Shares of Venus Pipes & Tubes have been on a roll since June. The stock hit its all-time low of ₹316.40 on June 1, 2022. It has jumped 94% in the last four months.
Brokerage firm Centrum Broking believes the stock can jump even higher. The brokerage has initiated coverage on the stock with a buy call with a target price of ₹764.
Centrum highlighted that the demand sectors like oil refinery, petrochemicals, chemicals, and pharmaceuticals are in a major capex cycle upswing with estimated investments of ₹3.3tn (based on announcements made by major players) over FY23E-25E.
This would roughly translate nearly ₹330bn of incremental opportunity for SS pipes. Besides, revoking export rebates by China and the use of only BIS-certified products will likely aid Venus Pipes to strengthen its market share through import substitution, Centrum said.
The brokerage firm believes Venus Pipes is set to expand its capacity to 33.6ktpa, expected commission by the Q1FY24E end. The capital outlay required for the expansion project is nearly ₹1.6bn funded largely through IPO proceeds.
Future growth will be fueled by both volume expansion at 32% CAGR over FY22-25E as well as cost savings on account of backward integration as it is setting up a 9.6ktpa piercing plant for seamless pipes which can help in saving ₹25-35k/t (at full capacity utilization can save nearly ₹240-335mn), Centrum said.
Venus Pipes has the potential to generate nearly 46% EBITDA CAGR over FY22-25E at nearly ₹15bn in FY25E (nearly 3 times from FY22 EBITDA) based on volume expansion, improved customer mix by shifting sales from stockists to direct sales/tender based, backward integration and improving operational efficiencies.
The EBITDA margins are expected to improve from about 13% in FY22 to about 17% in FY25E. Blended EBITDA/t inched up sharply from nearly ₹42,500/t in FY22 to nearly ₹56,796/t in FY25E. Post-IPO, nearly 25% of equity is diluted, hence return ratios are likely to moderate from superior RoE of 38% in FY22 to 23.2% in FY25E, said Centrum.
"With new capacities, Venus Pipes is set to become the second largest player in India. It is well equipped to exploit emerging opportunities in the form of import substitution, higher exports and huge capex upswing in demand markets," Centrum said.
"We expect Revenue/EBITDA/PAT to grow at CAGR of 32%/46%/48%, respectively over FY22-25E, keeping the balance sheet strong with Net Debt/EBITDA of 0.59x, high RoE of nearly 23% and ROCE of 20% in FY25E," the brokerage firm added.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
