Fortune Scrip     

Published: Apr 30, 2023
Updated: Apr 30, 2023

APL Apollo Tubes

Power of steel and innovation
Pan-Indian, global footprint

This fortnight, we have selected a fundamentally sound, financially strong, efficiently managed and growth-oriented company – one which has the ability to grow at a faster pace than its peers — as the Fortune Scrip. It is APL Apollo Tubes.

Formerly known as Bihar Tubes Ltd, APL Apollo Tubes is the largest producer of electric resistance welded (ERW) steel pipes and sections in India. It enjoys a 15 per cent market share in the country, which is expected to cross the 20 per cent mark within the next couple of years. The company’s products are well received in several global markets and are exported to over 20 countries. As by now it is globally recognized as one of the lowest cost producers in the world, its export prospects are all the more buoyant going ahead.

The New Delhi-NCR headquartered company has 11 plants spread across the country, with the highest number of SKUs in the range of 1,500+ and 75 registered trademarks with 16 registered product designs. Its product basket numbers over 400 as it believes that developing new and innovative products is a key driver to profitable growth.

The company thrives on innovation, which is its top priority. From products to processes to performance, innovation at APL Apollo is not a deliberate strategy but an intrinsic strength. When it entered the industry, it was about round circular pipes. As there were many large and established players, it was a herculean task for APL Apollo to compete with them. So the company thought of differentiating its position and decided to manufacture square and rectangular tubes which replaced conventional products like steel angles, channels, wooden structures and aluminium profiles. With this innovative approach, it gave a new dimension to the market. In due course, it emerged as the world’s first company to produce steel tubes from 10 mm to 1,000 mm with 0.23 mm to 40 mm thickness.

LATEST TECH

The company always strives to bring the latest technology to steel tube manufacturing in order to boost the industry as a whole in terms of efficiency and product innovation. It is a pioneer in electrical resistance welding (ERW), in-line galvanizing technology and high-speed rolling mills.

Today, steel tube manufacturing has emerged among the fastest-growing industries across the globe and APL Apollo has gone from strength to strength to lead this charge.

The company’s pillars are grounded in innovation, market creation and ESG, and its skills in these three areas are trusted by its customers and also by industry participants. As far as ESG is concerned, this strategy is embedded in its DNA in the last few years. The management believes that by imbibing these strategies, the company will remain in the forefront in achieving sustainable goals.

The company has a strong domestic distribution network, with more than 800 distributors who further sell the company’s products to 50,000 retailers and 2 million fabricators down the value chain. It has an extended distribution network of warehouses and branch offices in 39 cities across the country.

SALES ZOOMS

The rising demand for APL Apollos’s products at home as well as abroad has enabled it to make rapid strides on the financial front. During the last 12 years, the company’s sales turnover has shot up over 14 times – from Rs 899 crore in fiscal 2011 to Rs 13,063 crore in fiscal 2022. with operating profit surging over ten and a half times, from Rs 90 crore to Rs 946 crore, and the profit at net level to taking a high jump of over 14 times, from Rs 43 crore to Rs 619 crore. The company’s financial position is very strong, with reserves at the end of March 2022 standing at Rs 2,578 crore – over 51 times its equity capital of Rs 50 crore, that too after two bonus issues, one in 2007 in the ratio of 1:1. It is reducing its debt burden, with long-term borrowings declining from Rs 834 crore in fiscal 2020 to Rs 580 crore in fiscal 2022, which led to a reduction in interest burden from Rs 113 crore in fiscal 2019 to Rs 44 crore in fiscal 2022.

But I have not picked APL Apollo for the position of Fortune Scrip for its past laurels. Its prospects going ahead are all the more promising. Consider:

• The company, which has put up a robust financial performance during the last five years, is doing still better in the current year (2023) if the actual performance in the first three quarters is any indication. Sales turnover during the April-December 2022 period has almost doubled to Rs 10,296 crore as compared to Rs 5,864 crore in the corresponding period of the previous year and the profit at net level has more than doubled to Rs 360 crore, as compared to Rs 175 crore. Future prospects are all the more promising on account of strong fundamentals in terms of consistent profitability and steady ROCE, coupled with an overall global bullish sentiment. A leading research analyst expects APL Apollo to deliver 27 per cent EPS CAGR over 2022-2025 as large diameter pipes gain acceptance for building construction and drive ramp-up of volumes from the new Raipur facility. This will also increase the share of value-added products to 75 per cent by fiscal 2025 and aid margin expansion.

