Motilal Oswal Recommends Buy This Mid-Cap Stock For Over 40% Returns

APL Apollo Tubes continues to prove its market potential and dominance

Motilal Oswal, in its latest report, has said, "We visited the site of the Guru Teg Bahadur (GTB) Hospital to observe the shifting trends in the Structural Tube industry, driven by the increasing acceptance of steel tubes and its growing consumption in Construction projects."

The brokerage added, "Construction at the GTB Hospital began in Jan'22 and is expected to be completed within 150-170 days. Planned capex for the project stands at INR2.8b and is spread over an area 56,000sq. m. for which 2,700-3,000t of steel tubes will be required. As per our channel checks, consumption will be in the 4.5-5kg per sq. ft. range. The Delhi government has awarded seven new hospital contracts in Aug'21 (~2.2m sq. ft.), which will be constructed using the precast building technique, for which 10,000-11,000t of steel tubes will be required. The assembly of these structures will take place on-site with zero welding, while the fabrication will take place at the workshop."

"APL Apollo Tubes being a sole supplier of 100% structural steel tubes will be the key beneficiary. It currently dominates the domestic market with ~50% share. The cumulative market share of the next five domestic players stands at just 38%. It is best placed to benefit from the growing Structural Steel Tubes industry on the back of: i) industry-leading market share, ii) first-mover advantage (installation of DFT at plant locations), and iii) strong brand name," the brokerage has said.

Why should you buy the stocks?

Explaining the structural shift towards heavy structural steel tubes, the brokerage said, "Globally, consumption of heavy structural tubes is higher (30-40% of overall steel tubes consumption), whereas, for APAT, the number is pegged ~6%. Going forward, with higher adoption of heavy structural tubes in Real Estate and Infrastructure projects, the share of structural tubes is expected to improve, leading to an improvement in EBITDA/MT and operating margin for companies. India's Structural Steel Tube industry is pegged at 4MMT, or ~4% of overall steel consumption as compared to the global average of ~9%. As per an IBEF report, overall steel consumption in India is expected to clock an 8% CAGR to 230MMT over CY19-30. With growing acceptance of structural tubes, its share (as a percentage of overall steel consumption) is expected to rise to ~10%, taking overall volumes of structural tubes to 22MMT (17% CAGR over CY19-30E)."

The brokerage added, "India is currently witnessing growing acceptance of structural tubes in Construction projects due to a multitude of benefits. Structural tubes offer: i) a higher strength-to-weight ratio, ii) a faster completion time, iii) higher carpet areas, iv) 40-50% less dead weight, and v) higher recyclability etc. when compared to RCC structures."

Brokerage Suggests Buy for a Target Price of Rs 1,270

According to the brokerage firm, "The key drivers of APL Apollo Tubes's performance include: a) growing demand across product segments, b) increased product penetration, with a robust distribution network, c) an increase in the share of VAP, driving margins, d) the introduction of Apollo Mart, and e) its market leadership position."

The brokerage has said, "The earnings momentum will continue with: a) growing demand across product segments, b) increased product penetration, with a robust distribution network, c) an increase in the share of VAP, driving margin, d) the introduction of Apollo Mart, and e) its market leadership position.  Kicking-in of operating leverage and growing share of VAP is expected to lead to an improvement in margin and higher cash generation.  We expect a revenue/EBITDA/PAT CAGR of 25%/25%/34% over FY22-24 and a strong cumulative CFO/FCF generation of INR17.7b/INR9.8b over FY23-24. APLL is expected to turn net cash positive by FY24. We value the stock at 35x FY24E EPS. Our TP of INR1,270 per share. We maintain our Buy rating."

The brokerage commenting on the key risks, said the risks are a) Fluctuations in steel prices to impact margin, b) Slower industry growth may lead to muted growth for the company, and c) Maintaining of lower WC can be at risk (around four days in FY22).

About The Company- APL Apollo Tubes Ltd.

APL Apollo Tubes Ltd. was incorporated in the year 1986 and is Headquartered at Delhi NCR, India. It is a Mid Cap company having a market cap of Rs 22,656 Crores and operates primarily in the Metals - Ferrous sector. The company is one of India's leading branded steel products manufacturers. The Company runs 10 manufacturing facilities churning out over 1,100 varieties of MS Black Pipes, Pre-Galvanised Tubes, Galvanised Tubes, Structural ERW Steel Tubes and Hollow Sections. The company's key Products/Revenue Segments include Pipes & Tubes Steel, Scrap and Export Incentives for the year ending 31-Mar-2021.