IGI Logo

Sluggish Q1; Growth to Pick Up in H2

Est. Vs. Actual for Q1FY26: Revenue – MISS; EBITDA/t – BEAT; PAT – BEAT

Change in Estimates post Q1FY26: FY26E/FY27E:

Revenue:-4%/-5%; EBITDA: -5%/-3%; PAT: -7%/-4%.

Recommendation Rationale

• Sluggish Q1FY26: Q1 performance was impacted by a weak macro backdrop as volumes stood below expectations at 794 kt, down 7% QoQ, but up 10% YoY. Softer volume growth was on account of i) volumes lost for 1 week in North India and the last 20 days of July in the Middle East (Dubai) due to geopolitical tensions, ii) early onset of monsoon, and iii) softer money supply at channel partners.

• EBITDA/t missed consensus by 6% and stood at Rs 4,683/t, down 4% QoQ, but up 12% YoY, as the lower sales volume led to negative operating leverage and one-time notional expense of Rs 100/t related to ESOPs, which increased the employee costs in the quarter.

• Growth likely to pick up in H2FY26: Management foresees growth to pick up from H2FY26 as government projects will pick up post monsoon, leading to the buying power of channel partners (dealers). Exports to Dubai started recovering in Jul’25, and are likely to pick up in H2FY26. Rate cuts could also lead to higher retail demand (independent housing). The company’s strategy is to focus on EBITDA/t rather than pushing volumes in the market.

Sector Outlook: Cautiously Positive

Company Outlook & Guidance: FY26 sales volume growth guidance is revised down to 10-15% YoY from earlier 15-20% YoY due to a softer start to FY26. EBITDA/t guidance for FY26 is now in the range of Rs 4,600-5,000/t from earlier guidance of Rs 5,000/t. FY27 volume could grow by 15- 20% YoY, led by product development efforts and focus on exports. The current capacity is 4.3MT, which will increase to 6.8MT by FY28. The total capex for this expansion is expected to be Rs 15 Bn and will be incurred equally over the next 3 years. The ultimate goal is to achieve 70% VAP share and EBITDA/t of Rs 5,500-6,000/t.

Current Valuation: 35x P/E Mar’27 EPS (Unchanged)

Current TP: Rs 1,950/share (Earlier TP: Rs 2,035 published in our July’25 top pick)

Recommendation: We maintain our BUY rating on the stock.

Financial Performance: Numbers stood below expectations amidst a tough macro environment in Q1FY26. Revenue grew by 4% YoY, but down 6% QoQ over a strong base of Q4FY25, missing consensus by ~6%. EBITDA stood at Rs 372 Cr, up 23% YoY, but down 10% QoQ, ~6% miss against consensus. EBITDA/t stood at Rs 4,683/t, up 12% YoY, but down 4% QoQ and 6% below consensus, led by negative operating leverage on account of lower sales volumes and one-time impact of ESOPs in employee costs. VAP share slightly improved at 61% vs. 60% in Q1FY25 (58% in Q4FY25), and EBITDA/t across categories grew YoY. PAT stood at Rs 237 Cr, which grew by 23% YoY, but down 19% QoQ.

Outlook

The company’s vision is to expand its capacity to 10 MTPA by FY30, providing a growth tailwind in the longer term. We decrease our FY26/27E EBITDA as we factor in lower sales volume. We decrease our TP to Rs 1,950/share from Rs 2,035/share earlier, led by lower EBITDA estimates.

Valuation & Recommendation

We continue to value the company on Mar’27 EPS using a 1-year forward P/E target of 35x (unchanged) to arrive at our Mar’26 TP of Rs 1,950/share (from Rs 2,035/share). Our TP implies an upside of 15% from the CMP. We maintain our BUY rating on the stock.

Key Concall Highlights

• Volumes to pick up in H2FY26: Volume pick up will be led by i) exports to the Middle East, which were impacted in Q1FY26. Recovery is being witnessed in Jul’25. ii) Two new product lines got started, which will contribute in the next 7-8 months: a) is a 1000x1000 heavy structural tube with a capacity of 100 kt, and b) rust-proof tubes of 300 kt capacity have come up. These will give incremental volumes, and iii) H2 of the fiscal year is usually stronger for the construction sector. Retail demand from independent homes is likely to pick up as interest rates come down. Furthermore, dealers are sitting light on inventory, which will drive volume growth.

• Strategy to penetrate new markets – capacity expansion: The company targets to expand its current capacity from 4.5 MTPA to 6.8 MTPA by FY28. The expansion will help it cater to the virgin East Indian market and high-margin international markets. The expansion would include a brownfield expansion of 2 Lc Ton in Dubai, 5 Lc Ton roofing sheets and 1 Lc Ton Heavy structure in Raipur. Greenfield expansion would include 2 Lc Ton in Gorakhpur, 3 Lc Ton in Kolkata, 3 Lc Ton in Bhuj (for focusing on exports from India) and 3.6 Lc Ton in New Malur (including 1.6 Lc Ton shifting of existing lines). Furthermore, the company is also expanding into speciality tubes with a 0.5 MTPA expansion. The total capex outlay is expected to be Rs 15 Bn over the next 3 years.

• The Raipur plant is currently operating at ~60% utilisation on a blended basis. The Dubai plant contributed 6% of overall volumes. Demand has recovered post-impacted Q1FY26 due to geopolitical tensions in the Middle East. Utilisation rates are going up, and it is currently operating at a 60% utilisation level.

• Increase in employee cost: In Q1FY26, the company’s employee cost was Rs 1,170/t at Rs 93 Cr. The higher employee cost is due to the notional ESOP cost of Rs 6 Cr in the quarter. Going forward, sustainable quarterly employee cost will be in the range of Rs 87-88 Cr, which will be at Rs 600-700/t.

• Capital allocation strategy: Free Cash will be distributed equally between i) tax, ii) capex, iii) dividends/buybacks and iv) reduction of other liabilities (trade payables and other current liabilities). Net cash as of Q1FY26 stood at Rs 2.1 Bn (vs. Rs 3.1 Bn in FY25), and WC days remain in the single digit. By the end of FY26, the target is to achieve a much larger cash surplus.

• General category EBITDA/t spreads improved by ~ Rs 1,000/t, since the last 2 quarters company has been selling the general products at Rs 2,800/t The market has absorbed the price hike in general products, cementing APL Apollos' brand positioning.

• HRC vs. Patra spread: APL's Strategy is not to produce from Patra. When the spread between patra and HRC price is lower, HRC-led structural steel tubes gain market share from patra. When the spread is higher, it will focus on its own HRC-led structural products market with higher EBITDA/t.

• Other highlights: Plants achieved 72% of power consumption based on RE power, and the company’s target is to take it to 80- 85% over the next 2-3 years. This will reduce overall power cost.

Key Risks to Our Estimates and TP

• Failure to ramp up the expansion projects as guided by the company.

• Steep fall in regional HRC prices leading to traders destocking.

• Macroeconomic risk impacting the demand for structural steel.

For More Axis Securities Disclaimer https://simplehai.axisdirect.in/disclaimer-home SEBI Registration number is INZ000161633