Buy APL Apollo Tubes Ltd For Target Rs.1,920 by Motilal Oswal Financial Services Ltd
Margins restore to previous levels; sequential improvement visible
Earnings above our estimates
* APL Apollo Tubes (APAT) reported a strong quarter led by healthy volume growth (37% YoY), sequential margin recovery (EBITDA/MT up 2.3x QoQ to INR4,173 while still down 10% YoY), and market share gains in general structures. Discounting intensity during the quarter was also lower (down INR100-150/MT QoQ).
* Following a significant inventory loss in 2QFY25, 3Q was a more stable quarter. Looking ahead, we expect further improvements in volumes (led by better utilization in Raipur and Dubai plants) and margins (led by operating leverage). Our implied growth for Revenue/EBITDA/Adj. PAT in 4Q is ~19%/39%/42% YoY.
* We maintain our FY25E/FY26E/FY27E earnings and value the stock at 35x FY27 EPS to arrive at a TP of INR1,920. Reiterate BUY.
Strong volumes drive earnings
* Consolidated revenue grew 30%/14% YoY/QoQ to INR54.3b (est. INR58.1b) as the volume growth (up 37%/9% YoY/QoQ to ~828KMT) was partially offset by a decline in realization (down 5% YoY, while realizations grew 4% QoQ to INR65,597). VAP mix stood at 56% in 3QFY25 vs. 59%/55% in 3QFY24/2QFY25.
* Gross profit/MT declined 5% YoY but grew 33% QoQ to INR9,303. EBITDA/MT declined 10% YoY but increased 2.3x QoQ to INR4,173 (est. INR4,017). EBITDA grew 24%/2.5x YoY/QoQ to INR3.5b (est. in line).
* Adjusted PAT grew 31%/4x YoY/QoQ to INR2.2b (est. INR2b).
* In 9MFY25, APAT’s revenue grew 14% YoY to INR151.8b, while EBITDA/Adj. PAT declined 14%/17% YoY to INR7.9b/INR4.6b. Volume grew 19% to 23,07,530MT.
Highlights from the management commentary
* Demand scenario: The company is witnessing a recovery in demand across its end-user segments, with strong demand tailwinds in the railway and aviation segments. While demand in infrastructure, water transportation, and construction has been softer, a recovery is expected in 2HCY25.
* Guidance: APAT guided for a marginally better EBITDA in FY25 vs. FY24, with an expected EBITDA of over INR4b in 4Q and EBITDA/MT of over INR4,500/MT. The company has maintained its sales volume guidance of ~4MMT/5MMT in FY26/FY27, respectively. EBITDA per ton is expected to reach ~INR4,500 over the next couple of quarters and is likely to improve to INR5,000 over FY26.
* 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 INR6b over the next year, reaching a total manufacturing capacity of ~5.5MMT.
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 continue witnessing strong volume growth. We expect margins (EBITDA/MT) to improve sequentially in 2HFY25, supported by the operating leverage and higher mix of VAP.
* We expect APAT to clock 19%/23%/28% CAGR in revenue/EBITDA/PAT over FY24-27. We value the stock at 35x FY27 EPS to arrive at a TP of INR1,920. Reiterate BUY.
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