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APL Apollo Tubes Limited- Analysis

March 13, 20218:09 am
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APL Apollo Tubes Ltd is the largest ERW pipe & tube manufacturer in India. The company is a growth machine having grown revenue at a CAGR of massive 27% between 2011-2020(growing revenue by 8.5X in these 9 years) while the profitability had grown at a CAGR of 21%. In the current blog “APL Apollo Tubes Limited- Analysis”, I will share :

1. Indian Steel tubes and pipes industry

2. ERW Steel tubes & pipe business

3. Demand drivers for the structural application for ERW tubes

4. About ‘ APL Apollo Tubes Ltd’

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5. How the company is differentiating itself in a low margin business

6. Financial Analysis ,Products, Distribution, Branding, Plants, Acquisition, Technology, Competition, Risks

Let me first explain the difference between Pipes & Tubes. Pipes always have round cross-section whereas Tubes can be round , rectangular or square. Pipes are used for transportation whereas tubes are used in structures. 

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Now, I will quickly brief about the different types of pipes. 

Electric Resistance Welding (ERW) pipe is manufactured by rolling metal and then welding it longitudinally across its length. ERW pipes can further be categorized into MS Black pipes, Galvanized Iron(GI) Pipes, Pre Galvanized pipes(GP) and Hollow sections.

EBITDA Per Tonne(ERW)=₹3000-4000

SAW(Submerged Arc Welded) pipes : There are 2 types of SAW pipes HSAW & LSAW. The difference between them is the way they are welded. In LSAW pipes, the welding is longitudinal(welded both inside & outside), which means that steel (hot rolled coil plate) is rolled into a pipe and the seam is welded longitudinally.   In the HSAW type, steel coils are welded spirally, like a helix, so that the coil (strip) assumes the shape of a pipe. 

EBITDA Per Tonne(SAW)=₹6000-9000

Seamless pipe is manufactured by first softening the billets by heating it to 1250 degrees and then a piercer passes through this billet to give it a hollow shape. Seamless pipes does not have any welding. How are seamless pipes made: Video Link

Seamless pipes are the most energy and asset intensive.  It has the highest pressure-handling capacity & are able to withstand higher temperature and have stress resistance and hence have highest margins among the three. They are primarily used in oil & gas exploration and production.

EBITDA Per Tonne(Seamless)=₹14000-15000

Since ERW pipes is the most basic form of pipe with minimum value addition, the margins are the least in this segment.

For SAW and Seamless pipes, Oil & Gas industry is the growth driver. Whereas ERW tubes growth drivers are in structures. 

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Indian Steel Pipes & Tubes industry
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Indian Steel Pipes & Tubes industry- Market Size

With the recent found application of ERW pipes and tubes, the market size has expanded greatly and is expected to multiply going forward. Growth rate for ERW tubes is expected to be around 10% compared to 4-5%for HSAW & Seamless pipes. But APL Apollo is growing much faster than the industry taking away market share.

Besides technical advantages, hollow sections ERW tubes are also increasingly used for aesthetic characteristics(looks). Also, there is a shift of people moving towards steel sections rather than concrete. 

Since, APL Apollo tubes ltd is into ERW tubes & pipes, I will briefly talk about them.

ERW is the most basic form of pipe with minimum value addition and hence the lowest margin among all types of pipes. ERW pipe manufacturing is basically a converter business where they modify certain materials , to create new products. That would obviously imply thin margin for these businesses called as conversion margin.  

The raw material used here Hot Rolled steel coil. Raw material cost is about 85% of total cost of the ERW pipe manufacturer. Given the lower margin profile, the increase and decrease in raw material prices are passed on to the customers. 

Traditionally, ERW pipes found application in water supply, sanitation & irrigation. But lately,  CPVC pipes( think Astral Pipes) are taking market share from galvanized pipes(GI), particularly in drinking water segment and home plumbing segment. For companies into ERW category, another segment has opened up on a big way which is the use of ERW Hollow Section in the form of structures.

Also, ERW pipe industry is regional in nature due to high logistical cost. Most companies operate out of a single plant catering to the catchment area of 200-300km.

The positive point for ERW industry is high Sales to fixed asset ratio(5X-6x) i.e. in order to grow the business the incremental fixed asset investment required is low. For seamless pipes, it is about 1x, and that of HSAW pipes is 4x-5x.

Since all these pipes & tubes faces tough internal & external condition, they are prone to corrosion. To minimize corrosion, they are coated with Zinc(Zn) and there are several ways to coat Zn, some are more efficient than others.

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ERW Pipe manufacturing process

Coming to the future prospects, India is at a nascent stage in the use of structural steel tubes.

Growth drivers: 

1) Growing vertical mode of development(Skyskapers)

2) Infrastructure: Highways, Bridges, Flyovers & Public utilities, Prefabricated structures, 

3) E-commerce, Data centers & Warehouses- Demand for warehouses far outstrips demand

4) Durable alternative to wood & concrete- Particularly in coastal & hilly regions was witnessing increased use of GP pipes as an alternative to wood for roofing structure(Apollo Coastgard). Steel is 30% cheaper than wood.

