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Muted H1FY25, Management optimistic on delivering 35%YoY growth; assign BUY!

Result Synopsis 
Apollo Pipes Ltd (APOLP) reported a lackluster performance in Q2FY25. Volumes (82% of total) for Apollo Pipes (standalone), declined by 17%YoY to 16,430Te (2-year CAGR stands at mere 3%) due to lower agri & infra demand which constituted ~30% of volumes Vs 40-45% previously. Though ASP improved sequentially by Rs7.3/kg to Rs122.1, EBITDA/Kg declined to Rs11 as compared to Rs12.2/Rs11.6 in Q2FY24/Q1FY25 respectively, owing to low volume off-take and minor inventory loss of <RS50Mn. For H1FY25, standalone volumes declined by 9%YoY to 37,367Te. For Kisan, volumes stood at 3,722Te (18% of total volumes) as agri demand is soft during monsoons. ASP improved sequentially from Rs121/Kg to Rs137/Kg, but EBITDA/Kg contracted substantially to Rs3.5/Kg Vs Rs9/Kg in previous quarter, owing to lower volumes and volatility in resin prices. Overall volumes stood at 20,152Te with EBITDA/Kg of Rs10 for Q2FY25. For H1FY25, total volumes stood at 46,714Te with EBITDA/Kg of Rs10. (YoY nos are not comparable on consolidate basis due to acquisition of KISAN in FY25). Furthermore, higher finance and depreciation cost dented profitability. Notably, net debt increased to Rs710Mn Vs Rs70Mn as on March’24. Moreover, working capital-days expanded to 54-days Vs 19-days in FY24, due to high inventory build-up. 

Management guidance 

Company stated that H2FY25 should grow by 35% Vs H1FY25. Similar to stated targets growth in FY25 will also be 35% higher Vs FY24. Kisan will continue to contribute 25% of sales going ahead. On EBITDA level margins will be 8-9% wherein APL standalone should deliver 10% & Kisan is expected to operate at 5-6% margins. Post all expansions and desired product-mix, margins should expand to 11-12% by FY27 end. Moreover, with improvement in sales, working capital days should improve to 40-days. Company incurred capex of Rs650Mn in H1FY25 and for H2FY25 capex will be Rs1.8-2Bn. 

Our View  

Though demand is expected to improve H2FY25 onwards, owing to weak performance in H1FY25 we have revised our earnings estimates downwards by 34.5%/22% for FY25E/FY26E respectively largely due to lower volume growth. We expect Apollo Pipes standalone volumes to grow by 15%CAGR with improvement in demand and new up-coming capacities over FY24-FY27E and KISAN’s performance should improve gradually. With the company’s aggressive volume growth strategy and up-coming capex, we reckon EBITDA/Kg will be capped at Rs10 for the coming 2years. At CMP, the stock trades at P/E(x) 23x on FY27E EPS of Rs21.3. We have revalued the company at P/E(x) of 30x on FY27E EPS, arriving at a target price of Rs640. Hence, we upgrade the stock to a BUY rating.  

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