Initiating Coverage Iron & Steel Products APL Apollo … Apollo Tubes is amongst India's leading...

APL Apollo Tubes is amongst India's leading branded steel products manufacturers. The Company operates seven manufacturing facilities with a total capacity of 1.3 Million MTPA. It has pan India presence with units strategically located in Sikandarabad (3 units), Bangalore, Hosur, Murbad and Raipur. APL Apollo's multi-product offerings include over 400 varieties of MS Black pipes, Galvanized Tubes, Pre-Galvanized Tubes, etc.

APL Apollo Tubes caters to different sectors of the economy, which includes infrastructure, construction, automobile, energy and agriculture. Factors like continuous government reforms, increasing infrastructure spending, better monsoon, rising income level, introduction of latest products, etc. will ensure steady demand for APL Apollo's products from all the sectors.

The company is one of the leading steel tube manufacturers in India. Its products are used in diverse applications like structures of new commercial buildings and bridges, liquid petroleum gas cylinders, wind energy structures , water pipes, low-floor buses, metro railway bogies, airports, mobile telecom towers, etc.

It has been expanding its capacity across India to cater to the increasing demand. Recently it started a new facility in Eastern region at Raipur with an installed capacity of 0.32 mn tonnes, of which it has commissioned one line out of six lines and expects to start all the lines in the current fiscal.

APL Apollo is the first company to bring Direct Forming Technology (DFT) in India for making hollow sections, both square and rectangle. It is also focusing on inline-galvanizing technology in which tube manufacturing and zinc plating are done at the same time. Thus, technically advanced and upgraded products have enabled the company to differentiate itself from its peers, which we believe will continue to increase its customer base in the future.

With healthy revenue growth in the coming years and improvement in operational efficiency, we expect the working capital cycle of the company to improve with reducing inventory and receivables days. Also debt reduction will reduce the overall interest cost, which will add up to its bottom line.

APL Apollo Tubes is the market leader in the Indian ERW (Electric Resistance Welded) pipe industry with a market share of ~15%. With upcoming capacity expansion, entry into new markets (east India), branding, innovation and technology capability (DFT and in-line galvanizing), it is well placed to benefit from strong demand outlook for its various products. We expect Revenue and PAT CAGR of 18.2% and 30.8% over FY17-20E. At CMP 1,596, the stock is available at 11.6x of FY20E earnings, which is fairly attractive considering robust demand outlook, improving balance sheet and rising profitability. We recommend a Buy on the stock with a target of Rs. 2,352 with an 18 months perspective.

Financial Summary

Religare Investment Call

July 12, 2017

Iron & Steel Products

CMP (Rs)

Target Price (Rs)

Potential Upside

Sensex

Nifty

Key Stock data

BSE Code

NSE Code

Bloomberg

Shares o/s, Cr (FV 10)

Market Cap (Rs Cr)

3M Avg Volume

52 week H/L

Shareholding Pattern

(%)

Promoter

FII

DII

Others

1 Year relative price performance

1,596

2,352

47.4%

31,747

9,786

533758

APLAPOLLO

APAT:IN

2.4

3,770

15,100

1742/811

Dec-16

38.8

0.5

17.5

43.2

Mar-17

37.5

0.4

15.3

46.8

Jun-17

37.5

0.0

15.2

47.3

Research Analyst

Ajay Pasari, [email protected]

Investment rationale

Outlook & Valuation

Initiating Coverage APL Apollo Tubes

A strong play on capacity expansion and innovation...BUY

Particulars, Rs cr FY17 FY18E FY19E

Net revenue

EBITDA

OPM (%)

Adj PAT

PATM (%)

EPS, Rs

RoE (%)

P/E (x)

