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MOSL: APL APOLLO TUBES: Robust volume growth aided by improving on the ground situation

.  APL APOLLO TUBES: Robust volume growth aided by improving on the ground situation

(APAT IN, Mkt Cap USD3.4b, CMP INR1126, TP INR1330, 18% Upside, Buy)

APL Apollo Tubes (APAT)’s long-term growth story remains intact underpinned by growing application and rising consumption of structural steel tubes in residential & commercial buildings, warehouses, factories, agriculture and other infrastructure works. The industry, post-inventory destocking in the last quarter because of higher steel prices, is now witnessing channel re-stocking led by correction in steel prices. 

• From our channel checks, we sense the overall demand scenario to be better with channel re-stocking happening in anticipation of a stable or marginally higher steel price.
• Primary steel (HRC) price declined from the all-time high level and accordingly the gap between primary and secondary steel prices narrowed.
• Overall margins of the company are expected to get a boost with the commissioning of Raipur plant by 3QFY23, which offers value-added products.

Re-stocking of inventory to drive near-term growth

• APAT saw tepid demand in 1QFY23 due to destocking of inventory in the channel as steel prices were at all-time high levels; however, a fall in prices was anticipated due to steps taken by the government to control inflation.
• According to the recent , APAT's overall 2QFY23 volume rose 41% YoY/42% QoQ to 602,283MT (v/s our est. of 584,589MT) fueled by general structure tubes that increased 72% YoY. Overall 1HFY23 volume grew 28% YoY to 1,025,071MT (Refer to Exhibit 4).
• According to our channel checks, demand is recovering with distributors re-stocking their inventories as the HRC price has fallen ~21% to INR55,952/MT in Sep'22 from INR70,875/MT in Nov'21; distributors are not anticipating any further reduction in prices.
• From our channel checks, we sense the overall demand scenario to be better with channel re-stocking happening in anticipation of a stable or marginally higher steel price.
• We believe this strong demand outlook to aid growth during 3QFY23E as well, while growth in further quarters will be driven by the Raipur plant.

 

Narrowing gap between primary and secondary steel prices aids APAT

• Currently, the structural steel tubes market in India is ~7MMT out of which primary steel market is of ~3-4MMT. The same is likely to reach ~6MMT by FY25E. APAT being a market leader in manufacturing of primary steel-based products, targets to achieve a market share of ~60-75%, with volume of ~4MMT by FY25E.
• Primary steel (HRC) price declined ~21% to INR55,952/MT in Sep'22 from INR70,875/MT in Nov'21; while, secondary steel (scraps) price grew ~6% to INR50,972/MT from INR48,147/MT over the same period.
• Hence, the price gap between primary and secondary steel has narrowed markedly to INR4,953/MT in Sep'22 from INR22,728/MT in Nov'21.
• With the narrowing gap in prices, APAT stands to benefit as demand for its general structures (~37% of total sales volume in FY22) has increased led by customers shifting to a higher quality product made from primary steel (APAT's offering) vis-à-vis general structures made from secondary steel (by unorganized players).