APAT is likely to persist (in 1QFY25), the longterm growth trajectory remains intact (expect 27%/ 36% revenue/ EBITDA CAGR over FY24-26).

Tapping global opportunities to sustain the growth momentum

* APAT is a leader in the Indian structural tubes market with a market share of ~55%. The Indian structural tubes market was ~7.7MMT in CY23, and it is likely to reach ~17.3MMT by CY30, clocking ~12% CAGR over the period.

* Moreover, the HR coil-based structural tubes market is expected to reach ~13.3MMT by CY30 (vs. ~4.1MMT in CY23), clocking ~18% CAGR over CY23-30E.

* However, the global opportunity is massive. According to the ‘Expert Market Research’, the global steel market size was about 1,800MMT as of CY22. Considering that the global structural steel market accounts for about 9% of the total steel market, the global structural steel market stands at around 162MMT (~21 times the size of the domestic market).

* Accordingly, the company has recently commissioned (Dec’23) its manufacturing plant in Dubai (capacity of ~0.3 MMT; to be expanded to ~0.5MMT) and has set up a full-fledged team within the region, in order to cater to the rising demand in the Middle East.

* In addition, the company has highlighted its plan to open warehouses in four key cities around the globe (Liverpool, Melbourne, Antwerp, and Houston). APAT is strengthening its export department considerably to have a significant presence across the globe.

* In the longer run, the company expects its international sales to surpass 1MMT (~0.5MMT from the Dubai plant and 0.5MMT of exports from India), accounting for ~20% of the total sales volume (vs. ~2% in FY23).

* Therefore, going forward, international sales will be one of the key growth drivers for the company.

Valuation and view

* On a longer term, we believe APAT would sustain its earnings momentum on the back of: 1) growing demand across segments, 2) increased product penetration with a robust distribution network, 3) rapid capacity expansion, 4) an increase in the share of VAP, thus driving margins, and 5) its market leadership.

* We expect APAT to report a revenue/EBITDA/PAT CAGR of 27%/36%/44% over FY24-26. Considering the weak sales volume in 2HFY24 and the muted demand outlook in the near term, we cut our FY24E EPS by 5%. Consequently, we reduce our FY25/FY26 EPS estimates marginally by 4% each. We value the stock at 32x FY26E EPS to arrive at our TP of INR1,800. Reiterate BUY.

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