4,545

324

7.1

146

3.2

62.1

22.7

25.8

5,457

414

7.6

199

3.6

84.2

25.0

19.0

6,439

505

7.9

259

4.0

110.0

26.8

14.5

7,501

604

8.1

326

4.4

138.4

27.4

11.6Source : Company; RSL Research

FY20E

8090

100110120130140150160170180

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Apl Apollo Tubes Ni�y

Jul-

17

Initiating Coverage Iron & Steel Products


APL Apollo Tubes

Investment rationale

Application of APL Apollo’s products in major sectors of the economy

APL Apollo Tubes caters to different sectors of the economy, which includes infrastructure (metro, airport, ports, smart cities, etc.), construction (railings, cranes, fencing, etc.), automobile (bus/truck bodies and heavy vehicle axles), energy (power, solar plants, water transportation, etc.) and agriculture (drip irrigation, pump conveyance, etc.). India being amongst the fastest growing economies in the world would see huge demand and consumption in the coming years. Also factors like continuous government reforms, increasing infrastructure spending, better monsoon, rising income level, introduction of technically advanced products, etc. will boost the demand for APL Apollo's products from all the sectors.

APL Apollo has a diversified product basket

The company is one of the leading steel tube manufacturers in India. Its products are used in diverse applications like structures of new commercial buildings and bridges (urban infrastructure), liquid petroleum gas cylinders (housing), wind energy structures (renewable energy), water pipes (irrigation), low-floor buses, metro railway bogies, airports, mobile telecom towers, etc. The company has created a portfolio of innovative products like hot dipped galvanized pipes, pre-galvanized pipes, electric resistance welded tubes, black and hollow sections across dimensions.

For FY17, the revenue mix for the company was- Hollow sections (48%), Pre-galvanized tubes (23%), Black round pipes (15%) and Galvanized pipes (14%). The total volumes growth for FY17 was restricted at 4% hit by demonetization partly and volatile steel prices during the year. Black round pipes saw volume de-growth of 22%, whereas volume growth

APL Apollo Tubes has application of its various products in all the major sectors of the economy namely; construction, automobile, agriculture, solar energy, etc.

The company has over 400 product range used in different applications like water pipes, mobile telecom towers, bus bodies, structure of buildings, etc.

Source : Company

Application in areas like airport, automobile, solar, construction, etc.

for Hollow sections, Pre-galvanized pipes and Galvanized pipes was 12%, 18% and 2% respectively on YoY basis. The company has been ahead of its competitors in launching new and innovative products like door frames, coastal pipes, etc. We believe the company will continue to invest in technology and launch new products to cater to its diverse customer base.

Revenue growth to come from launch of branded products, capacity expansion and entry into new markets

APL Apollo has been expanding its capacity across India to cater to the increasing demand. It has increased its capacity from 0.49 million tonnes per annum in FY11 to 1.3 million tonnes in FY17. Recently it started a new facility in Eastern region at Raipur with an installed capacity of 0.32 mn tonnes, of which it has commissioned one line out of six lines and expects to start all the lines in the current fiscal. It has a pan India presence with units strategically located in all regions of the country -Sikandarabad (North-3 units), Bangalore (South), Hosur (South), Murbad (West) and Raipur (East). The company has guided to increase its capacity to 2.5 mn tonnes by FY20E through brownfield and greenfield expansion.

Capacity expansion along with launch of latest products will improve demand for company's products. APL Apollo has been aggressively pitching to create itself as a brand for its basket of product portfolio. Recently, it has launched Apollo Coastguard branded product to tap the growing consumption and demand of galvanized steel tubes in the coastal regions. This particular product is made from special galvanized steel, which will help them make 100% rust proof pipes.

Product wise Revenue break-up - FY16

Source : Company; RSL Research

Initiating Coverage


Major product categories include black round pipes, galvanized pipes, pre-galvanized pipes and hollow sections

The company has pan India presence with over 600 distributors and 26 warehouses across India

APL Apollo is in process to expand its capacity from 1.3 mn tonnes to 2.5 mn tonnes by FY20E, which would largely be funded through internal accruals

