After a 830% rally in 3 years, brokerages see more upside in this metal stock

The company has set an ambitious goal of becoming debt-free by early FY25.

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Brokerages cheer APL Apollo Tubes' stake purchase in Shankara, see an up to 28% upside

APL Apollo Tubes, a leading structural steel tube manufacturer, has been on a tremendous growth trajectory in the last three years, delivering a whopping 830% return to its shareholders. During this period, the stock has skyrocketed from ₹124.71 apiece to ₹1,160.

Further, the stock has seen a fabulous rise of over 42% from its one-year low of ₹816 apiece, and it has produced a staggering return of 7894% in the last ten-year period.

Despite this impressive performance, domestic brokerage firms continue to remain optimistic on the stock and raise their target prices following the company's robust Q4FY23 performance.

During the quarter, APL Apollo Tubes reported a 14.12% YoY increase in its consolidated net profit to ₹202 crore, led by strong volume growth and margin expansion. The company's sales volume increased by 18% YoY to 650kMT, ending FY23 with a total sales volume of 2.28 MMT, up 30% YoY.

Its revenue expanded by 5% YoY to ₹4,431 crore in the reporting quarter, while the operating profit came in at ₹323 crore, a growth of 21.42% YoY.

EBITDA margins increased by 10% QoQ and 3% YoY to Rs. 4,970/tonne, led by improved performance of the Raipur plant, the removal of discounts as channel de-stocking halted during the quarter, and the benefit of operating leverage, said brokerage firm Sharekhan.

Management guided for sales volume to be in the range of 2.8–3 MMT, 3.8–4 MMT, and 4.5–5 MMT for FY24, FY25, and FY26, respectively. Additionally, the company guided for exports of 100K tonnes in FY24 and expects it to reach 200–300K tonnes over the next 2-3 years.

Regarding profitability, the company expects an EBITDA of Rs. 5,000 per tonne for FY24, with a subsequent increase to Rs. 5,500–6,500 per tonne in the future.

Meanwhile, the CAPEX for increasing the capacity from 3.6 MMT to 5 MMT in the next 12–18 months will be Rs. 500–600 crore, which will be funded through internal cash flows.

The increased capacity will come from various locations like Dubai, East India, Raipur, and from debottlenecking projects. FY23 capex of Rs. 842.4 crore was entirely spent from internal accruals, said the brokerage firm.

Further, the company has set an ambitious goal of becoming debt-free by early FY25 while also aiming for ROCEs to reach 35–40% going forward. Additionally, the company foresees significant opportunities arising from railway modernization initiatives, it added.

APL's presence in a niche business, first-mover advantage (introduction of innovative, first-of-its-kind products) in the structural steel tubes space, and improved earnings quality (better margin/RoE profile) post the merger of Tricoat could help reduce the valuation gap with other listed building material companies (APL trades at 22x its FY2025E EPS as compared to the valuation of 50x for players such as Astral Limited), according to the Sharekhan.

The brokerage expects APL to sustain a high earnings growth momentum (projects EBITDA/PAT CAGR of 45%/52% over FY2023–FY2025E), supported by robust double-digit volume growth and margin expansion.

Hence, Sharekhan maintained its 'buy' rating on the stock with an unchanged target price of Rs. 1,425 apiece.

Likewise, Motilal Oswal also reiterated its ‘buy rating on the stock with a target price of ₹1,490 apiece, signalling an upside potential of 28.44% from the stock's previous closing price.

"The incremental capacity from upcoming plants and debottlenecking, along with the addition of high-margin products from the Raipur unit, should result in strong volume growth and margin expansion going ahead," said Motilal Oswal.

13 analysts polled by MintGenie on average have a 'Strong buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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