Apollo Pipes - Focus On Volumes Over Margins: Systematix

Systematix Research Report

We hosted the management of Apollo Pipes Ltd. in our investor conference. They sounded confident to outgrow industry volume growth with expansion in distribution pan India and wide product offerings.

However, Ebitda (~Rs 13/kg, 10-12% margin) will be under check in coming quarters due to aggressive plans for hiring and advertising and promotion expense and to aid dealer’s return on investment.

A Rs 5 billion capex is planned over FY24-26 to double capacity to ~290 kt and achieve 25% plus volume compound annual growth rate.

Plants in the Eastern Uttar Pradesh and Maharashtra, at Rs 1.35 billion capex each, is likely to be operational in H2 FY25. We estimate 31%/27%/51%/98% CAGR in pipes-volume/revenue/Ebitda/profit after tax over FY23-25E, with return on capital employed of ~17% in FY25E.

We expect Apollo Pipes to retain its fast-growing status, driven by pan-India aspirations and richer product mix towards non-agri value added product.

Doubling of capacities in three-four years at Rs 5 billion capex and expansion in distribution should help the company in attaining its pan-India goals.

While we remain upbeat on Apollo Pipes’ prospect, after recent run up in its scrip and at ~30 times FY25E price/earning, we downgrade our rating to 'Hold', with an unchanged target price of Rs 760 (32 times FY25E price/earning).

Margin trajectory is the key monitorable in coming quarters.

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