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A rejuvenated 2019; reiterate Buy
* APAT has announced the acquisition of a 200k ton plant in Hyderabad from Shankara Building Products for Rs700mn after a solid 4Q sales volume growth (+39% yoy). APAT’s total capacity is now 2.3mn tons, which is 28% of the Indian steel pipe industry.
* Key benefits from this plant are: high-margin products of 155k tons, reduction in logistics costs for Andhra Pradesh market and 29acres of land area (viable for future expansion). To add, Shankara will buy 250k tons of pipes from APAT annually.
* The deal is valued attractively at 1.2x EV/EBITDA. We estimate ROI of 26%/30% in FY20/21 on this investment. We raise FY20/21 earnings estimates by 4%/7% as we factor in the benefits from this acquisition.
* Stock has risen 30% in the last three months in anticipation of strong 4Q results. However, it is still trading at 14.8x FY20E EPS and we believe the recent developments should keep the momentum up. Reiterate Buy with a new TP of Rs2022, based on 20x FY20E EPS.
Acquisition makes APAT bigger and stronger
Following a solid 4Q sales volume growth (+39% yoy), APAT has acquired Shankara Building Products’ 200k ton plant in Hyderabad for Rs700mn /on a slump sale basis/as part of slump sale. With this, APAT’s capacity now stands at 2.3mn tons or 28% of the Indian steel pipe industry. According to the company’s management, the total value of existing infrastructure is Rs1.2bn. The acquired Hyderabad plant has capacity of 200k tons – Pre-galvanized (125k), Galvanized (30k), Structural (25k), and Round (20k). Key benefits from this plant acquisition include reduction in logistics costs and large infrastructure. APAT expects to generate EBITDA of Rs400mn/Rs600mn in FY20/FY21E from this plant. We raise our FY20/21 earnings estimates by 4%/7% as we factor in sales volumes of 120k tons/160k tons.
Further good news
Another positive developments include the allotment of 400k shares and 500k warrants to promoters. The proceeds worth Rs970mn will be used to fund Apollo Tricoat acquisition (deal announced last year). The share allotment at Rs1,800/share and warrant allotment at Rs2,000/share should be seen as a strong commitment from the promoters (significant premium to the current price and last three-month average price). Promoter holding will rise to 39.5% from 37.25%.
Outlook and valuation;
compelling Buy In our view, the current PER of 14.8x FY20E is unjustified given: 1) 51% EPS CAGR over FY19-21E and, 2) ROCE improvement to 24.5% from 16.8% over FY19-21E. APAT will report 4Q results in May’ 19. In anticipation of strong quarterly results, we expect EPS to rise 30% yoy in 4Q and this should catalyze the stock price. We maintain Buy with a new TP of Rs2022. We value the stock at 20x FY20E EPS, which we believe is reasonable. Key risks to our recommendation are: high volatility in global steel prices and a slowdown in the domestic construction activity.
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