apl apollo aplapo) - content.icicidirect.com

ICIC

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May 28, 2019

CMP: | 1330 Target: NA Target Period: NA

APL Apollo (APLAPO)

NOT RATED

Healthy volume growth to sustain....

APL Apollo is India’s largest producer of electric resistance welded (ERW)

steel pipes. Over the years, through organic and inorganic initiatives, the

company enhanced its ERW capacity, which is currently ~2.5x its nearest

peer. APL Apollo has an ERW capacity of 2.3 million tonne (MT) (inclusive of

recently acquired 200000 tonnes capacity from Shankara Building Products),

which has increased more than 8x in the last nine years. In the current

decade itself, APL Apollo has witnessed notable growth in its

capacity/volume thereby increasing its market share. APL Apollo’s installed

capacity has increased from 0.27 MT as on FY10 to 2.3 MT as August 2019,

registering a CAGR of 27%. Mirroring capacity growth, sales volumes have

grown from 0.17 MT in FY10 to 1.34 MT in FY19, registering CAGR of 26%.

Healthy demand environment to aid volume growth…

APL Apollo has a versatile product offering that caters to the needs of its key

user industries viz. construction and building materials, infrastructure, etc.

There is significant scope to grow India’s infrastructure and APL Apollo is

well placed to cater to this rising demand. Over a longer term horizon, taking

into account India’s potential, APL Apollo can play a role of a catalyst in the

India growth story. Strong government impetus, increasing purchasing

power, improving life-style dynamics, etc, are likely to provide a boost to all

key sectors of Indian economy.

Adoption of new technology augurs well….

Over the years, APL Apollo has been at the forefront in innovation and

adoption of new technology. In light of this track record, in 2016, APL started

adopting the direct forming technology (DFT). By the end of FY19, the

company established eight DFT lines with a cumulative capacity of 600000

tonnes. The OTO hollow shape universal (HSU) forming mill also known as

direct forming technology, has been specifically designed to produce square

and rectangular tubes for the construction industry and furniture

applications. Adoption of DFT technology has advantages in the form of

saving raw material costs, allows processing of small batch orders, etc.

Valuation & Outlook

With potential across all major sectors and new age applications, APL

Apollo’s business model is well positioned to capitalise on this opportunity.

On the back of its strong product offering, we expect sales volume to grow

from 1.34 MT in FY19 to 1.92 MT in FY21E, implying a CAGR of 19.8%. At

the CMP, the stock is currently trading at 10.8x FY21E EPS and 6.2x FY21E

EV/EBITDA.

Key Financial Summary

(| Crore) FY17 FY18 FY19 FY20E FY21E CAGR FY19-21E

Total Operating Income 3,923.9 5,334.8 7,152.3 9,196.5 10,828.1 23%

EBITDA 333.0 371.0 392.8 528.7 636.1 27%

PAT 152.1 158.1 148.3 230.6 298.0 42%

EPS (|) 64.5 66.6 62.2 95.1 122.9

P/E (x) 20.5 19.9 21.3 13.9 10.8

Price/Book (x) 5.5 4.5 3.8 3.3 2.6

EV/EBITDA (x) 11.1 10.4 10.1 7.5 6.2

RoCE (%) 22.2 20.2 18.3 21.0 23.1

RoNW (%) 21.6 18.9 15.4 18.5 19.8

Source: ICICI Direct Research, Company

Particulars

Particulars

Market Capitalisation (| crore) 3,213.1

FY19 Total Debt (| Crore) 893.3

FY19 Cash & Cash Eq (| Crore) 47.7

EV (| Crore) 4,058.7

52 Week H/L ( |) 1915 / 1009

Equity Capital (| Crore) 23.9

Face Value (|) 10.0

Key Highlights

APL Apollo’s installed capacity has

increased from 0.27 MT as on FY10 to

2.3 MT as August 2019, registering a

CAGR of 27%

Sales volume has grown from 0.165

MT in FY10 to 1.34 MT in FY19,

registering a CAGR of 26%

Going forward, we expect sales

volume to grow from 1.34 MT in FY19

to 1.92 MT in FY21E, implying a CAGR

of 19.8%

Price movement


Research Analyst

Dewang Sanghavi

[email protected]

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NIFTY APL Apollo

ICICI Securities | Retail Research 2

ICICI Direct Research Initiating Coverage | APL Apollo

Company background

Incorporated in 1986, APL Apollo Tubes is India’s largest producer of electric

resistance welded (ERW) steel pipes in India. Furthermore APL Apollo is also

among the top five steel tube manufacturers globally. The company

commenced operations with a modest capacity of 6000 tonne at

Sikandrabad (Uttar Pradesh). Over the years, through organic and inorganic

opportunities, the company has built the current capacity of 2.3 million

tonne (MT) (inclusive of recently acquired 200000 tonnes capacity from

Shankara Building Products). Including the recently acquired Shankara plant,

APL has eight manufacturing facilities across six locations. The company has

manufacturing facilities in Sikandrabad (three manufacturing units) (UP),

Murbad (Maharashtra), Bengaluru (Karnataka), Raipur (Chhattisgarh), Hosur

(Tamil Nadu) and Chegunta near Hyderabad (Telangana). Furthermore APL

Apollo, through its wholly-owned subsidiary Shri Lakshmi Metal Udyog

(SLMUL), has acquired more than 50% stake in Apollo Tricoat.