43%

20%

14%

19%

4%

Hollow sec�ons Pre-galvanized tubes

Galvanized tubes

Black round pipes Trading and scrap

Hollow sec�ons Pre-galvanized tubes

Galvanized tubes

Black round pipes Trading and scrap

46%

23%

14%

14%

3%

Product wise Revenue break-up - FY17

Production in MTPA


Capacity in MTPA

68

2,1

93

89

8,6

90

93

1,0

00

1,0

70

,65

0

1,2

52

,66

1

1,5

03

,19

3

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

FY15 FY16 FY17 FY18E FY19E FY20E

Produc�on MTPA

1,0

50

,00

0

1,3

00

,00

0

1,3

00

,00

0

1,6

50

,00

0

2,0

00

,00

0

2,5

00

,00

0

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000


Capacity MTPA

Iron & Steel Products APL Apollo Tubes

APL Apollo has announced strategic tip-up with NEXTracker to manufacture a key component of its solar tracking system in India. This will enable NEXTracker to source high quality steel products from APL Apollo for solar parks and power plants in India and also help it to penetrate in the fast growing renewable energy market in India. With government's focus on developing solar energy projects in India with a capacity of 100 GW by 2020, the demand for premium pre-galvanized hollow section tubes is expected to be around 1 million tonnes.

Exports contribute to ~5% of the total revenue. The company is planning to increase exports mainly to US and Europe with latest technology (DFT). It is planning to start a new facility in Dubai in FY19-20E. The implementation of GST is likely to benefit the company in terms of better market share (current share ~15%) in the coming years as organized players will benefit the most and are growing at a faster pace than the industry.

Direct Forming Technology, In-line galvanizing and value added products to improve margins

APL Apollo is the first company to bring Direct Forming Technology (DFT) in India for making hollow sections, both square and rectangle. Currently, it is the latest global technology for making hollow sections. Presently in the conventional technology, round pipe is formed and then the round pipe is converted to square and rectangular shape. However, in Direct Forming technology, square and rectangular sections are formed directly through welding with high production speed. This could be a potential trigger for the company, as the customers can order customized sizes in small or large quantities, which would expand its addressable market size. DFT will help to produce hollow sections within a certain range of dimensions and thickness without changing rolls, which could save setup time, save rolls management time and reduce to zero the space required to store rolls series.

It has successfully established its first DFT line at its Hosur facility and is expected to start more lines at its other existing facilities in the current fiscal. The full benefit of DFT will only be realized from FY19E and thus we expect the company to report healthy margins in the coming years. Apart from DFT, it is also focusing on inline-galvanizing technology in which tube manufacturing and zinc plating are done at the same time. The tube exterior is uniformly galvanized and an anticorrosion coating is applied over it. The tube interior is uniformly finished with baked coating simultaneously done in manufacturing, giving the tube interior its strong anti-corrosion property. Thus, technically advanced and latest products have enabled APL Apollo to differentiate itself from its peers, which we believe will continue to increase its customer base in the future.

Initiating Coverage


The company is targeting to grow at ~20% higher than industry growth of 8-10%, which shall help it to improve its market share in the coming years

Direct forming technology and in-line galvanizing technique to boost its product portfolio, improve working capital cycle and reduce production time

Revenue to grow at CAGR of 18.2% over FY17-20E leading to economies of scale and higher margins


3,138 4,214 4,545 5,457 6,439 7,501

25.6%

34.3%

7.9%

20.1%18.0%

16.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Revenue- Rs. Cr (LHS) Growth % (YoY) - (RHS)


Improving working capital cycle, reducing debt and robust return ratios

With healthy revenue growth in the coming years and improvement in operational efficiency, we expect the working capital cycle of the company to improve with reducing inventory and receivables days. The management is aiming to become net debt free company in the next 3-4 years, which will reduce the overall interest cost in the coming years. The entire capex requirement to increase the capacity from 1.3 million tonnes to 2.5 million tonnes is being done through internal accruals. Thus, we expect the company to report healthy margins in the coming years along with robust return ratios.

