APL Apollo Tubes - Journey from a semi-commodity player to a branded one - HDFC Securities

Mr. Anuj Upadhyay, Institutional Research Analyst, HDFC Securities

APL Apollo Tubes (APL) is India's leading structural steel tube manufacturer with a capacity of 2.6 million tonne per annum (mtpa) and a pan-India presence. APL's market share enhanced from 27% in FY16 to 50% in FY21, led by a strong distribution network, branding, offering of customized & innovative products and capacity enhancement. APL's strategy to focus on rural areas and tier 2/3 cities paid off well during the reverse migration last year. With 24% CAGR in both revenue and PAT over FY11-21, it has emerged as one of the pioneers in the segment, much ahead of competitors. Going ahead, we expect APL to post revenue/PAT CAGRs of 20%/34% over FY21-24E, led by an increased mix of value-added products (75% in FY25 vs 57% in FY21), capacity expansion, improved margins, and enhanced government spending on infra. APL's valuation has sharply rerated on market share gains, debt reduction, robust growth visibility, and margin expansion. It is trading close to the average multiple of building material stocks as 75% of its product mix caters to this segment. We expect it continue to trade at such premium multiple and initiate coverage on APL with a BUY rating at a TP of INR2,226/share (35x FY24E EPS).

Pioneer in structural steel segment: APL has reported a strong 24% CAGR topline and earnings growth over the past decade, led by customised product offerings, adoption of latest technologies, capacity expansion, vast distribution network, brand building, and a strong balance sheet. This has led to superiority over peers in the space and has helped it enhance market share to 50% (in FY21) vs 27% in FY16. Furthermore, with an increasing share of value-added products, the company has managed to garner a premium value for its products.

Building a strong brand: APL has successfully captured the mindshare of fabricators and architects, making its steel tubes as their first choice for applications. Along with innovative products and offerings, APL has aggressively focused on creating a strong brand image through large-scale print and TV commercials, sponsorships of mega sports events and roping in of celebrities as brand ambassadors. These efforts have allowed it to successfully creep into the rural areas, which are yielding strong results.

Far ahead of peers: Having a 50% market share, adopting the latest technologies and withholding a strong brand image, APL stands much ahead of its competitors. Its pan-India distribution network (2x of its nearest peer), enhanced capacity (3x of the nearest peer) and broad array of product offerings (3x more SKUs) have helped it gain 5x market share vs peers. 40% of its products literally face zero competition, which allows it to command premium value and higher margins. Using advanced technology, it has managed to offer customised products in a much shorter duration than peers, placing it much ahead of them; we believe it would continue to stay ahead, going forward.

Initiate with a BUY: We expect APL's revenue/PAT to grow at CAGRs 20%/34% over FY21-24E, led by healthy volume growth, margin expansion, reduced working capital, and reduced debt. We thereby initiate coverage with a BUY rating and a TP of INR2,226/share (based on 35x FY24E EPS). The multiple of 35x is based on the APL's superior performance, operational efficiency and strong positive outlook going ahead.

Shares of APL Apollo Tubes Limited was last trading in BSE at Rs. 1866.4 as compared to the previous close of Rs. 1879.4. The total number of shares traded during the day was 18019 in over 2278 trades.

The stock hit an intraday high of Rs. 1908.7 and intraday low of 1834. The net turnover during the day was Rs. 33576353.

Source : Equity Bulls

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