Over the years, APL Apollo has emerged as a one-stop shop for a large of

steel tubes and caters to an array of industry applications. The cumulative

capacity of 2.3 million tonnes per annum (MTPA) makes APL Apollo one of

the largest branded steel tube manufacturers globally. The company’s

products are of superior quality and have been approved by reputed

international agencies like SGS (France), CE (Europe), etc. APL Apollo also

has ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 certifications

while all its products are BIS- marked.

The product portfolio consists of 1100+ variants having diverse shapes,

sizes and grades. The company also has a wide distribution network

comprising of 790 distributors and 50000 retailers covering 300+

towns/cities. APL’s products find application in vital sectors like

infrastructure, construction & building materials, energy and engineering,

automobiles, agriculture and other industrials.

Exhibit 1: Company Timeline


APL Apollo is India’s largest producer of ERW pipes

and one of the top five steel tubes manufacturer in

the world. As on August 2019, the company has an

installed capacity of 2.3 million tonnes (MT) of pipe

making capacity. The products that APL Apollo

manufactures has wide applicability in areas of

infrastructure, construction & building materials,

energy & engineering, automobiles, agriculture and

other industrials



Strong manufacturing base

APL Apollo is the only ERW pipes manufacturer in India that has a pan-India

footprint. The company has three plants in North India in Sikandrabad, two

in the south at Hosur (Tamil Nadu) and Bengaluru (Karnataka), one in the

west at Murbad (Maharashtra) and another in the east at Raipur

(Chhattisgarh). In addition to the above-mentioned plants, the company also

recently completed the acquisition of Shankara Building Products’

production unit in Chegunta, Hyderabad.

Exhibit 2: Pan-India footprint

Source: Company, ICICI Direct Research

Over the years, the company has meticulously increased its installed

capacity through organic and inorganic expansion to cater to growing

domestic demand for ERW steel pipes. During FY10-19, the installed

capacity witnessed an impressive CAGR of ~27%. APL Apollo’s installed

capacity has increased from 274000 tonnes in FY10 to 2300000 tonnes by

August 2019 (inclusive of Shankara’s 200000 tonnes capacity).

Exhibit 3: Witnesses robust capacity growth


0.3

0.5 0.50.6

0.8

1.1

1.3 1.3

1.8

2.1

2.3

0.0

0.5

1.0

1.5

2.0

2.5

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 June'19

(in

million t

onnes)

Through organic and inorganic acquisition, in the

current decade, APL Apollo witnessed robust

growth in its installed capacity. Between FY10 and

August 2019, APL Apollo’s ERW making capacity

registered growth of ~27%



State-of-the-art production facilities with widespread presence

APL Apollo has state-of-the art facilities with manufacturing footprint across

the length and breadth of the country. The company has three plants in the

north, Sikandrabad (UP), three in South India, one each in Hosur (Tamil

Nadu), Bengaluru (Karnataka) and one at Chegunta (Telangana), which was

recently acquired from Shankara. It has another plant in East India at Raipur

(Chhattisgarh).

Exhibit 4: Installed capacity across locations (including DFT)

In Million Tonne (as of June 2019)Capacity

(In MT)

Raipur (Greenfield Capacity) 0.35

Murbad (Lloyds linepipes) 0.40

Hosur (Unit 2) 0.55

Sikandrabad (Unit 1) 0.35

Sikandrabad (Apollo Metalx - Unit 1 & 2) 0.35

Bengaluru (SLMUL) 0.10

Chegunta (Recently acquired from Shankara) 0.20

Total 2.30


With a strong three-tier distribution network across India, the company has

a strong presence in the market through its 790 direct distributors/dealers

and 50000 retailers and fabricators. APL Apollo also has a healthy network

of warehouses cum branch offices in over 29 cities across the country

thereby lending strong logistical support to its operations.

APL Apollo has a balanced capacity distribution across all four geographies

viz. north, east, west and south. In terms of capacity distribution, North India

accounts for~28% of APL Apollo’s capacity, South India accounts for 30%

of its capacity while West India and East India account for ~22% and 20%,

respectively. This capacity distribution is excluding the recently acquired

Shankara’ 200000 tonne capacity.

APL has its manufacturing facilities across all

geographies viz north, east, west and south thereby

providing a wide presence and reach



Industry scenario – ERW steel pipes and tubes

Steel tubes and pipes are widely used in a range of applications in the

construction, infrastructure, energy sectors and other industries. The electric

resistance welded (ERW) steel pipes and tubes is a versatile key sub-

segment that finds application in both traditional as well as new age areas.

