APL Apollo Tubes

Stock Opportunities
171

I’m fairly convinced that WFH culture might continue even after the crisis subsides. Mentioned some of the second order impacts I could think of due to this here:

One of those is a crack on commercial real estate. I was worried about its impact on APL Apollo as 78% of revenues came from Construction & Infrastructure in FY19.

Found list of customers in FY16 Annual Report. Pasting here for reference.

Infrastructure customers: Delhi Metro, Mumbai Metro, Bengaluru Metro, Hyderabad Metro, Kolkata Metro, Kochi Metro and Jaipur Metro, L&T, Gammon, Afcons, BL Kashyap, CPWD, GMR, Engineers India, MHADA and ACE among others.
Power and Gas customers: BHEL, HP, IGL, GGL, BP, Suzlon, MRPL, NTPC, Cairn Energy, Mahindra and Susten among others.
Pre-Engineering customers: Zamil, Kirby, Tiger, Pennar and many more.
Corporate customers: Adani, Reliance, Ashok Leyland, Tata, DLF, SAIL and many more.

Customers which have some exposure to Commercial Real Estate in this list => BL Kashyap, DLF, L&T, Engineers India.
Pre-Engineering customers may have some exposure too but reading up a bit on the internet about these suggest they are mostly used in warehouses, but experts can comment.

Overall, doesn’t look very worrying after going through the list of customers. However, might take some extra time for company to get back onto growth due to issues like migrant labour, but that is a risk I’m willing to take, not the WFH shift (if it really materializes).

Discl: Invested in APL Apollo recently. Might consider adding more in the future. Request investors to do their due diligence before buying / selling APL Apollo. I’m not an investment advisor.

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172

In fact, they may get tailwinds should the government ramp-up infra spending as fiscal stimulus to mitigate recession.

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Not just commercial real estate. May other industries could be impacted such as: Ashok Leyland - due to lower demand of vehicles, Reliance/Cairn - Crude fall impact, Power & Gas - Lower demand (rough guess)
Govt pockets would run thin after this pandemic and would remain thin for atleast 6-9 months. So govt can slow down spending on infra projects. Construction and Real estate will witness sudden fall.

Below is a note from Prabhudas on Infra:
Infrastructure Sector Update - Covid-19 brings execution to a standstill*

We are cutting FY21E and FY22E earnings of Infra companies by 49.5% and 14.7% respectively, as lockdown would take time to fade away. Further in our view the current situation raises concern on incremental problems such as a) labor availability post lifting of lockdown, b) diversion of Govt funds towards public welfare measures in 1HFY21, c) fiscal constraints and cash flow issues and d) delays in new orders and tardy implementation. We believe these problems would be the key monitorable for revival of the sector.

Our Industry interaction suggests that execution is on a complete standstill since 25th Mar’20 due to a) directive and strict implementation of nationwide lockdown, b) stoppage of work requested by clients, c) labour related issues who were unable to return post Holi holidays and d) concerns towards health and safety of employees and laborers. The above mentioned factors would result into 15-20 days of revenue loss for our coverage universe in 4QFY20E which is seasonally the best quarter (accounting for ~30-35% of total fiscal revenues).

Impact on execution likely to result into 15-20days of revenue loss: We believe there would be a revenue loss of 15-20days in 4QFY20E. Further, as lockdown continues, the impact of revenue loss in FY21E will be difficult to gauge and will depend on the extent to which the lockdown continues. We have assumed a revenue loss of 3 months in order to account for a nationwide lockdown.
Force majeure clause in placed for most contracts: Our interactions suggest that most of the companies have force majeure clause built in their agreements under which major fixed costs such as manpower and equipment idle time, etc. can be claimed even in such uncontrollable event.
Awarding activity across the sectors to pick up from 2HFY21E: Amidst the lockdown scenario and concerns over spread of Covid-19, ordering activity has come to complete standstill post 15th Mar’20. In our view, the pipeline for tenders have been very encouraging, however ordering activity would be delayed with government departments working at a limited capacity. We expect the ordering activity to pick up from 2HFY21E as government thrust on infrastructure spending (~Rs102trn over 5years) would continue. Further in our view, order book is not a major concern as most of the companies in our coverage have a comfortable order book-to sales ratio providing revenue visibility for 2-3 years.

