APL Apollo Tubes Ranking ‘Purchase’; Shankara deal to be EPS-accretive

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Mgmt expects funding to spice up development momentum; ‘Purchase’ retained with TP of Rs 1,110

APL Apollo (APL) has introduced a minority fairness funding proposal by its wholly owned subsidiary APL Apollo Mart Ltd (Apollo Mart) into Shankara Building Products Ltd (Shankara). APL will find yourself proudly owning ~9.9% of Shankara for a complete funding of Rs 1.8 bn (~6% of APL’s complete capital employed as of end-Dec’21). This shall be via a mixture of buy of secondary promoter shares (1mn shares @Rs 755/share) and proposed preferential allotment of convertible warrants (1.4mn shares @Rs 750/share). Shankara was valued at 0.9x EV/gross sales (FY22 annualised).

The funding shall be funded through inner accruals and is predicted to be EPS and RoCE accretive from the very first yr. APL sees a chance to probably double its current gross sales from Shankara. We keep Purchase on APL with a goal worth of Rs 1,110/share.

Funding rationale: Based on administration, (i) the funding is aligned with APL’s development plan, (ii) Shankara could be a perfect launch platform for APL’s new merchandise, (iii) there could be synergies via Shankara’s retail/ wholesale community, (iv) growth of the structural metal tubes market and (v) affiliation would guarantee gross sales consistency as Shankara is amongst APL’s key distributors.

APL Apollo + Shankara associations: Shankara distributes ~0.1mnte of APL Apollo’s volumes. In April’19, APL acquired Shankara’s 0.2mnte Hyderabad plant for ~Rs 700 mn. APL recovered its whole funding value inside three years, boosting its total ROCE. Present Ebitda era (estimated) from that plant is Rs 400-500 mn pa. With the present funding, administration count on gross sales consistency to be maintained together with development momentum. APL sees a chance of doubtless doubling gross sales via Shankara utilizing its intensive retail/wholesale community.

Concerning the deal: The funding shall be made via a mixture of buy of secondary promoter shares and proposed preferential allotment of convertible warrants, taking the full funding measurement to Rs 1.8 bn. Apollo Mart will make an instantaneous funding of ~Rs 1.018 bn (secondary market buy +25% warrant subscription cash) and the remaining funding of ~Rs 787 mn shall be made inside 18 months (75% on warrant conversion). The goal deal is predicted to be accomplished in Q1FY23 topic to approvals.

Dangers: We haven’t factored in any further investments for strengthening the distribution/retailing framework for APL. Extra such investments, going ahead, might have implications for future RoCE.

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Lexie Ayers
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