In terms of traditional usage, ERW pipes found application in the field of

engineering, power, oil & gas (last mile city gas distribution), etc. New age

applications include building of modern infrastructure that includes metros,

airports, malls, greenhouse structures, etc.

Exhibit 5: Industry structure - steel tubes, pipes


India is among the leading ERW steel tubes manufacturing hubs in the world

with domestic demand levels of ~10 MTPA. Other countries that

manufacture steel pipes and tubes include China, Turkey, Italy and the US.

The demand is led by increased consumption in housing infrastructure and

construction sectors. Over the last few years, the domestic ERW pipe

industry is expected to grow at a CAGR of ~10-12% wherein the current

domestic market size is pegged at US$5 billion (~| 35000 crore).

Indian steel tubes and pipes are preferred across the globe for their superior

quality as well as low costs and geographical advantage. Going forward, an

increased government thrust to boost infrastructure development and the

”Make in India” initiative, smart cities, airports, new routes and gas pipelines

are all set to propel industrial growth in India. This would further boost

demand for steel and related products in the country.



APL Apollo – One-stop shop for steel structural products

Over the years, APL Apollo has emerged as a one-stop shop for steel

structural products catering to key sectors of the Indian economy. The

company is engaged in production of four key types of pipes & tubes viz.

hollow section pipes, black round pipes, pre-galvanised pipes (GP) and

galvanised tubes (GI). The company’s products find application in the areas

of construction and building materials, infrastructure, energy and

engineering, automobiles, agriculture, etc.

Exhibit 6: APL Apollo's key user industries


In terms of product-wise break up in FY19, hollow sections contributed 57%

of volumes, black round pipes contributed 15% of volume, GP contributed

21% of volume while GI contributed the balance 7% of volumes. In terms of

industry-wise break up, construction and building materials comprised 68%

of volumes, infrastructure for 10%, energy and engineering for 9% while

automobile and agriculture accounted for 5% and 8%, respectively.

Exhibit 7: APL Apollo's industry-wise volume break-up


Exhibit 8: Product-wise volume break-up


68%

10%

9%

5%

8%Construction & Building

material

Infrastructure

Energy & Engineering

Automobiles

Agriculture

57%

15%

21%

7%

Hollow sections

Black round pipes

Pre-Galvanized tubes

(GP)

Galvanized Tubes (GI)



Investment Rationale

Adoption of new technology augurs well….

Over the years APL Apollo has been at the forefront of innovation and

adoption of new technology. Furthering this track record in 2016, APL

adopted the direct forming technology (DFT) wherein by the end of FY19,

APL established eight DFT lines with cumulative capacity of 600,000 tonnes.

The OTO hollow shape universal (HSU) forming mill also known as direct

forming technology, has been specifically designed to produce square and

rectangular tubes for the construction industry and furniture applications.

The mill produces hollow shapes through direct forming, skipping the

traditional step of producing round tube and then squaring them. Through

introduction of this new technology, APL Apollo will have first mover

advantage, auguring well in the long run.

Exhibit 9: Direct forming technology (DFT) process line


Direct forming technology (DFT) is the latest global technology to make

hollow sections of varying shapes/sizes and thickness with superior quality.

This is in contrast to traditional technology where round tubes need to be

formed first and then converted to rectangular or square shape. With DFT,

hollow sections are formed directly through high speed welding at one go,

thereby reducing the rollover time to ~20 minutes (from 4-24 hours in the

conventional technology). From a manufacturing standpoint, the technology

results in direct material savings of ~2-10%. DFT products also find good

acceptance in countries like the US, Europe, South Korea and Japan.

Exhibit 10: Operational benefits of DFT Technology

Key Advantages of DFT

No rolls change required

Saves time and space

Reduced changeover time

Rolls management optimization

Material saving

Just in time production

High automation

Minimal intervention of the operator

Easy maintenance




Key advantages of deploying DFT technology…

Savings in raw material cost: The traditional technology involved

converting round pipes into square and rectangle pipes leading to

wastage of material at the edges of the round pipes. DFT eliminates the

wastage leading to cost savings to the tune of ~2-10%. This helps

enhance efficiency and reduce costs

Customised/small batch orders: DFT allows processing of smaller order

batch size of 10-20 tonne (vs. traditional technology processing capacity

of ~400-550 tonnes). The smaller orders coupled with customised sizes

are expected to unearth a considerable amount of untapped demand for

APL. For example, a customer can get his actual requirement say 96 mm

x 48 mm instead of 100 mm x 50 mm. This helps increase the

addressable market for the company

OEM & export market: Products manufactured through DFT have all-

round acceptance in developed markets like Europe, Japan and the US.