Initiating Coverage


APL Apollo is focusing on debt reduction, improvement in working capital cycle, higher profitability through increase in volumes and realizations, which would further increase its return ratios

RoE to increase with rising PAT and reducing debt


RoC to improve and remain robust in the coming years

13.9%

18.9%

22.7%

25.0%

26.8% 27.4%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

29.0%


ROE %

17.8%

22.9%

21.0%

24.8%

28.1%

30.7%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%


ROC %

DFT to aid improve operational margins


Higher realizations and reducing debt to support PAT

191.4 281.7 324.4 413.5 505.5 604.1

6.1%

6.7%7.1%

7.6%7.9%

8.1%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

-

100.0

200.0

300.0

400.0

500.0

600.0

700.0


EBITDA- Rs. Cr (LHS) EBITDA % (RHS)

63.8 100.6 145.9 198.6 259.4 326.4

2.0%

2.4%

3.2%

3.6%

4.0%4.4%

1.4%

1.9%

2.4%

2.9%

3.4%

3.9%

4.4%

4.9%

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0


PAT- Rs. Cr (LHS) PAT % (RHS)


Initiating Coverage


APL Apollo Tubes is amongst India's leading branded steel products manufacturers. The Company operates seven manufacturing facilities with a total capacity of 1.3 Million MTPA. It has pan India presence with units strategically located in Sikandarabad (3 units), Bangalore, Hosur, Murbad and Raipur. APL Apollo's multi-product offerings include over 400 varieties of MS Black pipes, Galvanized Tubes, Pre-Galvanized Tubes, Structural ERW Steel tubes and Hollow Sections. With state-of-the-art-manufacturing facilities, APL Apollo serves as a 'one-stop shop' for a wide spectrum of steel products, catering to an array of industry applications such as urban infrastructures, housing, irrigation, solar plants, greenhouses and engineering. The Company's vast 3-tier distribution network of over 600 dealers is spread all across India, with warehouses cum- branch offices in over 20 cities.

The company's realizations are highly impacted by volatility in steel prices. Its key raw material is HR coils, which are used to make pipes and tubes. Thus, huge volatility in steel prices can impact its revenue and earnings.

APL Apollo caters to different sectors of the Indian economy, which includes infrastructure, construction, automobile, energy, etc. Any slowdown in these sectors could have negative impact on the company's revenue growth.

Company background

Risks


Net revenue

Expenditure

Raw material consumed

Employee cost

Other expenses

Total expenditure

EBITDA

OPM (%)

Other income

Depreciation

PBIT

Interest expenses

PBT

Exceptional items

Tax

Tax rate %

PAT

Less: Share of minority interest

Add: Profit/Loss of associates

Adjusted Net Profit

PATM (%)

