Apollo Pipes Q3 Results Review - Weak Volume Likely To Strongly Rebound In Q4: Systematix

Systematix Research Report

Apollo Pipes Ltd.'s large miss in Q3 profit after tax was on lower-than-expected volume (up 5% YoY, down 5% QoQ), realisation (down 11% YoY and 7% QoQ) and Ebitda margin (down 59 bps YoY at 9.1%).

Volume was impacted by below normal channel inventory due to falling trend in PVC prices. Agri (sales mix 42%) segment was more impacted than residential. After a weak Q3, Apollo Pipes sees strong rebound in Q4 volume and end FY24 with a 25% growth. A Rs 5 billion capex plan over FY24-26 will more than double capacity to 286 kt (North 50%, other regions 15-20%) and will drive 30% volume compound annual growth rate.

After Varanasi (land worth Rs 500 million near acquisition, production likely in H2 FY25), it further plans to acquire lands worth Rs 1 billion in Maharashtra and South India in FY25. Rise in advertising and promotion spend, employee cost and other expenses on aggressive expansion plans will restrict Ebitda/ kg (FY23/26E: ~Rs 10/Rs 15).

However, focus on cash sales would reduce net working capital cycle to less than 40 days in two-three quarters. Considering Apollo Pipes’ weak Q3 and management’s focus for volumes over margins, we have cut FY24E/25E/26E earnings estimates by 17%/12%/4% mainly on lower than earlier estimated volumes.

We now estimate 25%/23%/42%/68% CAGR in volume /revenue /Ebitda/PAT over FY23-26E, with return on invested capital of ~17% in FY26E.

At ~24x FY26E price/earning, we maintain 'Hold' rating with a revised target price of Rs 717 (earlier Rs 745), based on 25 times FY26E P/E.

While Apollo Pipes has maintained its industry leading volume growth status, margin trajectory is the key monitorable in coming quarters.

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