The deployment of DFT will give APL a global presence, opening up the

export market while superior product quality will give access to cater to

OEM demand. In FY19, export contributed ~4% to overall volumes and

OEM contributed 5% to overall volumes. Going forward, the target is to

increase the contribution from both OEM and export segment. Going

forward, high quality customised shapes and sizes of products, achieved

through DFT, to help penetrate OEMs and export markets

Exhibit 11: DFT machine




Versatile product offerings to ensure healthy volume growth

APL Apollo has a versatile product offering that caters to the needs of its key

user industries viz. construction and building materials, infrastructure, etc.

Hollow section, black round pipes, pre-galvanised tubes and galvanised

tubes are APL Apollo’s key product offering. In terms of market share for

FY19, APL Apollo had ~28% market share in pre-galvanised tubes (GP),

~26% market share in hollow sections, ~12% market share in black round

pipes and ~9% market share in galvanised tubes (GI). In the overall ERW

pipe segment, APL Apollo’s market share was at ~18% in FY19. Historically,

its market share in the domestic market has been on an increasing trend

from ~12% in FY15 to ~18% in FY19.

Exhibit 12: Domestic market share across products (in FY19)


Exhibit 13: Market share in overall ERW segment


There is significant scope in growing India’s infrastructure and APL Apollo

is well placed to cater to this rising demand. Taking into account India’s

potential, the company can play a role of a catalyst in the India growth story.

Strong government impetus, increasing purchasing power, improving life-

style dynamics, etc, are likely to provide a boost to all key sectors of the

Indian economy. With potential across all major sectors and new age

applications, APL Apollo’s business model is well-positioned to capitalise on

this opportunity. On the back of a strong product offering, we expect sales

volumes to grow at 19.8% CAGR in FY19-21E. Below we pictorially represent

the key areas where APL Apollo’s products can be used in the building

material space.

Exhibit 14: Application of APL's products within building material space


28%26%

12%

9%

0%

5%

10%

15%

20%

25%

30%

GP pipe Hollow sectios Black pipe GI pipe

(%

)

12%

14% 14%

16%

18%

0%

5%

10%

15%

20%

FY15 FY16 FY17 FY18 FY19(%

)



Wide distribution network ensures maximum penetration…

APL Apollo’s domestic market presence is emphasised by its three-tier

distribution and solid supply chain mechanism of state wise wholesalers,

district wise distributors and retailers. The well-built structure has propelled

the market presence of the company enabling better penetration in demand

areas. APL Apollo’s distribution network has increased from 150 distributors

in FY10 to 790 in FY19. During this period, the company’s distributor base

has grown at a healthy 20% CAGR. Additionally, APL also has 29

warehouses, thereby ensuring effective and efficient supply. The robust

distribution network aids the company in supplying products to customers

with minimum logistic cost and delivery time compared to its competitors.

The large base of distributors has ensured maximum penetration for APL

products and expanding market share across tier I and tier II cities.

Exhibit 15: Distribution network grows at 20% CAGR in FY10-19


…Pan-India presence diversifies risk; ensure quick supply

APL Apollo has manufacturing facilities across all geographies viz. north,

east, west and south. In terms of capacity distribution, south India has

highest capacity share with ~30% of total installed capacity while central

India has lowest capacity share with ~20% share in total installed capacity

(this excludes the recently acquired Shankara’s capacity). This balanced

capacity distribution augurs well for the company. Balanced distribution of

capacity across the country aids in catering to incremental demand arising

out of an any part of the country and also helps diversify slowdown related

risks (if any) with respect to any specific geography. Freight cost is also a

critical cost. Pan-India presence helps ensure quick and cost-efficient supply

of pipes/tubes to customers, thereby also leading to freight cost related

savings.

Exhibit 16: Capacity distribution (excluding recently acquired Shankara capacity)


150 175

200

275 300

375

600 600

650

790

-

100

200

300

400

500

600

700

800

900

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

No. of Distributors

30%

28%

22%

20%

South

North

West

Central



Shankara’s plant acquisition to add value…

In order to strengthen its leadership position in India, in April 2019 APL

Apollo acquired Shankara’s 200000 tonnes tube manufacturing capacity unit

in south India along with land of 29 acres for a consideration of | 70 crore.

The acquired facility has a healthy product portfolio mix. The above-

mentioned acquired facility has established manufacturing lines for pre-

galvanised tubes (GP) with capacity of 125000 tonnes and galvanised tubes

(GI) with a capacity of 30000 tonnes. The acquisition will aid in increasing

revenue and volume contribution from the value-added segment and also

result in a steady improvement in margins.

Exhibit 17: Snapshot of acquired plant of Shankara's

Source: Company, ICICI Direct Research. MTPA – Metric tonnes per annum.

APL Apollo’s existing manufacturing units catering to the southern markets

are operating at over 80% utilisation levels. Shankara is the second largest

player in the South Indian market. Acquiring one of its units with a capacity

of 200000 tonnes would aid APL Apollo to consolidate its position in the

South Indian market. This transaction would enable APL Apollo to add

further capacity at attractive valuations given the strong demand outlook

over the next few years. Shankara’s acquired facility is currently operating

at ~40% capacity utilisation level. The APL Apollo management is aiming to

ramp up this utilisation level to APL Apollo’s standard of ~80-85%.