EPS

Particulars, Rs cr FY18E FY19E

FY17


4,545.0

3,800.5

72.1

348.1

4,220.6

324.4

7.1

3.8

51.2

277.0

68.3

208.6

0.0

62.7

30.1

145.9

0.0

0.0

145.9

3.2

62.1

6,438.7

5,358.1

98.6

476.5

5,933.2

505.5

7.9

4.6

68.1

441.9

54.7

387.2

0.0

127.8

33.0

259.4

0.0

0.0

259.4

4.0

110.0

7,501.1

6,232.2

114.4

550.3

6,897.0

604.1

8.1

4.9

74.5

534.5

47.3

487.2

0.0

160.8

33.0

326.4

0.0

0.0

326.4

4.4

138.4

5,456.5

4,547.2

85.0

410.7

5,043.0

413.5

7.6

4.2

59.8

357.9

61.5

296.4

0.0

97.8

33.0

198.6

0.0

0.0

198.6

3.6

84.2

P&L Account- consolidated


Initiating Coverage

FY20E

Share Capital

Reserves & Surplus

Total Shareholder's Fund

Non-Current Liabilities

Long term borrowing

Deferred tax liability

Other long term liabilities

Long term provision

Current Liabilities

Short term borrowing

Trade payables

Short term provisions

Other current liabilities

Total liabilities

Fixed Assets

Goodwill on Consolidation

Non Current investment

Long Term loans & advances

Other non-current assets

Current Assets

Inventories

Trade receivables

Cash & Cash equivalents

Short term loans and advances

Other current assets

Total assets


FY17P


23.6

847.6

871.2

196.3

92.3

95.0

1.1

7.8

958.0

442.5

414.8

9.4

91.3

2,025.4

809.0

67.0

12.7

66.2

1.7

1,069.0

582.3

342.4

9.7

130.1

4.5

2,025.4

23.6

1044.8

1068.4

164.8

55.4

99.8

1.2

8.4

1,004.4

420.4

475.4

10.1

98.6

2,237.6

810.3

67.0

12.7

69.5

1.7

1,276.6

687.1

393.8

54.4

136.6

4.7

2,237.6

23.6

696.7

720.3

203.7

104.9

90.5

1.0

7.2

926.0

465.8

370.4

8.4

81.5

1,850.0

790.0

67.0

12.7

77.8

1.7

900.8

469.6

295.2

1.7

130.1

4.3

1,850.0

Balance sheet- consolidated

Iron & Steel Products

23.6

1292.9

1316.5

148.4

33.2

104.8

1.3

9.1

1,042.4

378.3

546.7

10.9

106.5

2,507.3

820.4

67.0

12.7

72.9

1.7

1,532.6

803.9

456.8

123.5

143.4

5.0

2,507.3

FY20E

APL Apollo Tubes


Initiating Coverage

Profit Before Tax

Add: Depreciation

Add: Interest cost

Op profit before working

capital changes

Changes In working Capital

Direct taxes

Cash Flow From Operating

Activities

Cash Flow from Investing

Activities

Purchase of Fixed assets

Others

Cash Flow from Investing

Activities

Cash from Financing Activities

Net proceeds from borrowing

Dividend (incl dividend tax)

Interest cost

Cash Flow from Financing

Activities

Net Cash Inflow / Outflow

Opening Cash & Cash Equivalents

Closing Cash & Cash Equivalent


FY17P


208.6

51.2

68.3

328.2

35.3

-62.7

300.7

-185.9

16.2

-169.7

-27.8

-34.0

-68.3

-130.1

0.9

0.8

1.7

387.2

68.1

54.7

510.1

-92.1

-127.8

290.1

-69.4

0.0

-69.4

-59.1

-62.3

-54.7

-176.0

44.7

9.7

54.4

487.2

74.5

47.3

609.1

-104.6

-160.8

343.7

-84.7

0.0

-84.7

-64.2

-78.3

-47.3

-189.9

69.1

54.4

123.5

296.4

59.8

61.5

417.7

-88.1

-97.8

231.8

-78.8

0.0

-78.8

-35.9

-47.7

-61.5

-145.0

8.0

1.7

9.7

Cash Flow statement- consolidated

FY20E

Dividend per share Rs

Dividend Yield (%)

Payout %

EPS Rs

Book Value per share Rs

Profitability Ratios

EBITDA / Total income (%)

PBT/Total income (%)

NPM / Total income (%)

ROCE (%)

ROE (%)

Liquidity ratios

Debt-Equity Ratio

Current Ratio

Interest Cover Ratio

Turnover ratios

Total Asset Ratio

Fixed Assets Ratio

Debtors Velocity Overall (Days)

Inventory (Days)

Creditors Velocity (Days)

Cash Conversion cycle

GROWTH YOY%

Sales Growth %

Operating Profit %

Net Profit Growth %

VALUATION

P / E Ratio

P / BV Ratio

EV / EBITDA


FY17P


12.0

0.7

19.4

62.1

305.3

7.1

4.6

3.2

21.0

22.7

0.8

1.0

4.1

2.6

7.0

20.7

42.7

25.1

38.3

7.9

15.2

45.1

25.8

5.2

13.4

22.0

1.4

20.0

110.0

452.9

7.9

6.0

4.0

28.1

26.8

0.4

1.3

8.1

3.0

8.4

20.9

36.0

25.2

31.6

18.0

22.2

30.6

14.5

3.5

8.3

27.7

1.7

20.0

138.4

558.1

8.1

6.5

4.4

30.7

27.4

0.3

1.5

11.3

3.2

9.5

20.7

36.3

24.9

32.1

16.5

19.5

25.8

11.6

2.9

6.7

16.8

1.1

20.0

84.2

369.3

7.6

5.4

3.6

24.8

25.0

0.6

1.1

5.8

2.8

7.7

21.3

35.2

26.3

30.2

20.1

27.5

36.1

19.0

4.3

10.4

Key Financial ratios- consolidated

FY20E



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Initiating Coverage Iron & Steel Products APL Apollo Tubes

Initiating Coverage Iron & Steel Products APL Apollo … Apollo Tubes is amongst India's leading...

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