APL Apollo Tubes reported better than expected profitability for Q3 FY21 as its EBITDA was 27% higher than our estimate. The EBITDA/tonne at Rs4,780 (+43% YoY) was a strong beat and was led by better product mix and scarcity of raw material (steel)/ tubes. APL Apollo’s EBITDA jumped 45% YoY to Rs2.3 bn. Higher operating cash flow for 9M FY21 at Rs 8.5 bn (Rs 5.1 bn in FY20) and fall in net working capital days to 8 days by Q3 FY21 led to net debt falling to Rs 2 bn by Q3 FY21 from Rs 8 bn in FY20.
IDBI Capital raised their FY21 EBITDA estimate for FY21 by 14% given a strong margin beat in Q3 FY21. Even for FY22/FY23, IDBI Capital raises their EBITDA estimates by 17%/16%. IDBI Capital values the stock at a PER of 25x FY23E EPS (earlier 20x FY22E) and raises their target price to Rs 1149 (earlier Rs767). Maintain BUY.
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Key Highlights and Investment Rationale:
APL Apollo Tubes is witnessing strong demand in end markets; hence it aims to increase capacity from 0.5 mtpa to 3 mtpa by FY22 (funded through internal accruals). It plans to add two new products to its portfolio (colour coated tubes and heavy structural tubes). Also, APL is working to further improve its supply chain management.
Operating cash flow strong; return ratios higher:
APL Apollo Tube’s net debt has fallen to Rs 2 bn as of December 31, 2020 compared to Rs8 bn as of March 31, 2020 as it generated operating cash flows of Rs8.5 bn in first half of FY21 (FY20 operating cash flows were Rs5.1 bn). Its 9M of FY21 ROCE stood at 25% (compared to 18% in FY20).
Management targets 4 mn tonnes of volumes by 2025:
Management targets volumes of 4 mn tonnes in coming three-four years (current run-rate of 2 mn tonnes) with focus on value added products for the rest of 2 mn tonnes. In FY22, it targets 20% volume growth. IDBI Capital applauded APL Apollo’s management for its execution, strong improvement in product mix alongside sharp improvement in working capital during 9M of FY21. As per management, the new EBITDA range would be between Rs 4- 5,000/tonne (Rs 3-4,000/tonne in the last five years) on better product mix. IDBI Capital expects APL’s EBITDA/net profit to grow at a CAGR of 17%/28% over FY21-23.