This Metal Stock Jumps 16.92% In 1 Month, Sharekhan Sees More Upside

With a throughput of 2.6 million tonnes per year, APL Apollo Tubes Limited is India's largest producer of structural steel tubes. The company is one of India's top recognized steel product producers, with over 1,100 variants of pre-galvanized tubes, structural steel tubes, galvanised tubes, and MS black pipes. The company's stock has risen 16.92 percent in a month on the NSE, while the stock has gained 1.65 percent in the previous six months. The stock is down -4.24 percent year to date (YTD), but it has climbed 40.78 percent in the previous year. Sharekhan, a brokerage company, has a buy call on the stock with a target price of Rs. 1,100.

Investment rationale

According to Sharekhan "APL Apollo Tubes Limited (APL) has announced to invest Rs. 180.5 crore for a 9.9% equity stake in Shankara Building Products (Shankara) through its wholly-owned subsidiary APL Apollo Mart. Shankara is already a key distributor of APL and the investment would help APL further leverage Shankara's distribution reach (presence across 10 states with 90 stores covering 450,000 sq. ft and 30,000 SKUs across the home construction and renovation lifecycle) and provide cross-selling opportunities for APL. As per our analysis, APL's 0.2 million-tonne Hyderabad plant (acquired from Shankara in April 2019 with high-margin products such as GI/GP pipes) contributes EBITDA of Rs50 crore assuming 50% utilisation and margin of Rs. 5,000/tonne."

"The deal would help to push more products through Shankara's stores and could improve utilisation for APL's Hyderabad plant going forward. The management expects investment to drive margin/earnings and to be EPS/RoCE accretive form the first year onwards but await further clarity on management's plan to achieve the same. The management indicated the following rationales for investment in Shankara: 1) The investment is aligned to APL's growth plan for the next three years, 2) launch platform for APL's new products, 3) synergies through Shankara's retail/wholesale network, 4) association would ensure sales consistency as Shankara is APL's key distributor and 5) expansion of structural steel tubes market," Sharekhan has said.

Buy for a target price of Rs. 1,100

The brokerage has claimed that "APL's presence in a niche business, first-mover advantage (introduction of innovative, first-of-its-kind products) in the structural steel tubes space and improved earnings quality (potential margin/RoE improvement) post the likely merger of Tricoat could help reduce valuation gap with listed building material companies (APL trades at 25.5x FY2024E EPS as compared to valuation of 46x for players like Astral Limited). We expect APL to sustain its high earnings growth momentum (expect PAT CAGR of 37% over FY21-24E) supported by robust double-digit volume growth and margin expansion. Hence, we maintain a Buy rating on APL with an unchanged PT of Rs. 1,100."

A delayed recovery in demand from construction and infrastructure projects could hurt earnings outlook. Any intensifying of competition from well-established steel companies could affect APL's volume growth and the working capital cycle", said Sharekhan by highlighting the key risks of the stock.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan Ltd. 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.