Please find below the images of ERW tubes’ in various infrastructure application .

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Images of ERW tubes' in various infrastructure application .

   

About the company: APL Apollo Tubes Ltd

Incorporated in 1986, APL Apollo is one of India’s leading building material structural steel tube brands.  APL Apollo Tubes ltd is the largest manufacturer of ERW pipes in India. Its 10 manufacturing facilities across the country have 2.5 million TPA of structural steel tube making capacity which is atleast 2x its nearest competitor.

APL Apollo Tubes ltd the largest producer of Electric Resistance Welded (ERW) Steel Pipes and Sections in India.

APL Apollo drives 70% of its revenue from the structural tube segment which find application in modern infrastructure such as airports, malls, ports, warehouses etc

Company’s capacity is 2x that of its nearest competitors. They have focused primarily on growth.  APL enjoys economies of scale in raw material procurement and also has an advantage of lower freight costs with facilities and depots located close to demand hubs.

APL has done strategic tie up with nextracker for manufacturing key structural components of its solar tracking system.

The company has 40% market share in ERW structural pipe(Hollow section pipe) segment in terms of volume of production in India. Being a branded player, the company is able to snatch market share from smaller & unorganized sector.

Promoter Sanjay Gupta works with an entrepreneur mindset and has been instrumental in taking the company to such an scale. Promoter group holds around 40% stake in the company & is consistently increasing the stake.

Now, let me talk about how the company is growing in a commodity business.

How APL Apollo Tubes is differentiating itself in a low margin industry?

How APL Apollo Tubes is differentiating itself in a low margin industry?​
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APL Apollo Tubes Ltd- Distribution footprint

Given the high cost associated with logistics in ERW industry,  APL’s countrywide spread manufacturing plant & warehouses help to reduce the logistics cost. 

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APL Apollo Tubes Ltd- Distribution Growth
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APL Apollo Tubes Ltd follows 3-tier distribution model

Company is also increasing its warehouse count to reduce the lead time to distributors and has currently the lowest lead time among its competitors which is less than 2 days.

The company has pan India presence.

Products

  1. Hollow sections: EBITDA margins=6-8%. It is used in Infrastructure fabrication, construction, machinery & furniture. The improvement in load bearing strength of hollow section pipes has increased the the application of this product in infra.
  2. Black round pipes: Black Round Pipes which are a low margin product are also gradually being replaced by structurals. Typically it is used in water & sewage transport, fire protection & automobiles. EBITDA Margin=4-6%
  3. Pre-galvanised tubes (GP): Here the HR Coil is first galvanized with Zinc before tube is welded. Better corrosion resistance. EBITDA Margin=10-14%.Finds application in electric conduit pipes, fencing, cabling, ducting & rooftop. To make GP tubes and hollow sections, Apollo Metalex and Shri Lakshmi Metal Udyog  were backward integrated with in-house sheet galvanising facilities wherein APL directly manufactures pre-galvanised sheets from HR coils.
  4. Galvanised tubes(GI): Tubes are formed first & then hot dipped into Zinc. Zinc coating is not uniform. Segments that are witnessing a decline are GI pipes that are primarily used in traditional applications like irrigation, agriculture, firefighting and plumbing which have been replaced by PVC pipes.
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Some of the value added products of APL Apollo include color-coated pipes, designer tubes, etc. Standard products has EBITDA less than Rs 2,000/ Ton whereas Value added products has EBITDA more than Rs 4,000/Ton.

Also, have introduced steel door and window frames which fetches higher margin.

Financials

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APL Apollo Tubes Ltd- Financials

As you can see,  APL Apollo has witnessed massive growth on the back of rapid capacity addition. With the growth the absolute profits have increased consistently ,though the margins are still at lower level. But the operating cash flow is far better than profits for most of the years(high depreciation cost) 

The company also has maintained healthy Return on equity and ROCE. There has been consistent improvement in Net working capital which further improved substantially in 9M FY21. The management in their concalls have assured that they will try to further improve upon it rather than things reversing to their previous levels.

The capacity addition along with debt has its drawbacks given the thin operating margin the company has. For example in the year FY20, from the operating margin of ₹477cr,  almost 200 cr of interest payment(₹107r) and depreciation(₹96cr) gets deducted. Hence lower profit after tax but the higher operating cash flow(depreciation being a non cash item). 

Things are getting better from here, the company has reduced gross debt from ₹834cr in FY20 to ₹523cr in 9MFY21 and plans to be a Zero debt company. Also, have reduced receivable days to less than a week now. 

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Net Working Capital improvement
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APL Apollo tubes ltd- Ebitda profile

Branding

Moving from order book to distribution based business requires advertising & marketing spend pushing the end customers to come asking for its products.

To build its brand image, APL Apollo has been associated with all high decibel sporting events like Indian Premium League(Delhi Capitals), Pro Kabbadi league & Indian Super league.

The company also had roped in Amitabh Bachchan as its brand ambassador. 

Also doing a lot of digital marketing.

Put up a huge number of signages at all dealer outlets for higher visibility.

