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An ideal proxy to strong construction demand

We initiate coverage on APL Apollo Tubes Ltd (APL) with a BUY rating on the following conviction (i) company’s substantial ~55% market share in the buoyant structural steel tubes industry (HRC Coil based), (ii) growth boost from new capacities, (iii) higher share of value-added products, (iv) remarkable product innovation & growing industry applications (v) healthy FCF generation & superior return ratios.

Indian structural steel tubes (SST) industry set to clock 12% CAGR:

Given robust realestate development in both residential & commercial space, and massive works in infrastructure across India, the SST industry is expected to grow by 12%CAGR over 2023-2030E. Housing/Commercial buildings/Infra constitute 63%/19%/13% of overall SST application. Incrementally, with newer applications in commercial spaces likes hospitals & schools, railways, airports, and industrial uses, SST usage is likely to expand materially. Consequently, SST as % of total steel production is expected to increase from 6% to 8% over 2023-2030E.

APL commands ~55% market share in SST (HRC based):

The company has maintained its dominant position in SST industry over the years. APL’s market share (HRC based structural steel tubes) has expanded from 18% in FY19 to 55% in FY24 on account of constant product innovation and being the market creator for new products & new applications. The number-2 manufacturer has a market share of ~10-12%, reflecting APLs dominance in SST industry. Going forward, strong tailwinds for SST industry are likely to make APL the biggest sector beneficiary.

New capacities to fast-track growth:

APL tubes have added 1.2Mn Te capacity from FY21 to FY24 to reach a total capacity of 3.8Mn Te, and the same is expected to stand at 5Mn Te by FY25E. Owing to strong growth across housing & infra segment, we reckon volumes to grow by stellar 20%CAGR over FY24-FY26E. Incrementally, with ramp-up of Raipur (1Mn Te capacity operated at 55% utilization) & Dubai plant, we expect the growth trajectory to accelerate. Though H1FY25E is likely to be sluggish, we expect demand to revive sharply from H2FY25E following resumption of infra spends & higher construction activities. Moreover, with higher steel prices & better product mix, we reckon ASP to increase by 3%CAGR over FY24-FY26E which should ensure a robust revenue growth of 23% over the same span. Company’s aim is to grow volumes by 25%CAGR over next 2-3 years.

HRC price rise and better product mix to boost EBITDA/Te:

Steel prices are recovering on the back of strong Indian demand projected from the construction and infrastructure sector. Additionally, raw materials prices are expected to remain elevated as both the iron ore and coking coal are in short supply, which should lead to higher HRC prices. Moreover, share of Value-added products has grown from 42% in FY19 to 58% in FY24 and APL is focused on expanding this share in the future as well, which is showcased in their capex plan (a mere 10% of incremental capacity is earmarked for General products & rest for Value-added products). Consequently, we expect EBITDA/Te to improve from Rs4,554 in FY24 to Rs5,204 in FY26E. Overall EBITDA is expected to grow by 28%CAGR over FY24-FY26E. Management is confident of achieving an EBITDA/Te of Rs5,500 in coming 2 years.

Healthy FCF generation & superior return ratios imminent:

Owing to cash & carry model adopted by APL and given the company’s bargaining power in supplier negotiation, minimal capital is blocked in working capital. Hence, despite the Rs6Bn capex lined up for next 2 years, we reckon strong FCF generation of Rs18Bn over FY24- FY26E. Further, ROE/ROCE is likely to expand from 22.2%/26.1% in FY24 to 26.4%/31.6% by FY26E, respectively.

Premium multiples to sustain going forward:

We expect Revenue/EBITDA/PAT growth of 23%/28%/34%, respectively over FY24-FY26E. Historically APL tubes has traded at a premium multiple of P/E(x) of 40x (avg 1-year forward multiple), since FY21. At CMP, the stock trades at P/E(x) of 44x/31x on FY25E/FY26E EPS of Rs33.2/Rs47.4, respectively. We initiate coverage on APL Apollo Tubes Ltd with a BUY rating, having valued the company at P/E(x) of 40x on FY26E EPS, for a target price of Rs 1,895, which marks an upside of 29% from CMP.

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