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APL Apollo Management meet takeaways

Contributed by Angel Broking

APL Apollo is one of the largest Electric Resistance Welding (ERW) pipe manufacturers in India with 5 manufacturing locations spread across northern, southern and western parts of India. Its products include galvanized tubes, pre-galvanized tubes, MS black tubes and hollow sections. The company has increased its capacity by 7.5x from 80k tonne in FY2007 to 0.6mn tonne currently. Its products find application in piping, cabling, engineering, power transmission, construction, automotives, gas distributions, sprinklers etc.

On the verge of massive expansion plan: APL Apollo aims to increase its capacity from 0.6mn tonne as of December 2012 to 1.0mn tonne by CY2015 with a capex of Rs.200cr via brownfield expansion at its existing plants. As per the company, it has the required land at its existing plants to meet the expansion plans; the capex is expected to be fully funded via internal accruals. Post expansion, the company targets an annual turnover of US$1bn.

Aims to grow sales via market share gains: The current market demand for ERW in India is ~7mn tonne, with APL Apollo being among the largest manufacturers. The unorganized (smaller) players account for 5mn tonne of the market. APL Apollo aims to gain market share from these unorganized players. To drive market-share gains, the company aims to leverage on its economies of scale, increase dealer-network and offer better quality products, going forward. The company aims to nearly double its dealer network from the current level of 300 as a part of its marketing plan. Currently, ~95% of the company’s raw material (basic steel) requirements are procured from JSW Steel.

Low margins, high duties mute down threats from imports: APL Apollo’s business model comprises of purchasing simple hot-rolled-coil (steel) and converting it to pipes. Approximately 83-86% of the company’s net sales are constituted by raw material costs, 7-8% of net sales is conversion costs, leaving the balance 7-8% as EBITDA margin. As per the company, low margins in the business, import duty on steel products and significant freight costs mute down the threat from imports. The company is aiming to double its capacity. However, margin improvement on account of economies of scale is likely to be insignificant, given the conversion business model followed by the company, in our view.

High working capital to keep balance sheet leveraged: The company’s business is working capital intensive. In order to maintain the current net sales annual run-rate of Rs.1,600cr, it requires ~Rs.300cr of net working capital (which is funded via working capital loan). Going forward, although the company expects to fund its capex to double its capacity via internal accruals, it will require an additional Rs.300cr of working capital loan in order to grow its top-line.