Why APL Apollo Tubes deserves its high valuations

APL Apollo Tubes, India’s leading structural steel tube manufacturer, did well even during pandemic triggered disturbances. APL’s focus on rural areas and smaller cities saved it during last year’s reverse migration. Since around 75% of its product mix caters to building construction, recent revival in construction activity is good news for APL. Its present capacity utilisation is placed only around 65%. Increased production will results in better operating leverage and profitability.Analysts are getting bullish on APL now because it has transformed from a commodity player to a branded player. Structural steel pipes have applications in residential and commercial buildings, warehouses, factories, agriculture, and other infrastructure works. Its early initiatives on the emerging structural steel segment helped APL to report industry beating growth rates—24% CAGR in both revenue and net profit during the last 10 years. In addition to establishing itself as a pioneer in India, APL is also the fifth largest player globally.In addition to organised growth, capacity expansion through inorganic route (eg acquisition of Lloyds Line Pipes, Taurus Value Steel and Apollo Tricoat) also helped APL to report splendid growth rate. This competition beating growth helped APL increase its market share from 27% in 2015-16 to 50% in 2020-21. Its market share is expected to improve further due to superior growth and due to shift from unorganised to organised players. The structural steel tube industry itself is on a growth phase in India and its present share, as a percentage of domestic steel consumption, is only 4%, significantly lower than the global average consumption of 9%.APL is expected to maintain its competitive edge in coming years also due to its strong distribution network and high capacity. Usage of latest technology helped APL to offer much better and faster customisation of its products. Due to this, around 40% of its products face very little competition and helps APL command higher premium and margins. As per estimates, its net profit is expected to report 30% CAGR between 2020-21 and 2022-23. APL’s diversified products and pan-India presence reduces the concentration risk. Though its valuation may look higher compared to steel players, it is similar to building materials company. Its faster growth rate is another reason why it deserves higher valuation.86703102 Selection Methodology: We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.(Graphics by Sadhana Saxena/ET Prime)

from Economic Times https://ift.tt/3aiAEIt