Buy APL Apollo Tubes; target of Rs 2000: Sharekhan

Sharekhan's research report on APL Apollo Tubes

Q3 results were in line with estimates but were soft due to q-o-q sales volume de-growth of 11% and 4% contraction in EBITDA margin. Thus, operating profit declined by 14% q-o-q to Rs. 280 crore (inline). The volume decline is attributed to destocking given high domestic steel price, subdued retail sales and delay in full commissioning of Raipur plant (operated at 50% utilization). EBITDA margin decline could be attributed to the impact on operating leverage as gross margin improved supported by 336 bps rise in VAP mix to 59%. APL is likely to miss its FY24 volume guidance of 2.8-3 mt but management sounded optimistic with volume target of 4 mt/5 mt for FY25/FY26, which implies 30% volume CAGR over FY23-26E. Margin to improve gradually with ramp-up of Raipur/Dubai plants. Recent fall in stock price from 52-week highs of Rs. 1,806 provides a good entry opportunity for investors.

Outlook

Moreover, a strong earnings growth outlook (expect 45% PAT CAGR over FY23-26E), high RoE/RoCE of 34%/44% would narrow the valuation gap with listed peers and make the risk-reward scenario favourable. Hence, we maintain a Buy on APL with an unchanged PT of Rs. 2,000.