APL Apollo Tubes Ltd (APL ) – A company with strong moat
APL Apollo Tubes (APL) is India’s largest structural tubes producer with a domestic market share of ~40% in FY20. The company has been on an expansion spree since a decade, through both, organic and inorganic routes by acquiring five companies since FY08. The company has increased its pipe manufacturing facility from 53,000tpa in FY06 to 2.5mtpa in FY20. It is the only producer of structural tubes with a pan-India presence and has manufacturing plants across India’s northern, western, central and southern regions.
APL has a wide geographical reach, which helps the company save on logistics cost, as well as lead time. The company has an edge over competitors in the fragmented structural tubes industry, where firms compete on prices and lower logistic costs. Proximity to client base helps it ensure quicker delivery. The company derives about 35% of its revenues from South,30% from West, 25% from North and 10% from East. The company has expanded its distribution network over time to newer cities and towns. It has presence in more than 500 towns through its vast network of distributors and retailers. Its 26 warehouses and a network of 800 distributors and 50,000+ retailers serve customers across the country. The company’s diverse product range helps it score over competitors.
India’s structural tubes market, pegged at ~4mt (~Rs190bn) in FY20, which has been growing at 8% CAGR over FY16-20. However, it is mere ~4% of India’s overall steel demand, which is very low compared to world standard which stands at ~9% of steel demand. With the pandemic causing havoc the world over, structural tubes demand is likely to slip ~10% yoy in FY21E and normalise Q4FY21E onwards. Government’s focus on infrastructure and increased usage of steel in residential and commercial buildings should drive huge demand for structural tubes over the coming years. Even at 4-4.5% of India’s steel demand, the structural tubes market is expected to grow at ~10% CAGR over FY21-25E to 5.4mt in FY25E.
APL’s products are divided into two categories: 1) low margin products like MS Black and hollow sections where the EBITDA/tonne is about Rs1,100-Rs3,000/tonne, and, 2) high-margin products like Galvanised tubes, pre-galvanised tubes, Apollo Tricoat where the EBITDA/tonne is about Rs4,000-Rs6,000/tonne. The share of high margin products are likely to contribute about 35% of its EBITDA while the rest is contributed by low margin products.
The key raw material used in manufacturing structural tubes is hot rolled coils (HRC). APL buys HRC from nearby major steel manufacturers, such as JSW Steel (60-70%), Tata Steel BSL (~20%) and the balance from Tata Steel and SAIL, which helps it save on logistics cost due to its close proximity. Any increase or decrease in prices of raw materials are passed on to the customer with a lag.
The raw material is the major cost for the company which accounts for about 85% of its overall revenues. APL’s key raw material is HR Coil or strips which is used to manufacture structural tubes. Though the company passes on the entire cost to the end customer with a lag it has not been able to do so at all times considering the price sensitive nature of the industry resulting in company’s margins taking a hit. Moreover a steep fall in steel prices would result in inventory losses which the company plans to mitigate by reducing its inventory to less than 30 days.
The structurals space accounts for ~95% of APL’s overall product portfolio currently. Over last few years, APL changed its product profile and began focusing on this space by improving product quality and adopting measures such as consistent branding and aggressive marketing. Moreover, weak competition too played in APL’s favour, as the company was successful in eating into the market shares of both, organized and unorganized firms. APL’s market share in the structural steel space surged from ~29% in FY16 to ~40% in FY20 and is expected to further increase to ~50% by FY23E.
During the past two years, the company spent ~Rs450-500m on branding & advertisements, and roped in Mr Amitabh Bachchan as Brand ambassador. The company also sponsored Indian Premier League (cricket league) and sign boards, in addition to tapping fabricators, etc.
APL has always preferred to grow inorganically and had acquired 5 companies since CY2007. It has expanded capacities and managed to turn them around.
APL’s plants were shut in April 2020, amid national lockdown (due to COVID-19 outbreak). The company has restarted its plants and has been operating at 70-80% capacity utilization since June 2020.
We expect the company’s business to grow by about 20% from 2022 though Covid 19 is likely to witness a dent in its revenues in the current year. The company’s diverse product range and distribution network has enabled the company to be the market leader with a market share of 40% which is expected to increase to 50% in FY23. The company has grown through the inorganic route by acquiring smaller companies in the space and has managed to successfully turnaround the fortunes of the acquired companies. With capacity utilization back to 70-80% post covid the performance of the company would show strong momentum in the medium term. The stock at the CMP of Rs.2899/- trades at about 30.29x its FY20 EPS. The growth will henceforth be driven by increasing contribution of high margin products which will increase its margins. We recommend long term investors to ADD this stock on dips.