APL Apollo Tubes Shares Gain As Motilal Initiates Coverage With A ‘Buy’
Motilal Oswal has set a price target of Rs 2,065 apiece on APL Apollo Tubes, implying a potential upside of 21%.
Shares of APL Apollo Tubes Ltd. gained after Motilal Oswal initiated coverage on the steel tube maker with a ‘buy’, citing diversified product portfolio, and on hopes of strong volume growth and improved profitability.
APL Apollo Tubes operates across four major product categories — Apollo Structures, Apollo Z, Apollo Galv, and Apollo Tricoat — which helps in mitigating concentration risk and increases product offerings, the brokerage said in a report.
The company has a strong presence in south and north India (about 58% of revenue). Penetration levels are expected to improve, with a shift in focus towards improving rural sales by adding distributors and warehouses to its existing network, it said. “Robust distribution network, along with warehouses, higher retail presence, and SKUs (stock-keeping units), are expected to improve last-mile connectivity.”
Besides, the recent merger of Tricoat into APL Apollo Tubes is expected to improve sales volume due to newer cross-selling opportunities and higher consolidated ad spends, which is likely to aid brand presence and image, the brokerage said.
A steady capacity addition, increase in penetration, and gains from unorganised players, the report said, are expected to improve market share of the company from current levels of around 50%. Even a marginal increase in domestic steel consumption, buoyed by an improving macro environment, is expected to have a “profound impact” on domestic volumes of structural steel tubes, benefitting APL Apollo Tubes “significantly”, the brokerage said.
Currently, the company operates at about 63% utilisation levels, the report said. “Higher sweating of assets is expected to lead to kicking-in of operating leverage and improve margin and profitability.”
Motilal Oswal has set a price target of Rs 2,065 apiece on the world’s fifth-largest maker of structural steel tubes and a domestic leader in the market. That implies a potential upside of 21%. The brokerage expects APL Apollo Tubes’ revenue and profit after tax to grow at an annualised rate of 20% and 35%, respectively, over FY21-24. Volumes, it said, are expected to grow at 18% CAGR during the period.
Motilal Oswal also listed a few risks to the company’s projected growth:
A sharp increase in steel prices may affect margin as APL Apollo Tubes may not be able to pass on the price fluctuations to its customers.
Slower industry growth may lead to muted growth.
Maintaining lower working capital days is going to be a challenge during the next phase of expansion.
Steel pipe/tube players with a diversified network across India can enter, boosting competition.
Shares of APL Apollo Tubes gained as much as 4.2% to Rs 1,774.9 apiece in early trade on Tuesday. Of the 16 analysts tracking the company, 11 have a ‘buy’ rating, three suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price targets implies an upside of 5.1%.
The stock has doubled so far this year compared with the S&P BSE Sensex’s 22.9% advance.