Furthermore, as part of the deal, APL Apollo has agreed to purchase 2.5 lakh

tonnes of pipes exclusively from the company in FY20. This augurs well for

APL Apollo as it would ensure secured offtake thereby aiding volume

growth. Going forward, APL Apollo also plans to bring down costs related

to raw material costs, operating costs and transportation cost owing to

economies of scale in the region. This should further aid in achieving a quick

turnaround of the acquired asset. The management is targeting a payback

period of less than three years for the acquired asset.



Focus on branding to expand reach…

APL has been focusing on branding activities since 2013, with the aim of

creating a sustainable brand across markets enabling higher visibility, strong

brand recall and stringent market gains. Another key objective of the

branding exercise is to provide customers with a first-hand feel of products.

The company has chalked out a multi-pronged marketing strategy, which

includes mass media advertising, experiential marketing techniques and

community building activities. APL Apollo’s branding exercise serves two

fold objective viz. a) creating awareness and visibility of brand and b)

provide consumers a first-hand feel of the products.

In FY19, the company launched the ‘APL Apollo’ Television Commercial

(TVC) supporting Delhi Capitals for IPL, India's biggest sports event and giant

platform on television, enabling maximum reach and generating mass

connect and visibility. The company has appointed a marketing consultant

to drive its overall branding strategy. APL Apollo has also introduced

innovative incentive schemes such as a multi-day international cruise for

dealers and distributors. It has also appointed a marketing consultant to

drive the company’s overall branding strategy. Identifying branding as a key

focus area over the medium to longer term horizon, APL Apollo plans to

progressively enhance its budget for brand building activities. Strong brand

awareness and widened distribution network is expected aid the company

in diversifying the “APL Apollo” brand reach and drive higher growth.



Financial highlights

Revenues expected to grow at CAGR of 23% over FY19-21E

While APL reported steady volume growth in FY19, profitability was

impacted by inventory loss incurred in Q3FY19. APL Apollo reported sales

volume of 1.34 MT vs. 1.13 MT in FY18, reflecting a sales volume growth of

19% YoY. On the back of steady volume growth and higher blended

realisations YoY, APL reported a topline of | 7152 crore in FY19 vs. | 5335

crore in FY18, reflecting growth of 34% YoY. EBITDA came in at | 393 crore

vs. | 371 crore in FY18, implying growth of 6% YoY. Operating profit in FY19

was impacted by an inventory loss of | 41.7 crore in Q3FY19, caused by a

steep fall in steel prices. EBITDA/tonne for FY19 was at | 2933/tonne in FY19

vs. | 3283/tonne in FY18. Adjusted EBITDA/tonne (adjusting for inventory

loss) would have come in at | 3245/tonne. Ensuing PAT was at | 148 crore

vs. | 158 crore in FY18, reflecting a decline of 6% YoY.

Going forward, we expect topline to grow at 23% CAGR in FY19-21E,

primarily led by volume led growth. We expect sales volumes to grow at a

CAGR of 19.8% in FY19-21E. We model sales volume of 1.68 MT in FY20E

and 1.92 MT in FY21E. The sales volume growth is expected to be driven by

a) availability of full installed capacity for the whole year, b) volume from the

recently acquired manufacturing facility of Shankara. On the back of

increasing sales volume from the higher margin business and absence of

any one-off related to inventory loss, we model EBITDA/tonne of

| 3149/tonne for FY20E and | 3311/tonne for FY21E.

Exhibit 18: Revenues expected to grow at 23.0% CAGR over FY19-21E


Exhibit 19: Sales volume to grow at CAGR of 19.8%


Exhibit 20: Expect EBITDA/t to hover at ~| 3149-3311/tonne


3,138

4,214

3,924

5,335

7,152

9,196

10,828

-

3,000

6,000

9,000

12,000

15,000

FY15 FY16 FY17 FY18 FY19 FY20E FY21E

(| c

rore)

0.70

0.96 0.98 1.13

1.34

1.68

1.92

0.00

0.50

1.00

1.50

2.00

2.50


(in

MT)

2584

2941

34013283

29333149

3311

0

1000

2000

3000

4000


(|

/tonne)



EBITDA to grow at CAGR of 27.3% in FY19-21E

On the back of steady topline growth, we expect EBITDA to also grow at a

healthy pace. During FY15-19, EBITDA recorded growth at 21% CAGR.

Going forward, during FY19-21E, we expect EBITDA to grow at 27% CAGR

to | 636 crore. The growth is expected to be on account of a) contribution

to volumes from the recently acquired Shankara plant, b) availability of

optimum capacity, going forward. Over the next couple of years, we expect

EBITDA margins to hover around 5.7-5.9% range. APL Apollo is in the

business of conversion of HR coil into pipes. Hence, the EBITDA margin is

broadly a function of realisations. Compared to previous years, sequentially

while there could be a declining trend in EBITDA margins, the EBITDA/tonne

is likely to firm up. This would augur well for the company.

