Global brokerage firm UBS Securities, in its latest report, upgraded its rating on APL Apollo Tubes to 'Buy' from an earlier rating of 'Neutral' and also revised the target price higher to ₹1,900 apiece from ₹1,600. This new target indicates an upside potential of 23% for the stock from its previous closing price of ₹1,548.
The stock has been largely flat for the past 18 months. With the recent correction, the brokerage noted that its PE multiple has come down by 20% from its peak, which it believes is attractive at current levels.
"The stock has underperformed in the past year, and the recent correction presents a good buying opportunity, in our view. Additionally, falling raw material prices and market share gains are likely to aid better performance sequentially," said UBS.
The brokerage's change in stance was attributed to the healthy spike in APL Apollo Tubes' volume growth in Q3FY25, which prompted them to undertake channel checks. Positively, the brokerage finds that APL's growth momentum is likely to remain strong, aided by customers shifting from refurbished steel to HRC structural steel tubes.
The brokerage's channel checks suggest that APL is gaining market share due to competitive pricing, a narrowing gap with refurbished steel prices, and strong demand for large-diameter pipes. General HRC steel is currently available at ₹52/kg compared to refurbished steel at ₹49/kg. A year ago, these prices were ₹65/kg and ₹54/kg, respectively.
It also noted that customers are migrating to HRC-based products from subpar refurbished steel, which is positive for APL Apollo Tubes' volume growth.
"One of our key concerns around APL losing market share to refurbished steel due to high HRC prices is largely resolved. Another interesting insight from our channel discussions is the decline in capital expenditure from governments in Southern states, impacting money supply and demand," said UBS.
APL has relatively lower exposure to these states, however, any recovery will aid its growth. Thus, the brokerage believes HRC steel prices are likely to remain soft given the upcoming domestic capacities.
The brokerage's analysis also shows that historically, APL's volume growth has inversely tracked changes in domestic HRC prices, with the COVID phase being an exception. HRC prices declined by approximately 17% YoY in December 2024.
UBS expects a combination of stable and lower HRC prices to augur well for APL, given the narrowing price spread between HRC pipes and refurbished steel pipes.
UBS expects mid-to-high-teen revenue growth for APL over the medium-to-long term, supported by the government's continued focus on infrastructure (airports, metros, railways, etc.) and recent rural housing and solar rooftop schemes. HRC prices have been correcting and are expected to remain stable, resulting in a demand shift from the secondary (refurbished steel) to the primary market.
According to the brokerage, channel checks suggest that APL continues to remain ahead of its peers in new product launches, aiding market share gains. UBS believes APL is well-placed to benefit from industry tailwinds and the current demand uptick on account of deflated steel prices positively impacting earnings growth.
APL Apollo Tubes is one of the leading building material brands in structural steel tubes in India. It operates 11 manufacturing facilities across the country, with a capacity of 3.6 MTPA as of the end of FY24.
Its multi-product offerings include over 1,100 varieties of pre-galvanized tubes, structural steel tubes, galvanized tubes, MS black pipes, and hollow sections.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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