After a 435% return in 5 yrs, has APL Apollo Tubes run out of steam?

Analysts continue to be buoyant on APL Apollo Tubes (APAT) even though the stock has rallied nearly 435 percent in the last five years. The share price of the company has surged from Rs 296.25 on July 9, 2014, to Rs 1,584.30 on July 9, 2019.

Analysts at various brokerage firms see up to 46 percent upside on the back of industry-leading capacity of 2.3mn tonnes, low-cost structure, acquisitions of Taurus & Apollo Tricoat and pan-India presence with a broad distribution network.

"We expect ROE to expand to 24.1 percent and RoCE to grow to 26.8 percent over FY19-21E. Meanwhile, revenue CAGR and EPS CAGR will be 21 percent and 49 percent, respectively, led by improved efficiency, better product portfolio and likely reduction in the net debt-equity ratio to 0.4x in FY21E from 0.8x in FY19," said Elara Capital in a report.

The decline in the debt-equity ratio will be led by improved performance and the absence of major capacity expansion in the near term, said Elara. This will deleverage the balance sheet and will help in generating free cash flow of Rs 320 crore over FY20-21E, it added.

"Deleveraging alone is likely to give 4 percent upside to the stock price," said the brokerage initiating coverage on the stock.

The company also posted robust sales numbers in the first quarter of FY20 as sales volume grew 29 percent YoY to 3,88,000 tonne, supported by strong demand and production ramp-up at all four plants.

"Q1 volume forms 24 percent of our FY20E sales volume. The steel pipes manufacturer is on track to achieve its guidance of 20 percent sales volume growth for FY20," Emkay said.

According to the brokerage, the high volume growth can be attributed to focus on building material steel pipes where the company has a dominant market share; benefits from Direct Forming Technology (DFT); expansion of the distribution network; and innovation in product offerings.

Elara expects acquisitions of Apollo Tricoat and Taurus Value Steel's manufacturing unit to play a key role in driving volume growth in the company, which in turn, would propel share price of APAT.

"The acquisition of Apollo Tricoat has an attractive payback period of less than 3-4 years. It is the first company to introduce global Galvant technology in India. Tricoat's current capacity is around 75,000-tonne pa and enjoys high margin, which is almost 2x of APL," the report said.

Meanwhile, Axis Securities opined that acquisition of Taurus Value Steel's manufacturing unit in Hyderabad, which clocked revenue of Rs 780 crore in FY18, will improve APAT's topline growth and could lead to logistic cost savings.

"Hyderabad market is currently catered by APAT’s Raipur and Hosur facilities. Besides, it will also result in an enhanced competitive advantage for APAT and thereby higher volumes," said Axis.

According to Elara, not only APAT but the entire electric resistance welded (ERW) pipe industry will grow as the government is expected to spend around Rs 1 lakh crore towards numerous projects such as metro, airport, urban development, irrigation and water sanitation and rising demand of prefabricated structures, followed by steady demand from traditional applications, like water transportation and sewage and oil & gas.

"The domestic ERW pipe industry posted a demand CAGR of 5 percent over FY16-19, and we expect the industry to grow at a CAGR of 7 percent over FY19-21E to 8 million tonnes by FY21E," said Elara.

Brokerage calls

Elara Capital: Buy (Initiated Coverage) | Target: Rs 2,267 | Upside: 43 percent

Emkay: Buy | Target: Rs 2,312 | Upside: 46 percent

Axis Securities: Buy | Target: Rs 1,897 | Upside: 20 percent