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Pick Of the Week – APL Apollo Tubes



We hereby present you our investment idea for Equity Investment i.e “Pick of the Week”. A thorough analysis of company, industry and economy goes behind our stock ideas for you. With the “Pick of the Week”, you may earn superior returns in stock market over a time horizon of 6 – 9 months.



INVESTING RATIONALE


• Q1FY20 healthy volume growth for 2nd quarter in a row: APAT reported a strong volume growth of 29% YoY on consolidated basis for Q1FY20. This is the 2nd consecutive quarter of healthy volume growth as was reported in Q4FY19 (39% YoY growth). We note, Hollow Sections core product (including DFT) of APAT formed over 54% of total revenues in FY19 & reported volume growth of over 31% in Q1FY20 at 219kt. Besides, growth has also been noted in products like GP (# 33% YoY @ 89ktons) and Black Round pipes (# 19% YoY @ 53kt). Volume growth was due to 1) higher focus of management towards value-added products, 2) Hollow Sections, DFT and 3) focus on new markets.

• Healthy Market share gains: Consistently from FY15 onwards APAT’s market share has seen a marked improvement from 12% then to 18% in FY19 a 600bps increase. This gain in market share over the last 5 years has been on account of distribution expansion, product portfolio expansion and customization (offer 1,100+ SKUs ; 200 SKUs added owing to DFT in the last 18 months), brand strengthening led by media spends and pick up in its key core industries like construction activity uptick.

• Acquisition to aid volume growth: In Q4FY19, APAT acquired the Hyderabad unit of Taurus Value Steel in an all cash deal of Rs. 70 crore. Taurus Vale Steel has a total capacity of 2,00,000TPA of which GI and GP pipe capacity is at 1,55,000TPA. This will support volume growth of the company and management guidance of reporting +20% volume growth CAGR over FY19-21E. Expect EBITDA/ton also to improve in the range of Rs. 3,400 – 3450/ton over FY19-21E

• We maintain a BUY with a target of Rs. 1,797



WE RECOMMEND


  • CMP

    Rs. 1605

  • Target Price

    Rs. 1797

  • Potential Upside

    12%


* Note: Stock Investment horizon Approx. 6-9 months. CMP as on 05th Jul, 2019.

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