Budget Stock Pick: Buy This Steel Stock That May Surge For Its Strong Balance Sheet

The Union Budget for Fiscal Year 2022 may provide key industries like steel with a lift. Even the Indian Steel Association (ISA) believes the government may announce customs duty reductions and regulatory frameworks targeted at encouraging the steel sector's development despite growing production costs. Axis Securities has issued a buy call on the shares of APL Apollo Tubes with a target price of Rs. 1,215, citing high expectations from the steel sector. The brokerage anticipates a 48 percent uptrend from its current market price of Rs. 817.50 as of 31 Jan, 10:12 am IST.

Q3FY22 results of APL Apollo Tubes (APAT) according to Axis Securities

The brokerage has said in its research report that "APL Apollo Tubes (APAT) Q3FY22 consolidated results were better than our estimates on the revenue front. However, it missed on EBITDA and PAT levels. The company's consolidated revenue grew by 24% YoY and 5% QoQ to Rs 3,230 Cr (Our estimate: Rs 2,827 Cr). The growth was reported despite volumes de-growth of 17% YoY and 6% QoQ. The EBITDA came in at Rs 202 Cr (Our estimate: Rs 198 Cr), down 13% YoY on account of a 28% rise in RM prices and a 23% rise in other expenses. Despite the fall in EBITDA, the company's EBITDA/Tonne grew by 5% YoY on account of 1) Higher share of value-added products, 2) Price hikes, 3) Operating leverage, and 4) Brand-led pricing power."

According to Axis Securities "The contribution from the value-added products stood at 65% in Q3FY22 vs. 60% in Q2FY21. Recurring PAT de-grew by 14% YoY and 12.5% QoQ to Rs 128 Cr (Our estimate: Rs 125 Cr) due to overall weak operational performance. Net Working Capital remained stable at 10 days due to reduction in debtors (strategic shift to cash and carry model), lower inventory owing to plant consolidation, and strict cost control measures. The company's market share remained stable at 50% in the structural steel tubes industry in India."

Key investment rationale for APL Apollo Tubes according to the brokerage

• For FY23, the company is targeting the sales volume of 2.5 MT, for FY24 3.2 MT and FY25 4 MT.
• The management remains confident of sustaining the current market share gains as it further sharpens focus on offering value-added products to its customers (fabricators, architects, etc), strong branding-led visibility, and continued pressure on smaller players in accessing working capital in the wake of relatively weaker industry demand.
• The company is working on innovative products apart from conventional products to replace the application of some conventional products such as steel angles, steel channels, wood, aluminium profiles, to create a market for its new value-added products. Additionally, its long-term goals include a higher contribution from value-added products, cost control, innovation, new market creation, and brand equity enhancement which will aid double-digit volume growth in the coming 2-3 years.
• The company is focusing on launching new products; Heavy structural tube -new technology in India and Colour coated tube - Expected to replace aluminium and wooden structures.
• APAT has guided the distribution of healthy dividends in the coming years with excess cash reserves.

Buy With A Target Price of Rs 1,215

The brokerage claims that "The balance sheet of APAT will continue to strengthen with healthy operating cash flows going ahead due to its balance sheet deleveraging, reduced working capital cycle with a strategic shift to cash and carry business model and efficient inventory management, focus on value-added products (In-line Galvanizing, coloured pipes, Apollo Tricoat), and rural push. Furthermore, the volume expansion plan from the current 2.6 MTPA to 4 MTPA would aid in market share gains from the unorganized players. We expect the company to deliver steady improvement in volumes and profitability moving forward. We retain a BUY rating on the stock with a TP of Rs 1,215/share and continue to value it at 30x PE of FY24E EPS."

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.