Pick Of The Week: Steel Stock APL Apollo Tubes Is Attractive To Buy, Potential Upside Of 10% In Near Term

Iron and steel products maker, APL Apollo Tubes is the pick of the current trading week. The midcap stock is recommended to buy for fetching up to 10% potential upside in the near term. The driving factors for the stock are its healthy volume and value-driven growth, the ramp-up in the Raipur plant, and major orders among others.

Brokerage Axis Securities while selecting APL Apollo Tubes as the pick of the current week, highlighted three key reasons for its investment rationale. These are:

1. Volume and value-driven growth outlook:

APL Apollo Tubes has Vision 2025 where it targets Revenue/EBITDA to grow 2x/2.5x over FY23 levels by FY26. FY24 sales volume guidance is ~2.8-3MT. Capacity and sales volume are expected to reach 5.0MT by FY25 and FY26 respectively. VAP share is expected to increase to 70% from the current 55% by FY25.

2. Raipur Plant Ramp-up:

In Q2FY24, the plant achieved volumes of ~100kt at 28% utilization level (vs. 75kt in Q1FY24). This will ramp up to 40% utilization in Q3FY24. Volumes will eventually ramp up to ~1.2MT at a 100% capacity utilization level by FY26 as the company's market-creation efforts have bought order visibility. EBITDA/t at Raipur improved to Rs 5k/t in Q2FY24 (from Rs 4k/t in Q1FY24) which will increase to a steady state of Rs 6k-7k/t once the ramp-up gets completed over the next 2.5 years.

3. Blended EBITDA/t to improve hereon:

With the ramp-up of the Raipur plant, the blended EBITDA/t is expected to improve gradually. In FY23, the EBITDA/t stood at ~Rs 4,481/t. The target is to achieve Rs 5,000/t in FY24 Rs 5,500/t in FY25 and Rs 6,000/t in FY26, assuming the Raipur plant manages to deliver products at Rs 6k-7k/t.

On the outlook and valuation, Axis Securities note said, "The company's market-creation efforts have brought more orders from railway stations and airports for the heavy structural and coated products at Raipur which has higher EBITDA/t. These new projects provide demand visibility for the company over the next few years. With a lower Capex intensity ahead, higher OCFs, and the Raipur plant stabilizing in due course, the company's ROCE is likely to improve from ~27% in FY24 to 37% by FY26. The company's vision is to expand its capacity over to 10 mtpa by FY30 providing a growth tailwind in the longer term."

Hence, Axis Securities recommended a BUY with a near-term TP of Rs 1,750/sh, implying an upside of 10% from the CMP.

On BSE, APL Apollo's share price ended at Rs 1,589.80 apiece, marginally up on Tuesday with a market cap of Rs 44,118.87 crore. Year-to-date, the stock has zoomed by nearly 44% on the exchange.

In 2023, the company also paid up 250% dividends amounting to Rs 5 per share to its shareholders. Its current dividend yield is at 0.31%.

APL Apollo Tubes is India's largest Structural Steel Tubing Company with an extremely strong local presence, thanks to our philosophy of Make in India, extensive distribution network and world class quality.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.