APL Apollo Tubes (APAT) on March 21 announced a minority equity investment by APL Apollo Mart Limited, a wholly-owned subsidiary of APL Apollo, in Shankara Building Products through a purchase of secondary promoter shares and proposed preferential allotment of convertible warrants.
The total investment size is up to ₹180.50 crore and the total holding of Apollo Mart in Shankara after the issue of the warrants will be 9.90 percent on a fully diluted basis.
Of the total investment, APAT will immediately invest ₹101.80 crore and invest ₹78.70 crore within 18 months.
The announcement by APAT has fetched positive reviews from brokerages as most of them see the stock as buy-worthy at this juncture when the valuation of the stocks is also at comfortable levels. The stock is now 16 percent below its 52-week high of ₹1,113.65 that it hit on December 16, 2021.
The brokerage firm Motilal Oswal Financial Services has a 'buy' call on the stock with a target price of ₹1,200, implying a 28 percent upside from the stock's March 22 closing of ₹937.50 on BSE.
APAT and Shankara have had a business association of over 15 years, with the latter being one of the key distributors of APAT’s products. Motilal Oswal believes this investment will further strengthen their long-standing association, ensuring consistency in sales through Shankara’s retail and wholesale network and creating synergies for APAT.
"The investment in Shankara is in line with APAT’s growth plan to become India's largest market platform for steel building materials by expanding its distribution reach in untapped markets. The investment is expected to drive margin and earnings growth and will be earnings per share (EPS) and return on capital employed (RoCE) accretive from the first year onwards," Motilal Oswal said.
Brokerage firm Sharekhan by BNP Paribas also has a 'buy' call on the stock with a target price of ₹1,100.
Sharekhan also highlighted that the investment would help APAT further leverage Shankara’s distribution reach and provide cross-selling opportunities to it.
"As per our analysis, APAT's 0.2 million-tonne Hyderabad plant (acquired from Shankara in April 2019 with high-margin products such as GI/GP pipes) contributes EBITDA of ₹50 crore assuming 50 percent utilisation and margin of ₹5,000 per tonne. The deal would help to push more products through Shankara’s stores and could improve utilisation for the company's Hyderabad plant going forward," said Sharekhan.
Sharekhan expects APAT to sustain its high earnings growth momentum. It expects PAT CAGR of 37 percent over FY21-24E, supported by robust double-digit volume growth and margin expansion.
Brokerage firm ICICI Securities has maintained its buy call on the stock with a target price of ₹1,110, based on 25 times FY24E price to earnings ratio (P/E).
"The stock has seen a massive rerating in the past 18 months on the back of Tricoat acquisition, repayment of debt and steady growth. With an improving return on equity (RoE) and RoCE profile, higher growth driven by constant efforts towards market creation, and steady increase in market share (to reach more than 60 percent in the next 3-4 years in our view), we believe that a multiple of 25 times FY24E P/E is justified," said the brokerage firm.
The risk for APAT is falling steel prices and normalising spreads. ICICI Securities believes a slower-than-anticipated pickup in the steel tubes market or equal marketing and distribution push by peers can lead to market share erosion or lower than expected revenue growth for APAT.
Delayed recovery in demand from construction and infrastructure projects could hurt the earnings outlook of the company. Any intensifying of competition from well-established steel companies could affect APAT’s volume growth and the working capital cycle, Sharekhan said.
Market sentiment on the stock is ‘neutral’, according to a MintGenie poll and an average of 13 analysts has a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.