Company in the last decade did a lot of below the line marketing activities such as regular Fabricators and Plumbers meet. Also, to encourage sales by its dealers, the company organizes annual Star Cruise trip for top performers.

The company have been adding new product line like color coated pipes, inline galvanized pipes & decorative segments. To cater to all consumer group, the company has the largest basket of product(1500 SKUs)

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Plants

The company has 10 manufacturing plant in Bulandshahar, (U.P.) 3 units; Hosur (Tamil Nadu); Murbad, Thane, Maharashtra; Raipur, Chhattisgarh; Medak district, Telengana; Attibele, Bengaluru; Malur(Karnataka); Gautam Budh Nagar, Uttar Pradesh. During FY20, the company converted one of the plant into warehouse.

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APL Apollo Tubes Ltd- Capacity

  

Acquisitions

Apollo Metalex, Sikandarabad (Sikandarabad, Uttar Pradesh): Acquired in 2007 to backward integrate its operations & obtain steady supply of pre-galvanized sheets.

Shri Lakshmi Metal Udyog, Bengaluru (Bangalore, Karnataka): Acquired the struggling company in 2008 on a share swap deal to cater to Southern India. 

Lloyd Line Pipe, Murbad (Maharashtra): Acquired in Nov 2010 to increase presence in western India. Paid ₹40cr in Cash. In 2016-17 the company merged this Wholly owned subsidiary with itself.

Shankara buildpro: In FY18, the APL Apollo acquired 2 lac MTPA tube manufacturing capability of Shankara building pvt ltd at Hyderabad consisting of lines for GI pipes and GP pipes.

Apollo tricoat: The company was incorporated as ‘Potential Investments and Finance Limited in 1983. It was involved in the business of trading steel products. In 2016, new management acquired Potential Investments and Finance Limited by way of open offer and then the name of the company was changed from ‘Potential Investments and Finance Limited’ to ‘Best Steel Logistics Limited’ and changed the nature of biz to Warehousing and Logistics. In FY18, the promoter group of APL Apollo acquired the company and changed the nature of the business to manufacturing innovative steel tube products. The company hadn’t mentioned the clear reason for the acquisition.

 

The acquisitions has been mostly of distressed assets implying that the company has not been spending heavily on acquisitions.

Technology

Direct Forming technology(DFT)/OTO Hollow shape Universal:  Using conventional technology round pipes were formed first and then converted to square & rectangular shapes. Using DFT square & rectangular shaped tubes directly through welding with high production speed. This technology also helps in making customized hollow sections in the mill without changing the roll. Provide flexibility to cater to more customized and small sized order.

APL Apollo also has an agreement with the equipment manufacturer of not sharing the technology with any Indian peer for the next 3 years.

 DFT also helps in material saving of 3-10%, reduced manpower(fully automated).

In-line galvanizing technology: Another new technology brought in for the first time in India which allows for manufacturing tube and Zinc plating simultaneously. It also has triple coating on these pipes. 

Competitors

Two of the listed competitors of APL Apollo Tubes ltd are ‘ Surya Roshni Ltd’ and ‘Hi-Tech Pipes Ltd’. APL Apollo tubes market share has increased to 50% in 9MFY21 in structural tubes whereas the next competitor has a market share of about 10%.

Surya Roshni being a diversified player does not fit the competitor entirely. Coming to the distribution network, Surya Roshni has distributor network of 250 compared to 800+ for APL.

EBITDA Per tonne APL Apollo Hi tech Pipes Surya Roshni

APL Apollo Tubes has maintained a superior EBITDA margin per tonne compared to its competitors

Risks

Any Drop in raw material prices causes inventory loss.

Any further substitution of GI pipes in its field of application can hurt volume growth. 

HR Coil is the raw material used for manufacturing ERW pipes/tubes. Raw material cost is about 85% of the total cost of the company. It is very important to track this. And domestic HR Coil prices follow international trend. 

US Midwest Domestic Hot-Rolled Coil Steel Futures – (HRCc1)

 

The current capacity utilization of 60-65% leaves enough room for growth and no doubt company will continue to add more capacities. So, growth momentum is likely to continue. As of now the company is in a increasing raw material scenario that will lead to inventory gain. But on the other hand, higher prices leads to lower purchases. If the demand continues to remains strong, then customers will have no choice but to buy. 

Given the low margin of the business, this also in a way may act as deterrent for competitors to enter the business.

If you would read the Astral Pipes story how they ventured into a market dominated with Galvanized Iron pipes with no margins to become the leader now, possibly over time we can see APL Apollo tubes become a leader with premium pricing ability in nascent sector of structural Hollow section pipes. The management of APL Apollo are trying out various stuff and sooner or later something will click in the right direction.

The ‘Astral Poly Technik’ story

 

Branding, move towards larger diameter pipes is likely to improve the margins. 

With reduced debt, the profitability is likely to improve.

Because of the low profit margin of the company, I guess that the company historically had lower valuation, which now is changing in the favor of the company.

Further reading:

Indigo Paints Ltd- IPO Review

Polycab India Ltd- Analysis

The ‘Astral Poly Technik’ story

 

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author-avatar

Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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