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Apollo Tricoat Ltd(ATL)

Apollo Tricoat Limited (ATL) journey:

It was initially incorporated as “Potential investment and finance ltd” in 1983 and acquired by Mr Saket Agarwal by open offer in 2016. Subsequently name was changed to Best steel logistics with major areas of business as warehousing,logistics and trading activity of steel.

In 2018 Mr Rahul Gupta(RG) son of Mr Manoj Gupta(Chairman of APL Apollo tubes) has acquired controlling stake and changed company name to Apollo tricoat ltd and started setting up plant near Bangalore for manufacturing of tricoat tubes.

By FY18 end RG has increased his shareholding to 31.25% (80,30,000 shares) from 5.41%(for FY17) by preferential allotment of eq shares and warrants(48,00,000 @Rs.120.00)

During OCT 2018, LAXMI UDYOG LTD ( Subsidiary of APL Apollo tubes) did purchase agreement with RG to acquire his eq shares, 43,00,000 eq shares after warranty conversion @ Rs.120 and 79,30,000 shares from public with open offer @ Rs.135. As per latest shareholding promoter and group hold 64.33% in ATL.

This whole process looks complicated to me, request vp expert @phreakv6 to comment.

(What I have written below is based on annual reports,scuttlebutt,plant visit,discussion with people involved in steel industry. My interpretation may be wrong in few things.)

Apollo tricoat has set up its plant near Bangalore for manufacturing of tricoat tubes,designer galvanised tubes,narrow sections…etc.(to know the difference between pipes and [email protected] HERE)

Normally steel tubes are produced from from HR coils. When plain HR coil converted into tube it has to be wielded at the point of contact and tube has to be covered with zinc to prevent rusting. Once tubes are made into round tubes they are cut and dipped in zinc bath. Making round pipes and zinc coating by dipping in zinc bath is easy but making in rectangular or square shape and zinc coating is not easy. When tube is made into rectangular/square shape zinc coating inside is not uniform and when air is blown inside to clear zinc impurities the distribution of zinc inside the tube gets altered.

To overcome the above, plain HR coil itself is dipped in zinc bath and later converted into tubes/rectangular section tubes which is called as GP Pipes(G- GALVANISED, P-PLAIN HR COIL).Problem with GP pipes is loss of zinc coating at the junction of wielding making it prone for corrosion.

Apollo tricoat has got inline galvanizing technology from a US company for which they seems to have paid good money. Using this technology the HR coil converted into tubes/sections, wielded, coated with three layers. Interior of steel tubes by zinc paint,outside by zinc galvanisation which is in turn covered by polymer coating making it corrosion resistant with smooth surface. The whole process happens inline continuously without any loss of continuity during the whole process.

Presently one line of tricoat tube has recently started with production capacity of 7,000 tons /month on two shift basis. The present line is still facing minor stabilization issue which will be solved completely. Trial batch has been dispatched and seems to well accepted by market. Present line can produce 0.5 to 2.5 inch size tricoat tubes. Different sizes of tubes can be produced by replacing the machine parts through which HR coil passes through. HR coil of different dimension is used depending on requirement ,size…etc

Benefits of technology: Greater corrosion resistance,greater yield, and tensile strength(see the presentation). As tube is wielded before coating,even the wielded area is as corrosion resistant as rest of the tube(which was problem with GP pipes).

Benefit to company is better margin compared to GI pipes (Rs.5-10/kg more than GI pipes/EBITDA margins are 2 times more compared to GP pipe as mentioned in APL concall) due to cost saving by inline process and less use of zinc.

ATL has target is to sell 30,000 tons of tricoat tubes for FY20. Another line for tricoat tubes will be installed in next 1-2 years.

Uses: Tricoat tubes will offer more life,better strength and corrosion resistance for roof top sheds.(kerala seems to biggest market of 30,000 MT per month for galvanised pipes.). Green House is emerging in India, through tricoat tubes we will be offering pre fabricated solutions to greenhouse supplying contractors.In developed countries its compulsory to use steel tubes for electrical conduit instead of pvc in high rise buildings. Presently there is no such trend in India but we can explore the market in future.

They have technology agreement with US company not to sell the technology to any other company for five years. Once ATL install another line in next 1-2 years US company can not provide technology for another five years. Apollo has to buy specific machinery provided by US company as nobody else can do. Don’t think anybody else will do it also as its expensive technology. Even globally just 4-5 countries have such product line and in each country its monopoly.

(Technology provider seems to be “ALLIED TUBE AND CONDUIT” which is a part of listed company “ATKORE INTERNATIONAL”. Allied tubes and conduit has patented FLO-COAT® inline galvanising technology which is similar to Apollo tricoat technolgy. My limited to search to look for market size,margins of Flowcoat tubes through Atkote international AR did not yield much results. For more details refer http://www.atc-mechanical.com/mechanical-tubing/flo-coat/ and http://www.atkore.com/about-atkore/.)

