ERW pipes is a 30,000 Cr market annually which will grow at a 5-8% rate depending on how well the broader economy does. APL last FY did a topline of 4200 Cr, hence the length of the runway is long given the competitive situation in this segment. What struck me was the fact that they have had virtually no competition over the past 3-4 years. Surya Roshni is busy with their electricals business (only recently have they announced intention to increase capacity for the pipes business), Tata Steel pipes section capacity has been at 550K MT since 2011 though they do the highest realization per MT. All others have smaller capacity and have more important business segments they have to focus on. In short when it came to incremental business expansion APL has been a monopoly for the past 3-4 years.
In a business where product differentiation is low due to commoditization the only moat possible can come from distribution, cost due to relative scale advantages. APL is more than 2x the size of the nearest organized player and this gap will only go up as they expand and sell more. In terms of the judgement this is an amazing management that has caught on to the possible opportunity and executed amazingly well.
In terms of execution capability they have proven multiple times that they can do organic/inorganic expansion and run the show efficiently. The absolute level of debt has been the same for some time now, relative debt levels will continue to come down since incremental capex will be driven by internal accruals. This year they will do 200 Cr capex, OCF will be in excess of this number since PAT is likely to be 140 Cr+. Purely from earnings expansion this should at 2x CMP in 3 years time, one need not even bank on re rating from here.
In terms of where this business should trade, the quality is far higher than it appears at first sight. Unless one takes the effort to understand why this companies has grown volumes at this pace, understands the competitive landscape he will never be convinced about this company. My sense is this will trade at 20+ PE from here, on a forward basis maybe at 18.
As per latest presentation they are significantly ramping up their distribution, sales team will be 2x from here in 3-4 years. They are doing exactly what I would do if I were to run the company to, logically I do not see any inconsistencies.
Of course given the lack of control on pricing and the way HRC prices can move in a quarter, one had to demand a higher margin of safety primarily through a lower acquisition price. Current price is close to being fair but nowhere close to being expensive.