Buy APL Apollo Tubes Ltd for the Target Rs.2,000 by Motilal Oswal Financial Services Ltd
Margin recovery on track
Operating performance in line with our estimates
* APL Apollo Tubes (APAT) showed a healthy recovery in operating performance in 1QFY26 despite weaker macroeconomic conditions, higher employee costs (incl. one-off ESOP cost) and geopolitical headwinds. EBITDA grew 23% YoY, led by volume growth of 10% YoY and EBITDA/MT of INR4,683 (up 12% YoY).
* We expect the growth momentum to improve ahead, led by capacity expansion and demand recovery from railways, aviation and real estate infra projects. For FY26, management has guided for volume growth of 10-15% and EBITDA/MT of INR4,600-5,000.
* We largely maintain our FY26E/FY27E earnings and value the stock at 35x FY27E EPS to arrive at our TP of INR2,000. Reiterate BUY.
Healthy volume and better margins boost EBITDA
* Consol. revenue grew 4% YoY (down 6% QoQ) to INR51.7b (in line), led by sales volume growth of 10% YoY (down 7% QoQ) to ~794KMT. VAP mix stood at 61% in 1QFY26 vs. 60%/58% in 1QFY25/4QFY25.
* Gross profit/MT was up 2% YoY/4% QoQ at INR9,938. EBITDA/MT rose 12% YoY (down 4% QoQ) to INR4,683 (est. INR4,837). EBITDA grew 23% YoY (down 10% QoQ) to INR3.7b (in line).
* Adj. PAT jumped 23% YoY but declined 19% QoQ to INR2.4b (in line).
Highlights from the management commentary
* Outlook: APAT has lowered its FY26 volume growth guidance to 10-15% from 15-20% earlier. It has revised its EBITDA/MT range to INR4,600-5,000 per ton vs. ~INR5000/MT previously.
* Divestment in Shankara: In the last 3-3.5 years, Shankara has quadrupled and the company now does not see any point in holding its investment in it. APAT divested its complete stake in the same.
* Expansion plans: APAT plans to expand via four key levers: expansions in key markets (East India, South India, and Dubai), new product segments, exports, and sustaining its brand premium. APAT expects capex of INR15b in the next three years to raise capacity from 4.5MT to 6.8MT by FY28.
Valuation and view
* We expect volume growth to improve further, led by capacity expansion in key markets, new product additions, and higher exports. Margin will also improve, driven by cost optimization, increased automation, and a rising mix of value-added products, driving steady growth in EBITDA/MT.
* We expect the growth momentum to further improve, led by demand recovery from railways, aviation and real estate infra projects and capacity expansion.
* We expect a CAGR of 19%/37%/44% in revenue/EBITDA/PAT over FY25- 27E. We value the stock at 35x FY27 EPS to arrive at a TP of INR2,000. Reiterate BUY.
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