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APL Apollo Tubes

In the latest call there were pointed questions on this again and his response was that he is on board of Shalimar but not does not hold any executive capacity. Also no plans of moving out of APL Apollo role anytime soon (within the next 2 years or so)

The only way we can get more clarity is to figure out how much time he is actually spending time with Shalimar Paints, if he is getting involved in ops it will clearly mean there is no smoke without fire

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Check out the Shalimar Paint con calls on Research Bytes. He clearly says that he works 2 days a week for Shalimar and is in charge of strategy and making sure they operate at international benchmarks. He took almost all the questions in the call while the CEO was mostly silent. He has also given media interviews on Shalimar.

I think he is more of an adviser at APL, Sanjay Gupta calls the shots. His departure if at all it happens may just cause a short term blip.

What I didn’t like was his blatant lie that he is in a non executive role at Shalimar.

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tricoat is a patented technology of atkore international- a U.S. based company.so not anyone can do it. secondly, if APL installs one line of tricoat , atkore can not supply tech to any other indian company for 5 years. so for next 10 years atleast, no one else in india is going to produce it.
also Rs. 6000/tonne EBITDA (Q1) is far more than any other steel pipe company.No one is even remotely close.

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Can you please quote the source of this information. Thanks in advance

Interesting piece FROM CO. PRESENTATION -
Usage in electrical conduit: TriCoat tubes are being used for electrical conduiting
purpose in developed countries. In certain countries like USA , Canada and Australia it is
mandatory to use steel tubes for a exposed conduiting in all high rise buildings. So Apollo
TriCoat believes there is a huge market and scope for developing this segment in India as well.

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Is is not Apollo Tricoat separately listed ?
What would be the impact on APL Apollo and if we like to bet on tricoat, is it not better to invest in that company? The thread for that company is below.

Would appreciate views ? I think Apollo Tricoat trades at steep valuation at this moment as per screener.

Video showing the vision and hunger of the management to stay on the top and be a dominant player in the segment. Although I would advise to take the content of this video with pinch of a salt since I learned this gentleman have also done pvt corporate seminars for Apollo Tubes. So possibly some connect to either the company or promoter.

20% growth in volumes in Q2 (11% on like for like basis) - link

Recently APL Apollo bought a distress plant from a subsidiary of Shankara Buildcon for some 70 Cr.

At the end of the above note this information regarding capital infusion was given.

This shows the confidence of the promoter with his business. That is indeed very good. If one tries and asses closely this infusion was done for the plant acquisition of shankara buildcon.

In the same press release it was mentioned that shankara was operating the plant at 40% and APL under its umbrella can operate the same at much better levels. Another important point is shankara has done a contract with APL that it will buy 2.5 lac ton material in Fy2020 which APL says will assist their volumes and the said contract is an exclusive one.

How it benefits APL (these are my assumptions and i could be wrong also here)

  1. Say APL has overpaid for the plant by X amount. The traditional method for accounting this is in cash flow from investing activities.
  2. Now APL (the money it has overpaid has to get back the same) over bills its inventory and sells the same to shankara (exclusive contract 2.5 lac ton which will assist volumes). The money received goes in cash flow from operations hence also affecting free cash flows from next period.
  3. Company key highlights is focus on cash flows.

Page No 7 & 8 in this presentation.

This show the strength of the business with increasing and improving Cash Flows.

How it benefits Shankara

  1. Shankara is in stress. They get to release their working capital tied up in their business by this stake sale.
  2. They get to pay down their debt with the same to some extent.

Shankara is the second largest player in southern region (again as per the press release) which was not able to efficiently use the plant (40% utilization levels) / Suddenly that same acquired plant has ramped up to efficient usage in just 1-2 quaters going forward.

The max growth in volumes and realizations the company is getting in GP (Galvanized segment) the in efficient plant acquired from shankara.

All looks like too good to be true. And when promoter shows confidence in business by infusion capital via pref allotment and warrants during the same time promoter is also selling their stock in open market sale (as per bse disclosures)

The confidence fading away in a time of few quarters.

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Few points on steel pipe industry from CRISIL; though the report is few months old but I found it to be very interesting