Exhibit 21: EBITDA and EBITDA margins trend


Improvement in operational margins to drive net profit

Net profit growth is likely to be driven by an improvement in operating

margin performance and better operational leverage. We expect net profit

to grow at a CAGR of 42.0% during FY19-21E to | 298.0 crore.

Exhibit 22: Net profit trend


182

282 333

371 393

529 636

5.8

6.7

8.5

7.0

5.5

5.7 5.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0

300

600

900

1,200

1,500

FY15 FY16 FY17 FY18 FY19 FY20E FY21E(%

)

(|

crore)

EBITDA (LHS) EBITDA Margin (RHS)

63.8 100.6

152.1 158.1 148.3

230.6

298.0 2.0

2.4

3.9

3.0

2.1

2.5

2.8

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-

125.0

250.0

375.0

500.0

625.0

750.0


(%

)

(|

crore)

PAT (LHS) PAT Margin (RHS)

EBITDA margins expected to hover at ~5.7-5.9%

levels over next couple of years



Return ratios to improve to improve steadily

During FY19, return ratios were impacted on account of inventory related

loss in Q3FY19 to the tune of | 41.7 crore. Going forward, we expect return

ratios (both RoE, RoCE) to improve steadily from FY19 levels. We expect

RoCE to improve from 18.3% in FY19 to 21.0% in FY20E and 23.1% in

FY21E. Similarly, we expect RoE to improve from 15.4% in FY19 to 18.5%

in FY20E and 19.8% in FY21E.

Exhibit 23: RoE and RoCE trend


19.1

22.2

20.2

18.3

21.0

23.1

17.7

21.6

18.9

15.4

18.5

19.8

10.0

12.5

15.0

17.5

20.0

22.5

25.0

FY16 FY17 FY18 FY19 FY20E FY21E

(%

)

RoCE RoE



Valuation & Outlook

With potential across all major sectors and new age applications, APL

Apollo’s business model is well-positioned to capitalise on this opportunity.

On the back of the strong product offering, we expect sales volume to grow

from 1.34 MT in FY19 to 1.92 MT in FY21E, implying a CAGR of 19.8%. At

the CMP, the stock is currently trading at 10.8x FY21E EPS and 6.2x FY21E

EV/EBITDA.



Risk & Concerns

1. Delay/poor acceptance of DFT products...

The DFT technology has a very specific advantage, which is offering

customised/client specific products. One of the key challenges

before the company is to migrate the customer base from the

standard sizes manufactured through conventional mills to more

specific customised sizes (e.g. 300x300) produced through DFT. The

management indicated that though the initial response from the

customer base has been good, the adoption of the technology will

be gradual and require at least a year or two to gain market share.

The margins in initial years are also likely to be more or less the same

as that of conventional mills for standard sizes. The premium on the

margins front for DFT (standard size) would, thus, depend upon its

market adoption. While APL has a first mover advantage in the

domestic industry, a poor response will hamper the prospects of the

company.

2. Inability to pass on increased raw material costs...

A sharp increase in steel prices impacted the overall EBITDA/tonne

of the company in the last couple of quarters. While the company

does have a policy to pass on the increase and decrease in raw

material prices (steel) to customers, the same comes in with a lag.

Given the increasing trend in steel prices, any inability to pass on the

increase in raw material cost will have an adverse impact on

profitability.

3. Threat of substitution…

PVC pipes have been gaining traction on the back of light weight,

low pressure handling and lower cost. The PVC pipes are a

substitute to traditional GI Pipes. In the past, the GI pipes volumes

have grown at a CAGR of 11% (FY13-17) earning margins of ~9-

10%. Any increase in substitution of GI pipes may hurt volume

growth as well as the overall profitability of the company.

4. Slow-down in end user industry…

The company primarily caters to sectors like construction and

infrastructure. The seasonality and delays in execution of projects is

likely to impact the demand from the construction and PEB industry.

Furthermore, delays and cost overruns in the government funded

large infrastructure projects can also hamper the APL‘s business to

such projects.

5. Increased competition…

The ERW pipes industry is highly fragmented, with ~40% of the

market catered to by the unorganised sector. Moreover, the industry

is marked by high asset turnover, low capex and minimum

technology requirement attracting investments in the sector. Any

capacity expansion by competitors or consolidation in the industry

can have a bearing on the competitive intensity in the sector. APL is

well placed to face competition (given size, pan-India presence and

economies of scale). However, inability to withstand competition

will have an impact on its profitability.



