156% gain in 18 months from APL Apollo Tubes
I first reported in March 2015 that three eminent stock wizards, Prashant Jain of HDFC MF, Kenneth Andrade of (then) IDFC MF and Ajay Relan of CX Partners, had commandeered large quantities of stock in APL Apollo Tubes, a small-cap (Rs. 2,100 crore) engaged in the manufacture of tubes and pipes.
I predicted that the interest of the three eminent stock wizards means only one thing, namely, that the stock will surge in the upward trajectory.
I was right because the stock has notched up impressive gains of 156% since then, outperforming the benchmark indices by a wide margin.
As of 30th September 2016, IDFC Premier Fund holds 15,43,699 shares while HDFC MF holds 11,66,000 shares. Ajay Relan’s holding is not known.
Vinit Sambre’s DSP Blackrock Micro Cap Fund buys chunk
Vinit Sambre, the whiz-kid fund manager of DSP Micro Cap Fund, has attained the prestigious distinction of “Best Mutual Fund Manager” owing to his feat of delivering 26% CAGR gains over the past five years.
This feat obviously means that we cannot ignore his stock picks but have to accord to them the utmost respect.
The DSP Blackrock Micro Cap Fund holds 10,24,797 shares as of 30th September 2016 while the DSP Blackrock 3 year close ended fund holds 3,20,248 shares.
It is notable that the three mutual funds collectively have a strangle-hold of 17% equity in APL Apollo Tubes.
Ashish Kacholia and Narendra Kumar Agarwal also storm into APL Apollo
Ashish Kacholia has scooped up a chunk of 5,49,587 shares while Narendra Kumar Agarwal (shares transferred to Suresh Kumar Agarwal) holds 5,35,957 shares as of 30th September 2016.
| APL APOLLO TUBES LTD – KEY FUNDAMENTALS | |||
| PARAMETER | VALUES | ||
| MARKET CAP | (Rs CR) | 2,109 | |
| EPS – TTM | (Rs) | [*C] | 58.40 |
| P/E RATIO | (X) | [*C] | 15.31 |
| FACE VALUE | (Rs) | 10 | |
| LATEST DIVIDEND | (%) | 100.00 | |
| LATEST DIVIDEND DATE | 08 SEP 2016 | ||
| DIVIDEND YIELD | (%) | 1.11 | |
| BOOK VALUE / SHARE | (Rs) | [*C] | 275.32 |
| P/B RATIO | (Rs) | [*C] | 3.25 |
[*C] Consolidated [*S] Standalone
| APL APOLLO TUBES LTD – FINANCIAL RESULTS | |||
| PARTICULARS (Rs CR) | SEP 2016 | SEP 2015 | % CHG |
| NET SALES | 955.51 | 1088.43 | -12.21 |
| OTHER INCOME | 2.07 | 1.82 | 13.74 |
| TOTAL INCOME | 957.58 | 1090.25 | -12.17 |
| TOTAL EXPENSES | 873.33 | 1035.3 | -15.64 |
| OPERATING PROFIT | 84.25 | 54.95 | 53.32 |
| NET PROFIT | 33.66 | 20.07 | 67.71 |
| EQUITY CAPITAL | 23.59 | 23.44 | – |
“Multi-bagger cooking under our very noses“: Mudar Patherya
Mudar Patherya, the veteran stock picker, is a die-hard fan of APL Apollo. In December 2015, he pointed that even though the Indian economy is sluggish, and APL Apollo is dependent on the infrastructure growth, it is growing by leaps and bounds instead of being sluggish like its peers.
After a detailed discussion, Mudar opined that APL Apollo is a “multi-bagger cooking under our very noses“.
“Can’t stop gushing” about APL Apollo: Mudar Patherya
Mudar Patherya surfaced again in September 2016 to heap lavish praise on APL Apollo.