Another line for door frames, designer galvanised tubes is in progress and will be operational in few months. Here HR coil goes through normal galvanising process but the tubes will have designs over the surface which is used for various domestic household uses like gates,window frames,railings…etc. Nobody else in India have this technology or producing it.This We have learnt from others outside India with the help consultant we are going to produce it. We will be making profiles and sent to our other division where it will be modified as per customer requirement. We will be replacing wood products by our steel products.

Steel companies produce thicker sections of HRC. Presently hrc coils of 1.4 to 1.2 mm is not available in market. We are putting cold rolling mill where these hr coil will be converted to thinner sizes using which small size section tubes of ¼ inch to 1.5 inch will be made. Thin sections by cold rolling mills of ¼ inch to 1 ½ inch for meeting customer requirement of frames,railings etc. This will be operational in six months. We have procured all the necessary machines and planning to commission every line over next few months ( including GP line?).

As we are supplying these pipes to premium market we want to pack both ends with plastic caps for better management during transportation. We are thinking to install machines for making plastic caps. For 200 tons of pipes per day dispatch requires 1000 to 2000 caps per day.

Hybrid pipes: plan for 10,000 tons capacity in a new plant nearby. Here galvanised steel tube is coated inside with PVC. This hybrid pipes can be used for drinking water purpose and it can be replacement for CPVC pipe.

Tricoat tubes will be sold through same distributors of APL tubes.Normal credit period of around 30 days. Raw materials will be sourced from JSW steel.

As per APL tubes concall EBITDA for GP pipe is around 5,000/ton. Going by the commentary tricoat will make 2 times the EBITDA margin i,e 10,000/ton(RS.10/KG)

Even if Tricoat able to sell 30,000 tons in FY20, they will be earning EBITDA of 30 Cr for FY20.

Financials: Does not have value as past business was entirely different. Below is performance of company (best steel logistics)

Questions:

  1. Acceptance of product: As its new technology with stated benefits of corrosion resistance,long life and better strength. Will customer note this differentiation and buy this new product?
  2. Even though ATL has agreement with US company,seems like there are companies in other countries which are using the same technology. Any Indian company may tie up with them and increase the competition.
  3. Why it’s monopoly business in different countries? Why only limited no of lines are functioning? Does the market size of tricoat inline galvanised tubes is limited? Or is it difficult to replace GP pipes?
  4. Higher margins are to some extent is due to less amount of zinc utilisation. What is the quantity/value of zinc required per ton of tricoat tubes v/s GP pipes.
  5. Can they pass on increase in raw material cost(predominantly steel) to customers. Even APL tubes couldn’t do it effectively is last few quarters.
  6. Better margins may be due to fact that they are going to use APL tubes distributors? What will be the expenses if they have to pay for it or end up using separate distributors?
  7. What will be the logistic costs if they have to supply all over India from single plant location?
  8. At the end its commodity conversion business. Does it deserve valuation of 530 Cr market cap.

Disclosure: tracking position.

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Thanks for the great write-up @narendra

The promoter stake play is quite intriguing. What I have found bizarre with this group is the existence of separate listed companies for slightly different lines of business. I dont see any reason for this other than an intention to play the market to their advantage - so sum of the parts is valued way over the valuation for single business, i.e if the combination existed as a single business.

As for the capital infusion, if RG was allotted warrants and pref. shares at Rs.120 and has subsequently sold a bulk of it at Rs.135, then he has essentially pocketed the difference short-changing APL Apollo Tubes shareholders who could have bought stake in Apollo Tricoat directly (through their subsidiary, like at present) through the warrants and pref. allotment at Rs.120. While 120 to 135 doesn’t look huge, we should also consider that RG perhaps only paid the 25% upfront for the convertibles. Since RG still holds a bulk of the shares, I think he will sell them in the future to Shri Lakshmi Metal Udyog at possibly higher valuation. So this seems to be a way to get money out of APL Apollo Tubes? Considering APL Apollo tubes is leveraged with about 600-700 Cr of debt, is this really prudent way to spend money?

Then there is this other thing that keeps bothering me about this group. If Tricoat and Apollo Pipes use some shared resources of APL Apollo Tubes, APL foots the bill while the other businesses enjoy the advantage. This should be concerning as the promoter holding in APL Apollo Tubes is going down while its going up in the other two businesses. What if they are using the proceeds from selling stake in APL Apollo Tubes to subscribe to convertibles in the other business and then making a subsidiary of APL buy their stake at elevated valuations, probably financed by debt! So this is a way of converting debt of APL to equity in Tricoat?