Financials

Exhibit 24: Profit & Loss (| crore)

(Year-end March) FY17 FY18 FY19 FY20E FY21E

Total Operating Income 3,923.9 5334.8 7152.3 9196.5 10828.1

Growth (%) (6.9) 36.0 34.1 28.6 17.7

Raw Material & Mfg Expenses 3,232.4 4548.3 6307.7 8046.9 9474.6

Employee Expenses 75.4 86.2 107.9 137.9 146.2

Other Expenses 283.2 329.2 343.9 482.9 571.2

Total Operating Expenses 3,590.9 4963.7 6759.5 8667.8 10192.0

EBITDA 333.0 371.0 392.8 528.7 636.1

Growth (%) 18.2 11.4 5.9 34.6 20.3

Depreciation 50.9 53.4 64.3 84.6 97.5

Interest & Finance Cost 72.0 81.3 113.4 109.0 106.0

Other Income 6.0 8.0 11.7 9.0 12.2

Exceptional Items - 0.0 0.0 0.0 0.0

PBT 216.0 244.3 226.9 344.2 444.8

Total Tax 63.9 86.2 78.7 113.6 146.8

PAT 152.1 158.1 148.3 230.6 298.0

Growth (%) 51.2 4.0 -6.2 55.6 29.2

EPS 64.5 66.6 62.2 95.1 122.9


Exhibit 25: Balance Sheet (| Crore)


Liabilities

Share Capital 23.6 23.7 23.9 24.3 24.3

Reserves & Surplus 679.8 814.1 940.2 1224.2 1478.5

Total Shareholders Fund 703.4 837.9 964.1 1248.4 1502.8

Total Debt 594.4 775.1 893.3 908.3 883.3

Deferred Tax Liability 81.3 99.4 120.0 122.4 124.8

Others 11.9 37.7 59.2 60.4 61.7

Total Liabilities 1,391.0 1750.2 2036.7 2339.6 2572.7

Assets

Net Block 630.8 852.0 1010.7 1125.7 1227.9

CWIP 138.4 56.9 27.5 27.5 27.5

Net Fixed Assets 769.3 908.8 1038.2 1153.2 1255.4

Goodwill on Consolidation 23.0 23.0 23.0 23.0 23.0

Investments 19.2 21.1 89.8 169.8 169.8

Inventory 469.6 591.5 783.5 957.4 979.0

Debtors 294.9 432.1 543.3 629.9 741.7

Other Current Assets 151.0 106.9 113.2 97.7 98.7

Cash & Bank Balance 1.6 6.8 47.7 42.2 36.9

Total Current Assets 917.1 1137.3 1487.7 1727.2 1856.3

Trade Payables 392.0 379.3 698.9 831.5 830.7

Other Current Liabilities & Prov 61.6 51.8 38.4 38.8 39.2

Total Current Liabilities 453.6 431.1 737.3 870.2 869.8

Total Net Current Assets 463.4 706.2 750.4 857.0 986.4

Other Assets 116.1 91.1 135.4 136.7 138.1

Total Assets 1,391.0 1750.2 2036.7 2339.6 2572.7




Exhibit 26: Cash Flow (| crore)


Profit/(Loss) After Taxation 152.1 158.1 148.3 230.6 298.0

Add: Depreciation & Amortisation 50.9 53.4 64.3 84.6 97.5

Net Increase in Current Assets (42.4) -215.1 -309.4 -245.1 -134.3

Net Increase in Current Liabilities 126.1 -22.5 306.2 132.9 -0.4

Cashflow from Operating Activities 286.7 -26.1 209.3 203.0 260.8

Increase/(Decrease) in Investments (11.1) -1.9 -68.7 -80.0 0.0

Increase/(Decrease) in Fixed Assets (172.8) -193.0 -193.6 -199.6 -199.8

Others (42.0) 25.1 -44.3 -1.4 -1.4

Cashflow from Investment Activities (225.9) -169.8 -306.6 -280.9 -201.1

Inc/(Dec) in Equity Capital 0.2 0.1 0.1 0.4 0.0

Inc/(Dec) in Loan (55.5) 180.8 118.2 15.0 -25.0

Dividend & Div Dist Tax (28.2) -34.2 -35.8 -43.7 -43.7

Others 22.8 54.4 55.7 100.6 3.7

Cashflow from Financing Activities (60.6) 201.0 138.2 72.4 -64.9

Net Cashflow 0.2 5.2 40.9 -5.6 -5.2

Opening Cash 1.4 1.6 6.8 47.7 42.2

Closing Cash 1.6 6.8 47.7 42.2 36.9


Exhibit 27: Ratio Analysis


Per share data (|)

EPS 64.5 66.6 62.2 95.1 122.9

Cash EPS 86.6 89.1 89.1 130.0 163.1

BV 242.8 296.4 351.3 397.6 514.8

DPS 10.0 12.0 14.0 15.0 15.0

Cash Per Share 0.7 2.9 20.0 17.4 15.2

Operating Ratios (%)

EBITDA Margin 8.5 7.0 5.5 5.7 5.9

PBT / Total Operating income 5.5 4.6 3.2 3.7 4.1

PAT Margin 3.9 3.0 2.1 2.5 2.8

Inventory days 44 40 40 38 33

Debtor days 27 30 28 25 25

Creditor days 36 26 36 33 28

Return Ratios (%)

