Wealth creator: This stock turned Rs 25,000 into Rs 12 lakh in 10 years

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Leading manufacturer of steel pipes APL Apollo Tubes has been riding a crest after its board approved the merger of Shri Lakshmi Metal Udyog and Apollo Tricoat with the company. Shares of the company have rallied over 14% to an all-time high of Rs 1,225 since the company made the announcement on February 27.

With a rally of 4,857%, the company has already turned the fortunes of many investors during the past 10 years. Shares of the company were hovering at Rs 24.71 on March 3, 2011. The rise in share price indicates that an investment of Rs 25,000 in APL Apollo Tubes in 2011 would have now become over Rs 12 lakh.

Will the momentum sustain? Brokerages retained their bullish view on APL Apollo Tubes after the announcement of the merger. Sharekhan has a ‘Buy’ call on the company with a price target of Rs 1,330.

The management expects synergies across cost, products, and branding and expects a minimum improvement of Rs 150 per tonne in EBITDA margin. The merger would also facilitate faster capacity expansion and facilitate penetration of Tricoat products in the West and East.

“Improved earnings quality post the merger (higher margin/RoE), focus on home décor, and brand building are likely to further re-rate APL and reduce valuation gap with building material players,” Sharekhan said.

Apollo Tricoat’s minority shareholders will receive one equity share in APL Apollo for each equity share held in Apollo Tricoat. This implies a premium of over 10% to the previous closing price for Apollo Tricoat’s shareholders. The merger will result in an increase of 10.8% in APL Apollo’s share capital.

Ambit Capital also has a ‘Buy’ rating on the company with a price target of Rs 1,331.

“We believe this (merger) is a step in the right direction to simplify its capital structure. For APL Apollo Tubes’ shareholders, this transaction will be marginally EPS-accretive. But this will be more beneficial for Tricoat’s shareholders,” Ambit said in a report.

As of December 31, retail investors held a 10.77% stake in the company. On the other hand, HNIs, mutual funds and foreign portfolio investors had 3.09%, 7.24% and 17.81% stake, respectively.