Maybe I am speculating too much but Tricoat valuations seem way out of whack, even if you consider the CapEx. There is just too much being priced in. All of this groups’ stock feel very manipulated to me as well.

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On the face of it I agree that the capital market structuring activity of the promoter group has been confusing to say the least - this is across all the three listed entities APL Apollo, Apollo Pipes (Amulya Leasing & FInance) and now Apollo Tricoat (Best Steel Logistics).

A few points I remember from the past 2-3 conf calls of APL Apollo -

  1. Sanjay Gupta’s son acquired shares in Apollo Tricoat at Rs 120 per share. SLMU has bought these shares from Rahul at the same price while the price paid to investors participating in the open offer is Rs 135. Sanjay Gupta and his son are not pocketing a single paisa in the process by way of profit on sale of stake

  2. The proceeds of the stake sale by Sanjay Gupta’s son have been infused into APL APollo - 97 Cr has been infused in April https://www.thehindubusinessline.com/markets/stock-markets/apl-apollo-tubes/article26845226.ece

  3. Apollo Tricoat has a land bank and approvals in place which cuts short the expansion time of SLMU by more than a year. Effectively SLMU (which is a subsidiary of APL Apollo) benefits from the Apollo Tricoat land bank

Would be keen to hear other perspectives on the deal structuring - when there is a series of transactions like these it always makes sense to get multiple perspectives and see what can go wrong where. With such transactions it gets difficult to cut through promoter intent and figure out why a circuitous route is being taken and then justifications are given about how the deals do not compromise on interest of other shareholders.

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Thank you @phreakv6 and @zygo23554 . Your views are very useful. Hope Q4 APL tubes concall will through more light.
I am interested in knowing about product acceptance/market opportunity for tricoat tubes. As of now Kerala seems to be their target market. Any vp member from Kerala do little bit scuttlebutt/speak to local steel pipe distributor about tricoat tubes?

Sageone (Samit Vartak) entered the stock : https://twitter.com/stockduniya/status/1139182876577026050

Investor Presentation : http://www.apollotricoat.com/pdfs/Investor-Presentation-March-2019-Final-V3.pdf


company has updated sales volume for Q1(10,000) which seems good within 3 months. This may be due to their initial stock push toward distributors. Need to track the sales volume continuity to understand the demand from customers. Going by the above notification not sure if the sales includes designer galvanized tubes also. When I visited the factory this line installation was in progress.
Discl: adding to tracking position

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Sir this is just 1 month worth of sales as the management (APL May concal) had mentioned sales will start only in June’19. They have suggested a 80-190k MT volume for the 10 month period of FY20. However we will have to monitor the end demand of the product post the initial push.

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Few important updates about ATL:

1.Revenue of 52Cr in Q1, EBITDA of 6cr(12%) and PAT of 3.7 cr(7%). Total sales volume of 10,286 MT in Q1.
2. Sales realization of around Rs 50,500/ton and EBITDA is Rs.6000/ton. This is much higher
compared to any other steel pipe sales realization and margins of APL Apollol tubes, indicating ATL products as higher value added with better margins. Margins may improve and reach 10,000/ton as sales volume increases with fixed cost absorption.
3. Company has started commercial production of both Inline galvanized (ILG) and Designer galvanized (DG) pipes in Q1.
4. Total capacity of 1,50,000 tons at Karnataka plant (ILG:50,000 and DG:1,00,000)
5.Recently (29th July) company has started commercial production of Door Frames (capacity of 50,000 MTPA) at its new factory Duajana,UP. Door frames are made using DFT technology making ATL as the only company to manufacture using this technology. Door frames marketted under brand “Apollo Chaukhat”. Its ideal replacement for traditional wooden frames with additional benefits of durability, longer life…etc.
6. Company will launch fourth product Narrow sections (capacity of 50,000 MTPA) by September-2019.
7.Total installed capacity including all products will be 2,50,000 MTPA.
(Source :Q1 results,presentation and notification to exchange.)
Not sure about current valuation of 600 Cr and stock has been steady during ongoing market.

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Need to understand how the capex has been funded. The FY18 AR, pg no 7 states that

“The company has invested Rs. 100 Crores in setting up a plant in Malur,
Bangalore with an initial capacity of 50000 MT per annum and which is expected to be commissioned by October 2019. All the necessary Government approvals are already in place and the work is in
full-swing, for timely commencement of commercial production”

I assume that Oct 2019 is typo, it should be Oct 2018, given that the production has already been commenced.

If the company is spending 100 cr for 50000 mt plant in Malur, what would be the capex for expanded capacity of 250000 and how is that funded? FY19 AR is not yet out, so can’t verify the capex figure from cash flow statement.

Disc: Not invested