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MOSL: APL APOLLO TUBES: Channel destocking dampens operating performance; full-year guidance intact

• APL Apollo Tubes (APAT) reported a weak operating performance with 14%/ 33% YoY decline in Gross Profit/EBITDA per MT, respectively, in 1QFY23. The result was adversely impacted by the industry-wide channel destocking prompted by the correction in domestic HRC prices and lower share of value added products (VAP).
• We retain our FY23E/FY24E earnings as APAT is likely to maintain its growth trajectory underpinned by a strong demand outlook. We value the stock at 33x FY24E EPS to arrive at our TP of INR1,190. Reiterate BUY.

 

Volatile raw material prices hurt margins

• Consolidated 1QFY23 revenue grew 36% YoY to INR34.4b (est. INR28.4b), led by both volume growth (+13% YoY) and higher realization (+20% YoY).
• Gross profit/MT declined 14% YoY to INR10,573 (+10% QoQ) in 1QFY23 on a lower mix of value-added products (61% in 1QFY23 v/s 67% in 1QFY22).
• EBITDA/MT contracted 33% YoY to INR4,587 (-5% QoQ) due to channel de-stocking prompted by domestic HRC price correction. The domestic HRC prices have declined 21% YoY in 1QFY23.
• EBITDA was at INR1.94b in 1QFY23, down 24% YoY (in line with our estimate).
• Adjusted PAT declined 27% YoY to INR1.1b (in line with our estimate).

 

Highlights from the management commentary

• Guidance: The company aims to achieve a volume of ~2.3MMT in FY23, of which ~1.0MMT is expected in 1HFY23 and the rest is anticipated in 2H. Management expects margin pressure to sustain in 1HFY23 with recovery visible in 2H; it stays firm on its margin guidance for FY23. APAT is also maintaining its FY25 capacity guidance at 4MMT and expects 32% volume CAGR until FY25. Capex guidance is unchanged at INR6.5b for FY23-24.
• A drop in HRC prices with an expectation of further decline led to channel destocking in 1QFY23. The current HRC price is at INR57/kg; domestic HRC price is still higher than international price by ~INR3/kg. Management forecasts HRC price to bottom out at ~INR52/kg.
• Raipur plant: The Raipur expansion plan is underway and is on schedule. EBITDA/MT in this unit would be INR6,000-8,000. Further capex plans in the Raipur unit will be considered by the management once it reaches a capacity of 3MMT.
• In heavy structural tubes segment, APAT recently received orders for a 15- storey commercial tower in the NCR region. APAT is also in talks for ~50 projects which will require ~0.2MMT of tubes.

 

Valuation and view

• We believe the earnings momentum of APAT would continue with: a) growing demand across segments, b) increased product penetration, having a robust distribution network, c) an increase in the share of VAP, thus driving margins, d) the introduction of Apollo Mart, and e) its market leadership position.
• Improving operating leverage, growing share of VAP and addition of high- margin products from the Raipur unit are likely to result in an improvement in margin and higher cash generation.
• We retain our earnings estimates for FY23/FY24 as the company is expected to maintain its growth trajectory on a strong demand outlook environment.
• We project a revenue/EBITDA/PAT CAGR of 19%/25%/33% over FY22–24, respectively. We value the stock at 33x FY24E EPS to arrive at our TP of INR1,190. Maintain BUY.