TOP IN TUBES

• The structural steel tube industry has emerged as one of the fastest growing industries in the country. This tubes market is expected to shoot up from around 5 mmt last year to 22 mmt by 2023. Today the market is estimated to be Rs 55,000 crore, which accounts for 8 to 9 per cent of the global steel tubes market. Almost half this market, in terms of value, consists of electric resistance weld (ERW) tubes and the other half is the stainless steel and sub-merger arc weld (SAW) tubes. APL Apollo enjoys a 55 per cent marketshare in India's structural tube segment. The rising demand for steel in the country indicates a significant opportunity for structural steel tubes companies like APL Apollo. Little wonder, APL Apollo has managed to grow revenues faster than the sector (5-year CAGR being 27 per cent for the company as against the industry CAGR growth of 7 per cent) due to its focus on innovation, branding/distribution and capacity expansion.
• The company's earnings are insulated from the steel industry's cyclical nature. Most of the company's 400 products are specialized and are used in high-growth sectors. A leading research analyst insists that APL Apollo's stock should not be looked at as a steel sector play but a bet on India's construction/infrastructure/agricultural push.
• APL Apollo, 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 for APL Apollo, the company buys around 2 per cent of Indian steel consumption and 10 per cent of Indian HR coil consumption. Further, the company is amongst the top 3 customers for large steel producers. Due to these facts, the company's steel buying price is the lowest in the structural steel tubing industry.

TECH LEADER

• The company is always in an expansion mode - organic as well as inorganic. The acquisition of Apollo Tricoat in October 2018 has enabled APL Apollo to expand its portfolio in the high margin segment. As a result, by now the company, being in a competitive environment, has managed to maintain its leadership position. What is more, the company has been ahead of the curve in adopting new technology to enhance business and efficiency. As far as organic expansion is concerned, the company has increased its capacity three times in the last 3 years.
• The company is the largest manufacturer of ERW structural steel pipes and sections in the country, with a capacity of over 4 million tonnes per annum. The ERW steel pipes market is expected to grow at a rate of 10 to 12 per cent CAGR, providing a huge opportunity for sales growth. These pipes are used for various purposes like transporting water and other liquids and gases. With the development of technologies, they are also used in industries like building materials, automobiles and daily utility items. Says one analyst who has studied the company's operations extensively, "Believing in pioneering changes to cater to an ever-evolving economy by infusing superior cutting-edge technology and innovation, APL Apollo serves as a one-stop shop for a wide spectrum of structural steel products, catering to an array of industry applications such as urban infrastructure, housing, irrigation, solar plants, green houses and engineering."

CUTTING DEBT

• The management continues for focus on innovating newer products as it aims to increase the value added products mix to over 70 per cent within the next couple of years from the current level of around 62 per cent. The company's operating cash flow for fiscal 2022 was very strong at Rs 652 crore, as compared to Rs 610 crore in fiscal 2020. There has been a fall in net working capital days from 97 in fiscal 2011 to 41 in fiscal 2018, and further to just 7 days in fiscal 2022. This has led to net debt falling to Rs 290 crore by September 2022 from Rs 790 crore in fiscal 2020. Its ROCE improved to Rs 34.7 per cent from 18.4 per cent in fiscal 2020. Going forward, the company will cheer its investors on account of a strong operating cash flow and higher return ratios.
• The company is doing very well on the export front and its export prospects, going ahead, are all the more encouraging as the quality of its products is well appreciated in overseas countries and its products are well entrenched in over 20 markets. Thanks to the introduction of new technology and launching of new value-added products, the company is all set to exploit a huge untapped potential, particularly across the US, Europe and the Middle East markets, and is busy planning related strategies.

APL Apollo will rule the roost in the structural steel tube industry as it is wedded to pioneering changes to cater to an ever-evolving economy by infusing superior cutting-age technology and innovation, while applications for 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.

Shares of the company are quoted around Rs 1,190. I will not be surprised if the price doubles in a year to Rs 2,000. This stock can emerge as a milch cow for investors with a long-term perspective.