Expanded Capacity And Higher Value Mix Will Drive Long Term Earnings Upside

Catalysts

About Apollo Pipes

Apollo Pipes is a pan India PVC and CPVC piping and building materials company focused on plumbing, agriculture and infrastructure applications.

What are the underlying business or industry changes driving this perspective?

• Large ongoing capacity build out to 286,000 tonnes with no balance sheet debt positions Apollo Pipes to capture potential upside when construction and water infrastructure demand normalizes. This can drive a step up in revenue scale and operating leverage led earnings.
• Shift in mix toward higher value categories such as CPVC, window profiles, OPVC and other non commodity building products, supported by the Lubrizol TempRite tie up, may lift realizations and EBITDA per tonne and support expansion in net margins over the next 2 to 3 years.
• Ramp up of the West India plant and commissioning of the new Varanasi facility enhance Apollo Pipes’ geographic reach in underpenetrated regions. This may enable faster volume growth and better freight economics that support higher consolidated EBITDA and return ratios.
• Accelerating replacement of legacy materials in water and sewer networks with products like OPVC, DWC and PE gas pipes, alongside greater use of branded plastic systems in housing, may support a long demand runway and sustained volume growth, potentially lifting absolute earnings.
• Channel inventory at unusually low levels and anticipated clarity on antidumping duty for PVC raise the prospect of a restocking cycle. Combined with improving government infrastructure spending, this may support a near term increase in volumes and a rebound in EBITDA margins and cash flows.

Assumptions

This narrative explores a more optimistic perspective on Apollo Pipes compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Apollo Pipes's revenue will grow by 22.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.3% today to 5.2% in 3 years time.
• The bullish analysts expect earnings to reach ₹1.1 billion (and earnings per share of ₹23.76) by about December 2028, up from ₹257.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 42.1x on those 2028 earnings, down from 51.4x today. This future PE is greater than the current PE for the IN Building industry at 26.2x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in end user demand from private real estate and government water infrastructure, combined with delayed fund releases for contractors, could extend the current volume stagnation beyond management expectations and limit the ability to utilize expanded capacity. This could put sustained pressure on revenue growth.
• A prolonged period of PVC resin price volatility and uncertainty around the timing and quantum of antidumping duty may keep channel partners understocked and wary of taking pricing risk. This would restrict restocking-led recoveries and compress gross spreads, weighing on net margins.
• The aggressive capacity buildout to 286,000 tonnes, despite current utilization around the low 40 percent level, risks structurally depressed return ratios if demand recovery is slower than planned. Fixed costs and the asset base would rise faster than volumes and EBITDA, which could constrain earnings growth.
• If competitive intensity and price wars in PVC pipes, especially in agri and Western India markets, remain elevated for a longer period, Apollo Pipes may be forced to trade margin for volume. At the same time, new high margin products such as OPVC, DWC and window profiles may scale up more slowly than anticipated, limiting improvement in consolidated net margins.
• Dependence on a single premium supplier relationship with Lubrizol for CPVC resin, as well as reliance on a rapid mix shift toward higher CPVC contribution, creates execution and concentration risk. Any disruption in supply, quality perception issues or failure to capture targeted institutional business could delay the anticipated uplift in realizations and EBITDA per tonne, muting earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Apollo Pipes is ₹469.0, which represents up to two standard deviations above the consensus price target of ₹365.5. This valuation is based on what can be assumed as the expectations of Apollo Pipes's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹469.0, and the most bearish reporting a price target of just ₹198.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be ₹20.8 billion, earnings will come to ₹1.1 billion, and it would be trading on a PE ratio of 42.1x, assuming you use a discount rate of 15.1%.
  
• Given the current share price of ₹300.3, the analyst price target of ₹469.0 is 36.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.