Q1FY24 Review: APL Apollo Tubes: Q1 a miss amid steel price weakness

8 Aug 2023 , 01:07 PM

APL Apollo’s Q1 Ebitda of Rs3.07bn was backed by healthy 662kt of volume which came amid channel destocking. This along with inventory loss and low utilisation of new plant (in ramp up phase) limited Ebitda/t to Rs4,644. Incrementally, mgmt. maintained its target of 2.8-3mt vol for FY24 and 5mt by FY26 with potential Ebitda of Rs29-30bn. Backed by a strong growth outlook, mgmt intends to double end FY24 capacity of 5mtpa to 10mtpa over medium term. Analysts of IIFL Capital Services cut FY24 EPS estimate by 6%. Reiterate BUY with revised TP of Rs1632. 

Q1 sees healthy volumes but weak profitability: 

APL Apollo reported volumes of 662kt in Q1FY24 – up 2% QoQ and 56% YoY. However, this was achieved amid falling steel prices and channel destocking which meant that company resorted to some discounting to push volumes. Combined with inventory loss of ~Rs380m on the inventory built up the ramp up New Raipur plant, overall Ebitda/t dropped to Rs4,644 from Rs4,970. Profitability was also impacted by the New Raipur plant running at 30% utilisation during ramp up in Q1. 

Management confident on 2.8-3mt volume for FY24: 

While falling steel prices hurt Q1, steel prices have inched up beginning Aug23. Hence channel demand is healthier amid a strong underlying demand for existing products. Management is targeting 700kt volume for Q2. Incrementally 2H would benefit from ramp up of the New Raipur facility where galvanising line for 0.4mtpa narrow & thicker sheets will be operational by Sep. Large dia tubes (500x500mm and 1000x1000mm sections) should also see larger dispatches maid good response to business development efforts and smoother ramp up of production lines. 

Intends to double 5tmpa FY24 capacity over medium term: 

FY24-25 will see capex of Rs6bn for expanding capacity to 4.8/5mt by FY24/25 with 70% share of VAP products. Management expects full utilisation of the same by FY26 with potential Ebitda of Rs29-30bn. It would embark on the next phase of capex of ~Rs20bn in FY27 to double the capacity to 10mtpa given the long highway for growth. This would be internally funded from healthy internal OCF generation.