Fortune Scrip

Published: Dec 29, 2021
Updated: Dec 29, 2021

APL APOLLO TUBES

Ruling the roost in structural steel tubes

This fortnight, we have selected a not so well-known structural steel pipe manufacturing company, APL Apollo Tubes, as the Fortune Scrip. The company is the largest manufacturer of Electric Resistance Welded (ERW) steel pipes and sections in the country, with a capacity to produce 2.6 million tonnes per annum. The company is known for its innovative approach and penchant for introducing newer and newer technologies, which have kept it ahead of its peers and enabled it to capture marketshare from unorganised and small players. Little wonder that its marketshare, which was around 27 per cent in 2016, has shot up to around 50 per cent in fiscal 2021.

Needless to say, the company is going from strength to strength on the financial front. During the last five years, its sales turnover has expanded from Rs 2,379 crore in fiscal 2017 to Rs 6,008 crore in fiscal 2021 with the net profit shooting up from Rs 39.32 crore to Rs 153.78 crore during this period. The company’s financial position is very strong, with reserves at the end of March 31, 2021 standing at Rs 1,420 crore – almost 57 times its equity capital. APL’s operating cash flow is very strong and it has succeeded in reducing its debt from Rs 790 crore in fiscal 2020 to Rs 160 crore in fiscal 2021. In the very near future, the company will be able to wipe out its debt and become a totally debt-free entity. So far, it has made two bonus issues – both in the ratio of 1:1 — in 2007 and 2021. Before the pandemic hit operations during the last two years (when the management preferred to skip the dividends), the company was paying handsome dividends at the rate for 140 per cent for the previous two years.

Once the impact of the pandemic started waning, the company entered the path of fast track recovery. For example, in Q2 (July-September 2021) of the current fiscal 2022, its sales volume rose by 15 per cent to 427,387 tonnes (as compared to 373,124 tonnes in Q1FY22) and the sales turnover moved up 4.38 per cent to Rs 857.55 crore. During the pandemic environment, the company focused on increasing the sales of its value-added products and in fact the value-added products portfolio contributed as much as 62 per cent in Q2 FY22 as compared to 57 per cent in Q1FY21. Going ahead, the prospects are highly promising as the company has successfully captured the mindshare of fabricators and architects, with many making its steel tubes their first choice for applications. Again, the company continues with innovations and implementation of newer and advanced technology. The company has managed to offer customised products in a much shorter duration than its peers and its margins are also better.

A renowned research agency (HDFC Securities) expects that led by healthy volume growth, margin expansion, reduced working capital and reduced debt burden, APL’s revenue and net profit will grow at a CAGR of 20 per cent and 24 per cent respectively over the next 3 years. But we have not picked this company as the Fortune Scrip on account of its past laurels. Its future prospects are also very bright. Consider:

APL took a far-sighted step to acquire Apollo Tricoat, which is the first company in the country to introduce Galvent technology. This will enable APL to expand its portfolio to the high-margin segment.

Tricoat has a production capacity of 2.50 lakh tonnes per annum of inline galvanized pipes (ILG), 1 lakh tonnes per annum of designer pipes, 50,000 tonnes of door frames and 50,000 mtpa of narrow sections. The per tonne EBITDA on ILG and designer pipes is Rs 6,000 to Rs 7,000, while that on door frames and narrow sections is Rs 4,000 to Rs 5,000. As compared to APL’s margin of 5 to 6 per cent, Apollo Tricoat has around 11 per cent operating margin. Going ahead, the APL management expects the EBITDA/tonne to improve further due to a better product mix and volume growth. The management vision, going ahead, is to achieve an EBITDA/tonne of around Rs 5,000 from last year’s level of Rs 3,058. Leading brokerage house Motilal Oswal believes the APL-Tricoat merger will prove to be margin- and RoE- accretive. This will create value for the shareholders. The brokerage firm expects 20 per cent revenue and 35 per cent net profit CAGR over the next 4 to 5 years till 2025.

The company is still in an expansion mode. The management has planned to increase the capacity from 0.5 mtpa to 3 mtpa by 2022 and targets 4 million tonnes by fiscal 2025 as against the current run rate of 2 million tonnes. At the same time, it plans to add two new value-added products to its portfolio – colour-coated tubes and heavy structural tubes. APL is also working to further improve its supply chain management.

Following the introduction of new value added products – leading to a strong improvement in product mix, lower working capital days alongside a sharp reduction in leverage in fiscal year 2021 — the management continues to focus on innovating newer products as it aims to increase the value added product mix to 70 per cent within the next 2-3 years from the current level of 60 per cent. The company’s operating cash flow for fiscal 2021 was strong at Rs 980 crore (as against Rs 610 crore in the previous year). Now, the fall in net working capital days to 8 days by fiscal 2021 has led to net debt falling to Rs 160 crore from Rs 790 crore in the previous year. Its RoCE improved to 26.5 per cent in fiscal 2021 as compared to 18.4 per cent in the previous year. Going forward, strong operating cash flow and higher return ratios will cheer investors.

APL is the largest producer of ERW steel pipes in the country with a capacity of 2.5 million tonnes per annum. The ERW steel pipes market in the country is expected to grow at 10 per cent to 12 per cent CAGR, providing a huge opportunity for the company, as at present the company has the largest and the most entrenched distribution network in the structural steel sector in India with a strong dealer distributor network of 800+ distributors, 27 warehouses and 50,000+ retailers.

APL, being the undisputed leader in the industry, enjoys easy raw material sourcing and at favourable prices as compared to its peers. With steel being the major raw material, the company buys 2 per cent of Indian steel consumption and 10 per cent of Indian HR coil consumption. Further, as the company is amongst the top three customers for large steel producers, it gets the material at a cheaper than market price. Thus, the company’s steel buying price is the lowest in the structural steel tubing industry. This pushes up the company’s bottomline.

Prospects for overseas sales are highly promising. APL products are well received in about 20 markets and demand is on the rise on account of the introduction of technology and newer product launches such as Tricoat colour tubes, narrow sections, etc. There has emerged a strong untapped potential market, particularly across the US, Europe and the Middle East. The company is now concentrating on promoting exports in these regions. This augurs well for the company going ahead.

APL Apollo will rule the roost in the structural steel tube industry as it is wedded to pioneering changes to cater to an every-evolving economy by infusing superior cutting-age technology and innovation while application of such tubes is on the increase. The company is all set to serve as a ‘one stop shop’ for a wide spectrum of steel products, catering to an array of industry plants, green houses and engineering. The pandemic has hit some of the players in the industry, who are over-leveraged with higher working capital days. A strong unit like APL can take advantage to raise its marketshare further on the back of aggressive sales strategy to hurt weak competitors, a strong financial and liquidity position, cost optimization measures and adoption of advanced technology. Shares of the company are quoted around Rs 850. I will not be surprised if the price doubles in a year to Rs 1,750. This stock can emerge as a milch cow for investors in the long term.

— Savyasachi