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176

APL Apollo Tubes - Initiating Coverage - Ambit.pdf (1.7 MB)
Ambit report on APL Apollo

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178

SEBI vide order dated June 23, 2020 bearing no. WTMWAB/IVD/ID2/7987/2020-21 has
restrained APL Infrastructure Private Limited, a Promoter entity of the Company from
accessing the securities market and from buying, selling or otherwise dealing in securities in
any manner whatsoever, either directly or indirectly, for a period of 2 (two) years from the
date of order, on account of alleged contravention of provisions relating of SEBI (Prohibition
of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
In a separate order dated June 23, 2020 bearing no. WTM/AB/IVD/ID2/7989/2020-21, SEBI
has issued similar directions against Mr. Sanjay Gupta (in his capacity as Director of APL
Infrastructure Private Limited), the Promoter and Managing Director of APL Apollo Tubes
Limited, thereby restraining him also from accessing the securities market and from buying,
selling or otherwise dealing in securities in any manner whatsoever, either directly or
indirectly, for a period of 2 (two) years from the date of order.
With regard to these matters both APL Infrastructure Private Limited and Mr. Sanjay Gupta
have stated that the matter is with respect to some small investments carried out by APL
Infrastructure Private Limited almost 12 years back. They have further informed the
Company that they are seeking legal advice and plan to move the Securities Appellate
Tribunal (SAT) to seek remedy in this matter as well as pursue any other legal
remedies/recourse available to them.
The said order does not have any material impact on the Company.

This is a 12 year old matter, will investor community take it as negative now?
Expert guidance need.

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Based on my experience, this kind of news will matter negatively when the sector is in downturn or there is a bear market. In the bull market these kind of news get discounted in a day. Frankly, this kind of transgressions is assumed to be common in India and unearthing of these doesn’t mean this is a badly managed company.

Disc: No interest

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181

Major observations from the earning call transcript :-
FY 20 :

  1. the company achieved sales growth of 22% and 1.6 mn ton and the markets hare stood at 40% which was 36% in fy 19.
  2. operating cash flows improved from 360 crore to 510 crore. net working capital reduced from 28 days to 20 days.
  3. The capacity of the company stands at 2.5 mn ton and there are no plans for capex for next two years.
  4. continuous focus on new product addition and as per them distribution expansion remains the key focus area along with branding. they spent 50 crs on branding.
  5. product break up is 70% building material 23% infra and 7% others.

Q&A with the management:

  1. The management claims that despite softer steel prices they have been able to achieve stable EBITDA levels. Their better working cycle management was on the back of better collection, low inventory and lower filters as well.
  2. for full year capex was done to the tune of 450 crs which includes acq of shankara and apollo tri coat. Inspite of two acq they were able to reduce their debt marginally by 26 crs.
  3. Sales ramp-up in the June quarter has been strong. have achieved almost 60% of volume which we had done in Q4 lastyear and 1QFY20.
  4. They are pretty confiedent of increasing market share due to change in business enviorment post covid from the existing 40% but are not very sure that will there be any volume growth this year.
  5. One major improvement post covid is that the company is doing more business on cash basis rather than on credit. this sounds really good for their cash flow, if it sustains post covid.
  6. They are bullish on structrual steel as compared to building material as it is a cheaper alternative for construction and the demand has picked up for the same.
  7. They want to get net debt free as soon as possible and dont want to raise debt or want togo for any acquisitions.
  8. Ebitda margins forthe comapnay have been stable from past 3-4 years in the range of 3000-3500 rs/ton which was along with rapid ramping up of capacity. They are projecting that the same might touch 5000 rs/ton whne capacity utilisation levels reach near 100%. according to them the same might be possible as DFT has been helping them to reduce their stock. They are also positive on reducing the effect of steels prices on their EBITDA as their material is now being sold as a PRODUCT.
  9. The market scenario post covidis tepid in metro and urban cities but they have seen incremental demand from the tier2-3 cities. they have increased their distribution network in the last 3 months. Dependency on top 50 customers has reduced from 50% to 25% and has increased from the balance from 50% to 75%.
  10. have shifted focus on small dealers and on supply channel management. 75% of the revenue is coming from tier2-3 cities which was around 40% last year. they were able to touch small points in citieslike mysore, hubli, tumkur and hasan. wereable to provide better product mix which is not feasible for their competetion. for the month of may they did 93k tonnes and for june 143k tonnes which looks like pent up demand.
  11. Earlier when the debtors were close to ₹500 crores, I used tothink that if I sell from 1.4 lakh tonnes to 2 lakh tonnes then my debtors will be around ₹800-1000 crore. So I used to be scared to show any aggression. But from the time debt reductionhas been done, debtor reduction has been done, our materials have started being sold on cashso the growth feels like it can done at a greater speed from before. Right now there is no hurdle in front of us. Earlier our debtors were hurdles many times.
  12. the management was very happy with the system which ran their operations during the time of covid. payments have been coming automatically, there is less stress due toless energy being spent on recovery as most of the transaction is being done on cash. even small dealers are reporting good sales for apl apollo products.
  13. They want to become negative debtors which if happens will be very encouraging. this along with resumption of normal business might boost the cash flows of the company in a big way.

few negatives :

  1. they are still wary of lockdowns and future lockdowns if any can hinder the business in meaningful way.
  2. sebi order against the promoter where in a investment of the promoter went bad. this case is around 10 years old and little details were disclosed about the same. the order has barred the promoter entity to not participate in capital market for two years.

regards
divyansh
disc: invested and planning to scale up if the numbers match the narrative.

