Market Expansion And Operational Improvements Will Benefit Future Prospects

Key Takeaways

• Market shifts and expanded facilities are set to drive revenue and international sales growth through increased volume and improved product mix.
  
• Strategic expansion and innovations aim to leverage operating efficiencies and capture EBITDA growth, enhancing margins and earnings.
  
• Declining profitability, weak demand, rising costs, and reliance on internal cash for CapEx create risks to earnings, margins, and liquidity.

Catalysts

Manufactures and sells structural steel tubes in India.

• APL Apollo Tubes expects a shift in market share from sponge iron steel pipes to HR coil steel pipes due to lower prices for raw materials, which is projected to drive increases in sales volume. This market share gain is likely to positively impact revenue growth.
  
• The Dubai plant, which provides access to cheaper steel from Asian countries, is operating at 58% utilization and is expected to increase its contribution to international sales. This can contribute significantly to future revenue growth.
  
• APL Apollo Tubes is innovating and ramping up production of new products from its Raipur facility, which should improve product mix and potentially lead to higher EBITDA per tonne. This can enhance both revenue and earnings.
  
• The company is penetrating new markets in Eastern India with new plants in Gorakhpur and Siliguri, which are expected to increase its reach in construction booming regions. This expansion is anticipated to increase sales volume and revenue.
  
• APL Apollo Tubes is targeting operating leverage benefits and value-added product mix improvements, expecting to capture ₹400 to ₹500 per tonne EBITDA expansion as production scales. This can enhance net margins and earnings.

APL Apollo Tubes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming APL Apollo Tubes's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 5.2% in 3 years time.
• Analysts expect earnings to reach ₹15.0 billion (and earnings per share of ₹53.88) by about January 2028, up from ₹6.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹17.6 billion in earnings, and the most bearish expecting ₹12.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.6x on those 2028 earnings, down from 66.6x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 22.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.02%, as per the Simply Wall St company report.

APL Apollo Tubes Future Earnings Per Share Growth

Risks

• The company faced a significant decline in profitability in the previous quarter, indicating potential volatility in earnings which could affect investor confidence and net margins.
  
• There is ongoing discounting due to weak end-market demand, which could lead to reduced profit margins if demand does not recover as expected.
  
• Concerns about macroeconomic conditions, including weak retail demand and delayed government spending, could hinder revenue growth and impact earnings negatively.
  
• Increased expenses in freight and power, alongside rising other operational costs, could pressurize net margins if not offset by higher sales volumes or price improvements.
  
• The company's significant growth plans are reliant on internal cash flows to fund a substantial ₹6 billion in residual CapEx, introducing execution risk and potential strain on free cash flows, which could impact the balance sheet and liquidity.

Valuation

• The analysts have a consensus price target of ₹1771.27 for APL Apollo Tubes based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2000.0, and the most bearish reporting a price target of just ₹1117.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹286.7 billion, earnings will come to ₹15.0 billion, and it would be trading on a PE ratio of 48.6x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹1523.35, the analyst's price target of ₹1771.27 is 14.0% 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.