• Demand for steel pipes likely to grow 7-8% in next five years compared to 4.5% in last five years. Growth would be higher for ERW at 8-10% as against 5-6% for S&S (Submerged Arc Welded and Seamless)
• Water supply, sanitation, irrigation and increased usage of structural pipes in infra to drive demand for ERW pipes
• For S&S, the main growth drivers is oil & gas
• CGD orders will require at least 10,000-15,000 KM per annum of pipes through fiscal 2029, entailing an opportunity of over Rs 5000 crore per annum over 10 years
• Generally, steel pipe makers work on conversion margin, which insulates them from price risk to a great extent
• Most of the pipe maker have completed capital expenditure programme in FY19 and have enough headroom for capacity utilization
• ERW pipe capacity utilization for FY18 was 59% and in FY19 was around 63%; next round of capex will start only when the existing capacity utilization will reach 80-90%
• S&S capacity utilization in FY19 was 46% and likely to increased to 50% in FY20
• For ERW pipe maker, sharp movement in hot rolled (HR) coil prices is key factor to monitor
• Steel pipe contributes around 8% of India’s steel consumption
• Steel pipe industry size Rs 50,000 crore, split equally between ERW and S&S (in value terms). In volume terms market split is 70:30 (ERW:S&S)
• Operating performance of S&S players was impacted in FY16-17 due intense competition of Chinese players; but performance improved in recent times due to implementation of anti-dumping duty
• Square ERW pipes (door and window frame) pipes, which are widely used for construction, are expected to be the fastest growing segment in steel pipe
• In ERW pipe segment share of unorganized player is expected to reduce to 40-45% by FY22 from 50-55% currently
• Ductile iron pipes is a major substitute for SAW pipes
• Margin for ERW players got impacted by around 150 bps due to inventory loss
• Govt. in December 2016 has extended the provisional anti dumping duty on seamless pipes (355 mm and lower diameter) from China by five years

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In the last 10 years APL Apollo has outperformed its closest peers significantly. Revenue for APL Apollo grew at a CAGR of 29.8% (through organic and inorganic route) while Surya Roshni posted a revenue CAGR of 13.7%. EBIT margin is also superior to its competitors; 90 bps higher in FY19, which is significant in such a low margin business. Hopefully it will improve further with their recently launched valued added product (DFT and Tricoat).
I have outlined the above in the following graph

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along with DFT and tricoat, I believe acquisition of shankara would also add to margins.They were APL’s biggest competitor in south. This will give pricing power. Additionally they have got 2,50,000 tonnes of committed volumes from shankara.

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Change in shareholding structure of Apollo Tricoat: I have observed one very interesting point that “INTEGRATED MASTER SECURITIES § LTD.” which acted as “Buying Broker” for “SHRI LAKSHMI METAL UDYOG LIMITED” (100% subsidiary of APL Apollo Tube) to acquire Apollo Tricoat during open offer in 2019 also acted as “Buying Broker” for Saket Agarwal (promoter group with 12.69% stake) to acquire the company in 2016. Saket Agarwal’s stake in the company has been reduced to 12.69% as of 30-September-2019 from 39.04% in June 2017. I have just one query regarding the acquisition of Apollo Tricoat; why APL Apollo Tubes acquired Apollo Tricoat via Rahul Gupta (son of Mr. Sanjay Gupta, Chairman of APL Apollo Tubes) instead of acquiring directly.

I have attached the shareholding pattern of Apollo Tricoat.

Apollo TriCoat shareholding.xlsx (12.3 KB)

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Q2 results (Link)

Decent results. Industry leading volume growth (expanded market share) but EBITDA declined because of overall demand slowdown and low steel prices. EPS doubled because of deferred tax.

Company is guiding for better capacity utilization and better profits from Q3.

@zygo23554 any comments would be helpful.

Thanks

Disclosure: Invested

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The results are bad compared to last year. PBT has declined from 41 cr to 26 cr. That’s a huge drop. This is largely due to increase in other expenses from 79 cr to 106cr. These are consolidated numbers. Standalone results have loss before tax.

Disc. Invested tracking qty.

4% increase in market share is a huge positive in my view.

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For apl apollo inventory loss has been the biggest contributor to reduced pbt. Steel prices have corrected during the quarter. Going forward this scenario shoukd improve.

Concall will provide more details and guidance

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This was known. One could gauge from Ashok Gupta’s investment in Shalimar paints and the amount of time he was spending there.

Highlights of Q2 fy 20 concall.
realizations:
Hollow section-Rs.40,500/tonne
GP pipe-Rs.48000/tonne
GI pipe-RS.50000/tonne
Black round tubes-RS. 40000/tonne

• EBITDA per tonne-Rs.2104.
• Cause for low EBITDA per tonne:

  1. lower capacity utilization
  2. inventory loss due to steep fall in steel price.
  3. branding expenses.
    • On inventory loss: there is 8-10 days of window period for passing on change in raw material price. Inventory days is 37 days. Both above factors result in loss of value of inventory whenever HRC prices fall.
    Inventory days can be brought to 25-30days. Lower volumes lead to higher inventory and hence higher the loss. In Q4 19 and Q1 20, when volumes were above 4 lk tonnes, there was no inventory loss. but in this quarter, volumes fell so faced loss.
    • Inventory loss is to the tune of 20-30 crores.
    • Maintain full year target of 20% volume growth (including tricoat).
    • Working capital days may increase slightly in H2 due to higher volumes.
    • Net debt will be reduced in H2. Finance cost is around 9%.
    • Break up of Increase in fixed assets:1) 250 cr in tricoat.
    2) 70 crores for acquisition of secunderabad plant.
    3)122 crore for cold rolling mill and expansion at Raipur plant.
    • Current market share is 40%. second largest player has 12% market share and 30% lower EBITDA and twice more debt than us. gaining market share from both organised as well as unorganised players.
    Disclaimer: I hold this stock in my core portfolio at an average price of 1100. Have carried out transaction in past 3 months.
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