APL Apollo Tubes Ltd. share price target

We hosted an NDR for APL Apollo Tubes (APAT) in Hong Kong & Singapore. Key takeaways: 1) 64% of revenue comes from building material segment, 2) strong demand for products from latest technology Direct Forming Technology (DFT), 3) full capacity of 2m ton...

APL Apollo Tubes: Capacity additions on track, focus remains on volume growth, We estimate earnings growth of 28% CAGR over FY17-20E, Strong balance sheet, improving cash flows; Reliance Industries: Global demand-supply dynamics favourable for GRM's, Pet-coke gasification project to improve GRM'..

We expect APL Apollo Tubes to report healthy 20% volumes CAGR over FY17-20E driven by uptick in demand, focus on higher margin value added products, rising contribution of niche DFT and GI/GP Pipes and benefits of operating leverage. We expect APAT to report 29% earnings CAGR over FY17-20E.

APL Apollo reported steady Q3FY18 result, as Net revenue increased 39.3%, while Net profit was up 23.4% yoy. Higher sales volume boosted total income; however rise in material cost impacted operational margins. We remain positive on the business given its healthy gains across exports and OEMs segments, which we expect to continue.

APL Apollo Tubes (APAT) in 2QFY18 posted consolidated revenues of Rs. 1345 Cr. (up 45% Y-o-Y, 16% Q-o-Q) due to strong 20% volume growth and higher realizations reported in Q2FY18. Strong Volume performance was supported by new clients in OEMs (grew 107% Y-o-Y)

The next generation DFT was one of the most favourite topic. DFT has enabled APAT to offer customized products at a lower cost and in less time than its competitors. It has also given access to overseas markets including US, Europe and Middle East. APAT expects to make 8-10% better margins using this technology. Investors also discussed 2QFY18 results which were in line with expectations. APAT reported impressive sales volume growth of 18% and earnings growth of 21% YoY despite GST implementation headwinds. The management highlighted that most of its 400 products are specialized and are used...

Valuation: At a CMP of Rs. 1,912.1, the company's share is trading at TTM P/E multiple of 31.5x. Moreover, it is trading at a P/BVPS and EV/EBITDA multiple of 6.3x and 16.2x, respectively. Anticipating higher acceptance of the DFT products and the volume growth guided by the management, we have increased the EV/EBITDA valuation multiple from 7.8x to 8.5x. Applying the same to FY20E EBITDA, we arrive at a target price of Rs. 1,850.4 per share. Thus...

Largest manufacturer of ERW Pipes, revenue growth aided by strong Volumes and capacity expansion. Total Industry size in value /volume terms for ERW Pipes is Rs. 32,500 Cr./ 8MTPA resp. APL Apollo Tubes to have a total installed capacity 2.0MTPA by FY18 end. Indian ERW market growing @ 9-10% p.a.

APL Apollo Tubes is amongst India's leading branded steel products manufacturers. The Company operates seven manufacturing facilities with a total capacity of 1.3 Million MTPA. It has pan India presence with units strategically located in Sikandarabad (3 units), Bangalore, Hosur, Murbad and Raipur. APL Apollo's multi-product offerings include over 400 varieties of MS Black pipes, Galvanized Tubes, Pre-Galvanized Tubes, etc.

We initiate with buy for a price target of Rs 2647.6 (12xFY20 EV/EBIDTA ) representing an upside potential of 73.6% from the CMP of Rs 1525 over the next 27 months.