RoE 21.6 18.9 15.4 18.5 19.8

RoCE 22.2 20.2 18.3 21.0 23.1

RoIC 21.8 19.8 18.2 21.0 22.9

Valuation Ratios (x)

P/E 20.5 19.9 21.3 13.9 10.8

EV / EBITDA 11.1 10.4 10.1 7.5 6.2

EV / Net Sales 0.9 0.7 0.6 0.4 0.4

Market Cap / Sales 0.8 0.6 0.4 0.3 0.3

Price to Book Value 5.5 4.5 3.8 3.3 2.6

Solvency Ratios

Debt / Equity 0.8 0.9 0.9 0.7 0.6

Debt / EBITDA 1.8 2.1 2.3 1.7 1.4

Current Ratio 2.0 2.6 2.0 2.0 2.1

Quick Ratio 1.0 1.3 1.0 0.9 1.0




Annexure

Product profile

APL’s products cater to high growth oriented sectors like construction,

manufacturing, infrastructure, renewable energy and agriculture. APL has

product variants of over 1000+ varieties, 3-4x the product basket of its

closest competitor. Also, 70% of the company’s products are niche and have

limited competition. The product profile focuses on continuous innovation

to meet exclusive customer requirements. The company adheres to major

quality certifications including ISO 9100:2008 and OHAS 18001:2007. The

products pass through stringent quality tests to ensure quality reaches its

customers. APL’s emphasis has been on leveraging the combined strength

of economies of scale, innovation, technological leadership and resource

optimisation to offer varied products to the customers at competitive prices.

Hollow sections /structurals

Hollow sections represent the fastest growing segment in the pipes & tubes

industry and have become increasingly important as construction material

in comparison to steel bars beams and open formations. Hollow sections

possess high tensile capacity, compressive strength, superior torsional

rigidity and fire resistance, making the most complicated constructions

possible. Also, the size of projects does not impose a limit on the application

of steel hollow sections. Besides technical advantages, hollow sections are

also increasingly used for aesthetic characteristics. The product is used for

visible construction elements in structural steel projects, to bring out artistic

impact of design. Apart from construction, hollow sections also find

application in transport, mechanical, heavy engineering, mining, process

engineering and agricultural sectors. APL Apollo Tubes manufactures high

tensile strength hollow section, which is used widely in various industries

including automotive, machinery, furniture, construction, etc. These

sections come in various shapes, sizes and finishes. Most common among

them include rectangular hollow sections (RHS) and square hollow sections

(SHS).

Exhibit 28: Conventional manufacturing process (hollow sections)




Pre galvanised tubes

Pre-galvanised tubes are made from pre-galvanised sheets. Several

preventive coatings are applied either before or after the tube production.

To make pre-galvanised tubes and hollow sections, Apollo Metalex and Shri

Lakshmi Metal Udyog (wholly-owned subsidiaries) were backward

integrated with in-house sheet galvanising facilities wherein APL directly

manufactures pre-galvanised sheets from HR coils. The tubes are tough and

durable, yet light with controlled zinc coating and are popular for number of

applications including fencing, cabling and ducting, automotive (bus body)

and green house structures. APL pioneered the manufacture of pre-

galvanised tubes in India. The state-of-the-art technology facilitates superior

quality customised products. MS galvanised sheets are used to manufacture

these GP tubes that are highly durable, stable and adhere to long

sustainability without atmospheric corrosion. Atmospheric and corrosive

environment prevailing at individual sites are the guiding factors that

determine the thickness of the coating to be provided to galvanised tubes.

The complete look & finish is aesthetically controlled at APL Apollo’s in-

house galvanising facility. Since these tubes have a homogeneous coating

all through, these can easily withstand any mechanical deformation without

affecting their zinc coating to alter the parent material.

Galvanised tubes

A steel tube that is covered with a layer of zinc metal is known as galvanised

steel. During the process of galvanising, steel is immersed in a molten zinc

bath, to ensure a tough and uniform barrier. These galvanised steel pipes

and tubes, are used in water supply, structural applications, etc. In order to

seek long-term structural performance in the harshest of weather

conditions, designers, builders and consumers have turned to using zinc-

coated steel pipes. This is because zinc-coated galvanised steel pipes and

tube resist the attack of wind, water and road salts. Apart from being easy

on the pocket, GI pipes are highly corrosion resistant, light in weight, easy

to handle during transport and easy to join.

MS black pipes

MS black pipe is manufactured using high grade mild steel and the latest

techniques in compliance with the set industry standards that ensure

durability and strength. Mild steel (MS) pipes are widely used across

industries because it is easy to weld and forge in various shapes and sizes

to meet the various pipelining and tubing applications. It is an ideal choice

for carrying liquids, fire fighting, structural and general engineering. These

pipes are also known as black pipes.



RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]



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