28% FII-Backed Metal Stock Is Axis Securities’ Pick of The Week: Here’s Why

Leading structural steel tube company APL Apollo Tubes (APAT) has 14 brands in 4 product categories. With a 3.6 MTPA capacity for structural steel tubes, it holds a 55% market share in India. Pre-galvanized tubes, galvanised tubes, structural ERW tubes, MS Black pipes, and hollow sections are among the product types.

There are eleven production sites run by the company. Over 800 distributors make up the company's extensive 3-tier distribution network, which is present in more than 300 Indian towns and cities. The brokerage firm Axis Securities is bullish on the stock and classified it as a pick of the week for a target price of Rs 1,750.

Investment Rational To Consider To Buy The Shares of APL Apollo Tubes

According to Axis Securities, here are fundamental reasons to buy APL Apollo Tubes.

Volume and value driven growth outlook: APL Apollo tubes has Vision 2025 where it targets Revenue/EBITDA to grow 2x/2.5x over FY23 levels by FY26. FY24 sales volume guidance is ~2.8-3MT. Capacity and sales volume are expected to reach 5.0MT by FY25 and FY26 respectively. VAP share is expected to increase to 70% from current 55% by FY25.

Raipur Plant Ramp-up: In Q2FY24, the plant achieved volumes of ~100kt at 28% utilization level (vs. 75kt in Q1FY24). This will ramp up to 40% utilization in Q3FY24. Volumes will eventually ramp up to ~1.2MT at a 100% capacity utilization level by FY26 as the company's market-creation efforts have bought order visibility. EBITDA/t at Raipur improved to Rs 5k/t in Q2FY24 (from Rs 4k/t in Q1FY24) which will increase to a steady state of Rs 6k-7k/t once the ramp-up gets completed over the next 2.5 years.

Blended EBITDA/t to improve hereon: With the ramp-up of the Raipur plant, the blended EBITDA/t is expected to improve gradually. In FY23, the EBITDA/t stood at ~Rs 4,481/t. The target is to achieve Rs 5,000/t in FY24 and Rs 5,500/t in FY25 and Rs 6,000/t in FY26, assuming the Raipur plant manages to deliver products at Rs 6k-7k/t.

Outlook & Valuation

"The company's market-creation efforts have brought more orders from railway stations and airports for the heavy structural and coated products at Raipur which has higher EBITDA/t. These new projects provide demand visibility for the company over the next few years. With a lower Capex intensity ahead, higher OCFs, and the Raipur plant stabilizing in due course, the company's ROCE is likely to improve from ~27% in FY24 to 37% by FY26. The company's vision is to expand its capacity over to 10 mtpa by FY30 providing a growth tailwind in the longer term. We recommend a BUY with a near-term TP of Rs 1,750/sh, implying an upside of 10% from the CMP," said Axis Securities in a note.

APL Apollo Tubes Shareholding

The information provided by Trendlyne shows that promoters' holdings dropped from 30.62% in the June 2023 quarter to 29.67% in the September 2023 quarter; FII/FPI's holdings grew from 25.07% to 28.66%; the number of FII/FPI investors bumped from 366 to 399; mutual funds' holdings went down from 8.82% to 8.61%; and institutional investors' holdings lifted from 37.80% in Q1FY24 to 41.35% in Q2FY24.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.