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Amidst the ups and downs in the domestic stock market, brokerage firm Nuvama Institutional Equities has issued a very positive report after visiting the manufacturing plant of the country’s leading pipe and structural steel tubes manufacturer APL Apollo Tubes and talking to the management. The brokerage has further strengthened its confidence in the stock after looking at the plant’s high production efficiency, capacity expansion and strong supply chain.
Nuvama has maintained its ‘BUY’ rating on the company’s stock and increased the target price, which indicates a strong upside potential of about 36% from the current market price. The brokerage believes that due to infrastructure boom, government schemes and increase in construction activities, the demand for structural steel pipes may reach record levels in the coming times.
After closely studying the production status and order book at the ground level during plant visits, Nuvama has identified 4 key triggers behind this uptick:
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Continuous increase in market share: Even in an environment of weak and sluggish demand, the company has strengthened its hold by snatching market share from unorganized and smaller competitors.
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Supply Chain and Channel Re-stocking: Dealers and distribution networks are seeing rapid re-stocking of inventory, indicating strong volume growth in the coming quarters.
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Improvement in steel prices and spreads: The company’s EBITDA per ton margin is on track to improve due to stability and possible increase in HRC (Hot Rolled Coil) steel prices, which may lead to a sharp jump in profits.
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Focus on high-margin value added products: The plant has state-of-the-art technology and increased production of large diameter value-added tubes, which is providing a huge margin cushion to the company.
According to the brokerage report, the company has strongly shifted its strategy from volume to profitability by withdrawing discounts in the past. When discounts decline and spreads improve, it has a direct and significant impact on operating profits.
Nuvama analysts estimate that the company’s EBITDA/tonne may touch better levels in the coming quarters. Additionally, with new capacities fully activated at Raipur and other key plants, the company is likely to grow its volumes in double digits on an annual basis. The increasing use of structural steel tubes in infrastructure projects domestically and internationally is proving to be a major growth catalyst for the company.
Whether you are investing in the market from Lucknow, Kanpur, Delhi, Jaipur or Mumbai, the brokerage suggests adopting a buy strategy on dips in quality stocks related to pipes and capital goods sectors. The upside target of 36% means that this stock can prove to be a solid compounder for medium to long term (12 to 18 months) portfolio.
However, like any equity investment, investors should also take into account the impact of fluctuations in steel raw material prices, global commodity trends and interest rates. The brokerage’s recommendation is based on the company’s strong balance sheet, low-debt profile and undisputed leadership position in the market.