APL Apollo Tubes Shares Gain As Motilal Initiates Coverage With A ‘Buy’

Aluminium tubes manufactured by APL Apollo Tubes Ltd. sit stacked on racks in companys warehouse (Source: Company website)

APL Apollo Tubes Shares Gain As Motilal Initiates Coverage With A ‘Buy’

Shares of APL Apollo Tubes Ltd. gained after Motilal Oswal initiated coverage on the steel tube maker with a ‘buy’, citing diversified product portfolio, and on hopes of strong volume growth and improved profitability.

APL Apollo Tubes operates across four major product categories — Apollo Structures, Apollo Z, Apollo Galv, and Apollo Tricoat — which helps in mitigating concentration risk and increases product offerings, the brokerage said in a report.

The company has a strong presence in south and north India (about 58% of revenue). Penetration levels are expected to improve, with a shift in focus towards improving rural sales by adding distributors and warehouses to its existing network, it said. “Robust distribution network, along with warehouses, higher retail presence, and SKUs (stock-keeping units), are expected to improve last-mile connectivity.”

Besides, the recent merger of Tricoat into APL Apollo Tubes is expected to improve sales volume due to newer cross-selling opportunities and higher consolidated ad spends, which is likely to aid brand presence and image, the brokerage said.

A steady capacity addition, increase in penetration, and gains from unorganised players, the report said, are expected to improve market share of the company from current levels of around 50%. Even a marginal increase in domestic steel consumption, buoyed by an improving macro environment, is expected to have a “profound impact” on domestic volumes of structural steel tubes, benefitting APL Apollo Tubes “significantly”, the brokerage said.

Currently, the company operates at about 63% utilisation levels, the report said. “Higher sweating of assets is expected to lead to kicking-in of operating leverage and improve margin and profitability.”

Motilal Oswal has set a price target of Rs 2,065 apiece on the world’s fifth-largest maker of structural steel tubes and a domestic leader in the market. That implies a potential upside of 21%. The brokerage expects APL Apollo Tubes’ revenue and profit after tax to grow at an annualised rate of 20% and 35%, respectively, over FY21-24. Volumes, it said, are expected to grow at 18% CAGR during the period.

Motilal Oswal also listed a few risks to the company’s projected growth:

  • A sharp increase in steel prices may affect margin as APL Apollo Tubes may not be able to pass on the price fluctuations to its customers.

  • Slower industry growth may lead to muted growth.

  • Maintaining lower working capital days is going to be a challenge during the next phase of expansion.

  • Steel pipe/tube players with a diversified network across India can enter, boosting competition.

Shares of APL Apollo Tubes gained as much as 4.2% to Rs 1,774.9 apiece in early trade on Tuesday. Of the 16 analysts tracking the company, 11 have a ‘buy’ rating, three suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price targets implies an upside of 5.1%.

The stock has doubled so far this year compared with the S&P BSE Sensex’s 22.9% advance.

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