APL Apollo Tubes: Well placed to grow volumes & profitability

8 Jan 2024 , 12:09 PM

Recommendation: Buy; Target price: Rs 1847

 

APL Apollo (APAT) is one of IIFL’s top mid-cap pick for 2024. Over FY23-26, APAT is well placed to deliver 36% EPS Cagr, led by strong end-market demand for the existing products and growing acceptance for innovative products for building construction in the RE and Infra segments. This will also drive higher share of value-added products to ~70% and aid margin expansion. At 32x FY25 PER, valuations are reasonable post the recent underperformance given 30%+ RoEs and strong FCF outlook over the medium term. 

Traction for large-diameter tubes to drive 23% volume Cagr: 

Q3FY24 volume was impacted by dealer level destocking, due to steel price fall. However, the traction for heavy/super heavy tubes was strong. Analysts of IIFL Capital Services expect improving utilisation for the 1.2mtpa New Raipur plant which has commissioned progressively over FY24 supported by acceptance of large dia tubes to replace RCC in RE/Infra projects and steady demand for other new products. Combined with a healthy end-market demand for existing products, this should support FY23-26 volume Cagr of 23%. 

Higher share of VAP and operating leverage to aid margins: 

The ramp-up of volumes of value-added products from Raipur will mean that share of commodity grade tubes should fall from the current levels of 45% to 30% in three years. Along with the operating leverage on higher utilisation of 5mtpa capacity, this should support a faster 32% Ebitda Cagr over FY23-26. 

Strong growth, robust ROCE to steer re-rating: 

At CMP, the stock trades at 32 FY25 PER. Analysts of IIFL Capital Services see upside to this, led by the delivery of 36% EPS Cagr, sustained 30%+ RoEs and healthy cash generation incrementally. In the near term, Q4 volume performance and traction for new products would be closely watched. Increasing competition should be offset by strong end-market demand outlook over the medium term.