“BUY” This Mid Cap Metal Stock With A Target Price of Rs. 1,180: ICICI Securities

 

The brokerage’s take on APL Apollo Tubes Limited

ICICI Securities has said in its latest research report that "Acquisition of Lloyds steel's Murbad plant allowed APL to expand its foothold in the West India market. The acquisition also allowed APL (known as Bihar tubes back then) to expand capacity from 0.4mtpa to 0.49mtpa. The acquisition took place around the same time when the company had entered into an Rs70mn distribution deal with Shankara (APL subsequently acquired Taurus Value steel, the steel pipe subsidiary of Shankara in CY19). APL sources HRC from JSW Steel's Dolvi plant. A cost-effective acquisition, subsequent brownfield investments (extremely cost-effective) including the addition of a DFT mill leading to significantly increased asset turns and expanding the SKU range meaningfully - all contributed towards expanding the western market while capturing incremental market share. West India now contributes ~ 32% of APL's revenue."

According to the brokerage "APL derives ~80% of sales from distributors. To improve delivery time, the company is creating mother warehouses pan-India, which will improve the service time to dealers and distributors. In FY21, APL Apollo invested in two warehouses in North (Noida) and East (Raipur) which will serve the distribution network in these regions. Further, the company has planned one warehouse each for the South and West regions, which should be operationalised in FY22 and will improve the delivery time to dealers and distributors. In addition, APL has strengthened and streamlined the supply chain, which has reduced delivery time from 15 days a few years ago to ~ 4 days now. The company aims to achieve a benchmark delivery time of 24 hours. The company has reduced its net working capital days to ~ 8 days in FY21 from ~25 days in FY20 by shifting to a 'cash and carry model. Purchase of DFT in CY16 from an Italian company, Olympia, allowed a significant improvement in turnaround time vis-à-vis conventional rolling and helped expand SKUs meaningfully. All these tenets of the company were confirmed through our distributor interactions."

Key takeaways from management meeting according to ICICI Securities

• ~Rs5,000/te of sustainable EBITDA margins has Rs1,000/te sourcing benefit (APL sources HRC at a discount being the largest buyer pan-India), Rs500/te on account of operating leverage and process benefit gains and Rs1,000/te on account of pricing premium due to brand creation.
• APL is 5 years ahead of the competition in creating new products and markets. e.g. APL did invest in heavy structural tubes 5 years back and is being able to capitalise on the same now; APL also could capture a large part of the doorframe market (colour coated) through strategic planning and product placement.
• Out of the current 0.45mnte monthly volumes, 0.2mnte is commodity and 0.25mnte is value-added; the difference in prices between HR and Rebar has impacted volumes of the commodity segment (- 10%); also, in FY21, there have been margin benefits of a) inhouse galvanizing and b) inhouse CR mills as the spread of HR and CR and HR to Galvanised (GP and GI) has increased significantly - the same is expected to normalise.

Buy APL Apollo Tubes Says ICICI Securities

ICICI Securities has claimed in its research report that "We visited APL Apollo Tubes' (APL) Murbad, Maharashtra facility and met with multiple APL distributors. Murbad was Lloyds steel plant, which APL acquired in CY10 for a cash consideration of Rs400mn with a capacity of 90,000te. The same has been ramped up to 0.35mtpa over the past seven years, with the introduction of direct forming technology (DFT) and cold rolling and Galva (GP/GI) capacity. We witnessed, firsthand, the increased capacity turns that DFT allows (~8 hours of conventional rolling time to ~1hr of DFT rolling, including HR slitting). Distributors re-iterated the well-known reasons behind APL gaining ~ 50% share in the structural tubes market in India i.e., i) highest number of SKUs, with the fastest turnaround and ii) distribution in pipes evolving to cash and carry through upfront discounting helping APL's working capital."

The brokerage house has also commented that "We maintain BUY with a revised target price of Rs1,180/share. This is based on 25x FY24E P/E (unchanged). The stock has seen a massive rerating in the past 18 months on the back of Tricoat acquisition, repayment of debt and steady growth. With an improving RoE and RoCE profile (significantly higher operating leverage), higher growth driven by constant efforts towards market creation, and a steady increase in market share (to reach >60% in the next 3-4 years in our view) - we believe that a multiple of 25x FY24E P/E is justified. We have increased our volumes estimates in line with management guidance (for FY24E) while reducing the EBITDA/te for FY23E to ~Rs5.000/te."

Disclaimer

The stock has been picked from the brokerage report of ICICI 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.