Recommendation from Steel-tubes & Pipe Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

APL APOLLO TUBES LIMITED. : POSTING A STEELY PERFORMANCE

HERE IS WHY
✓Focus on value-added products
✓Strong financial position
✓Dominant market share

With its tagline ‘We do not Make Steel Products, We Craft Steel’, APL Apollo Tubes Ltd. has been crafting value for its stakeholders over several years now. It is the largest producer of electric resistance welded (ERW) steel pipes and sections in India and caters extensively to the region along with exporting to over 20 countries globally. The company’s multi-product offerings include over 1,100 varieties of pre-galvanised tubes, structural ERW steel tubes, galvanised tubes, MS black pipes and hollow sections. Its vast distribution network is spread across India with warehouses and branch offices in 29 cities.

The company posted a resilient performance in FY21. It gained exceptional market share of 25 per cent in a challenging business environment while recording net sales of ₹ 8,500 crore in FY21 compared to ₹ 7,723.2 crore in FY20. That is a growth of nearly 10.9 per cent. It focused on keeping the inventory levels low and increased its utilisation capacity from 40 per cent to 70 per cent in three months. The increased proportion of value-added products to 60 per cent from 40 per cent in the previous year led to strong EBIDTA of ₹ 714.6 crore in FY21 as against ₹ 499.5 crore in the previous year, which showcased high growth of over 42.8 per cent. Also, the PAT jumped by 59.2 per cent to ₹ 407.7 crore while it stood at ₹ 256 crore in FY20.

In the building products sector, it has lowest debtor days of only five. On the liquidity front, the cash flows from operating activities increased from ₹ 510 crore in FY20 to ₹ 977 crore in FY21 by 91.5 per cent. The company had such a strong balance-sheet that it funded its capital expansion of ₹ 280 crore through its reserves and also paid off debt of ₹ 313 crore. For the latest quarter ended December, revenue grew by 24.95 per cent YoY to ₹ 3,123.94 crore. On a sequential basis, the top-line was up by 4.92 per cent. The volumes were not at par of what was expected. PBIDT exclusive of other income was reported at ₹ 202.28 crore, down by 12.85 per cent YoY.

The corresponding margin was reported at 6.26 per cent, contracting by 266 basis points YoY. PAT was reported at ₹ 127.88 crore, down by 14.05 per cent YoY. The PAT margin stood at 3.96 per cent in Q3FY22, contracting from 5.72 per cent in Q3FY21. This steel crafter has ROE and ROCE of 26.8 per cent and 27.8 per cent, respectively. It has adequate debt-to-equity ratio of 0.31 times. The stock is trading near the PE level of 48.4. The company has a strong market share of nearly 50 per cent in the domestic steel construction pipes’ market against 27 per cent in FY16, which clearly shows its growth trajectory and strong presence.

For the near future, the company is building a plant in Raipur on 400 acres for which ₹ 800 crore capex has been planned. The plant is expected to become partially operational from H1FY23 and would be a key contributor in FY25 sales volume target of 40 lakh tonnes against the current manufacturing capacity of about 26 lakh tonnes. Along with Apollo Mart, which would be India’s largest market platform for steel building materials, the company is sourcing growth opportunities in four segments namely skyscrapers, infrastructure, airports and warehousing. Considering all these factors, we recommend our reader-investors to BUY the scrip.