His words are worth being quoted in extenso:
“I can’t stop gushing about this company. The economy might be sluggish but APL appears to have discovered its sweet spot, adequately protected from competition. Consider: Revenues grew only two quarters in four (due to a decline in steel prices reflecting in its end realisations) but EBDT (earnings before depreciation and tax) has grown every single quarter – from Rs 49 crore to Rs 63 crore to Rs 65 crore to Rs 79 crore to Rs 81 crore. I often turn to my trusted confidante (interest outflow) for validation and in this case it sends out a confirmatory signal: interest outflow has been steady at Rs 18 crore in the past three quarters. A rising interest cover (five per cent-plus in the last quarter) indicates this is a dynamic proxy of a modern India, whether the country’s GDP grows seven per cent or eight per cent.”
Buy recommendation of Dharmesh Kant of Motilal Oswal
Now, we have the benefit of an expert analysis from Dharmesh Kant of Motilal Oswal about the merits of APL Apollo Tubes.
We have seen in the past that Dharmesh Kant is a stickler and recommends only top-quality companies which offer a healthy balance of safety and growth.
Some of his past recommendations include Force Motors, Hestor Biosciences, MPS, Camlin Fine Sciences, Thomas Cook and Aarti Industries, all of which have notched up stupendous gains.
His last recommendation was Sterling Tools, which happens to be a favourite of Dolly Khanna, Anil Kumar Goel and Narendra Kumar Agarwal/ Jagdish Kumar Agarwal.
All indications are that Sterling Tools is walking in the same path as its illustrious peer, Sundaram Fasteners, and will shower hefty gains on investors in the foreseeable future.
Coming back to APL Apollo Tubes, Dharmesh has recommended a buy on good logic:
“We recommend to BUY APL Apollo Tubes for a target of INR 1,248 – 15x on FY18E EPS (+37% Upside).
Market leader in ERW pipes: APL is the largest manufacturer of Electric resistance welded (ERW) pipes in India (Market size INR 300 bn/~7.5 mt) with a capacity of 1.3 mt and enjoys a market share of ~15% in domestic market ahead of Tata steel (6%), DP Jindal group (7%) and Surya Roshni (6%). It has a diversified product portfolio that includes MS black (22% of Revenues), Galvanised tubes (13% Revenues), Pre galvanized tubes (18% Revenues) and Hollow sections (48% Revenues). We expect the domestic ERW pipe market to grow at a CAGR of ~9% over FY16-19E. The bulk of the growth will come from the construction and infra segments (airports, mall & prefabricated structures) using the structural pipes & demand from traditional applications (water supply, sewage and oil & gas). As pipes are the most convenient way for city gas distribution (CGD), increasing investment in the CGD segment and expanding CGD network will support steel pipe demand.
Pan India presence – Significant competitive advantage: APL is the only player to have pan India presence as it derives 44% of revenues from South, 27% from West and 20% from North. It has an extensive distribution network (2x compared to peers) of +400 distributors, 26 warehouses and over 10,000 retail networks across India.
Growing successfully through capacity expansion: APL has been increasing its market share over last 5 years by expanding capacities. It has expanded capacity by 165% to 1.3 mt in last 5 years. It is expanding its capacity further to 2.0 mt which is likley to be completed Q1 FY18. It is setting up a greenfield plant with 200,000 tpa capacity at Raipur in Chhattisgarh. The company is also enhancing its capacity by another 500,000 tpa at its existing locations using the direct forming technology (DFT) to produce pipes for structurals. With new capacity at Raipur, the firm will target Central & East India markets where its presence is low. We expect a volume CAGR of ~20% over next 3-4 years as the capacity utilization improves.
Valuations & View: APL is well placed to gain from expected recovery in demand owing to infrastructure push by the government. Timely capacity expansion along with plans of doubling the dealer network will help it capture growth opportunity. We initiate coverage on the stock with a ‘BUY’ rating valuing the company at 15x FY 18E EPS of INR 83.2 with for a per share target price of INR 1,248, giving an upside of around 37%.”
Conclusion
Dharmesh Kant’s logic is quite convincing. His buy recommendation cannot be taken lightly especially when it has the endorsement of seven eminent stock wizards!
It’s best to stay out of market for few months. With the double blow of demonetisation slowdown and likely increase in capital gains tax, markets could crash badly by March
hey arjun, you forgot to put a COMMENT LINK on MoHnish Pabrai post. You got it wrong mate. All his Indian stocks are DUDS except GIC HOUSING.