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182

As a long term investor in this company, the recent spike has led to me take stock of the current scenario. Comments are welcome from other seasoned investors in this company

Positives:

  1. More business on cash basis
  2. Growing market share
  3. They were able to maintain margin despite softer steel prices in Q12021. However, the steel prices have started moving up significiantly over the last two months. So, scope for higher margins atleast for the next two quarters (till they clear off their old inventory)
  4. Management focus on becoming net debt free

Technically, it is hovering around near its previous highs (of 2K and 2.5K).

Would like to know what is required to move to next orbit, say 10,000Cr market cap from the current 5,000Cr?

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183

Agree on most points. Volumes growth (possibly from H2FY21) should bode well for share price
But your question on how to get to Rs5000 - We should look at where Astral Poly was in 2005. A commodity product converted into a brand. Can APL do Astral? Who knows?
I think with debt free status, payouts should go up, ROCEs should inch up with higher utilization. Looks interesting from 1-3 years perspective atleast.

Disc: Invested

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184

Q1 FY21 result out

  1. Revenue down as expected (1/3 of quarter under lockdown); stable ebitda margin due to cost management initiatives
  2. Balance sheet stronger than ever; More cash business that was referred in the previous call is evident here with lower WC days, lower debt and lower interest expense achieved through refinancing - recently issued CP at 6.6%

Other highlights from earnings presentation:

  1. Market share gains expected from building material companies as they are guiding 25-30% vol. decline

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Long awaited spike is here. Looks like Q2 result is going to be great and its subsidairy co Apollo Tricoat is rocking as well.

Learnt many valuable lessons on the power of patience and sticking to the process with this pick. This is more than just any other pick for me!!

Disc. Invested

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Very Exhaustive report. How do you get access to Ambit’s Research Library?

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32% YoY increase in volumes, largely contributed by Tricoat and Structural segments. Looks to have been largely driven by low base, market share gains and some amount of re-stocking at dealerships in top 15-20 cities as the management alluded in last quarter concall that they have been slow to take off in Q1 due to higher concentration of covid cases there.

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As per corporate announcement to the exchanges, APL Apollo Board to consider sub-division/split of the equity shares of face value of 10 each of the Company on 28th Oct

This is a good move

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Beg to differ. This is totally unwarranted. Just because it results in an upmove for a few scrips doesn’t mean that it is wise decision. Management is doing its business very well over the last few years. Don’t understand why they have to resort to this?

All in all, it looks like a non-event to me

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191

Bumper result from subsidiary Tricoat

Performance Review for Q2 FY21
 Sales Volume stood at 60,823ton, +121% YoY
 Net Revenue at Rs. 3,305mn, +115% YoY
 EBITDA at Rs. 373mn, +142% YoY
o EBITDA per ton stood at Rs. 6,137/ton, +10% YoY
 Net Profit after Tax at Rs.238mn, +153% YoY

Balance sheet:
D/E: 0.3x Vs 0.7 (Net debt declined to Rs0.7bn in Q2FY21 from Rs1.1bn in FY20)
Capacity increased to 350K from 250K with minimal capex out of internal accruals
Negative working capital of -3 days Vs -2 days

My take:

  • Clear indication of strong traction for its products
  • Long runway for growth
  • Strengthening balance sheet
  • Great result expected from APL Apollo as well
  • Ony worry is the trading multiple… peak earnings, peak multiple seldom end well (or is it soon to think about it??)
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With increasing sales and reducing debts, EPS should improve and hopefully the trading multiples will sustain.

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Talks about APL Apollo tube @ 3min about how unorganized to organized playing out in covid times

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This presents one of the paradoxes that investors need to routinely deal with.

A few years ago this was an average business with high growth potential, possibly a great stock though not many agreed with your view.

Today this is a better than average business with healthy growth potential, does it still remain a great stock given that almost everyone agrees with your view?

The challenge with a business that grows at the expense of all others in that market is that given a long enough run, the business becomes the market. If the market is not a high growth market, can the specific business continue to be a high growth business?

As the business becomes a dominant player in the specific market, the business quality only goes up but as the business becomes the market, the expected growth cannot be much higher than the market growth rate. What implications can this have for valuation when the market growth itself is in the 7-9% range p.a? What can drive this number into the lower teens?

This story is nowhere close to being fully played out, but it is time to start thinking about all possibilities. The idea is to think ahead of the curve, not to get taken in by narratives. At the height of the cycle, everything about a business looks good and everyone speaks it in glowing terms. Look back to the narratives surrounding Page Industries a few years ago, the business quality today still remains good but watch the valuation multiple once the market realized the business may no longer sustain a 18-20% growth rate.

Not coming to any conclusions yet, happy riding the current wave of business growth and the widely acknowledged improvement in business quality.

Disclosure: Invested for self and customers, one of the larger positions in the portfolio. I am a SEBI registered IA

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I agree with your argument as APL Apollo tubes is now a large player with 40% market share. More likely than not, they will growth near to industry rate after some more years of winning incremental market share from competitors.

I think Apollo Tricoat is now a much more interesting company to play this theme given nascent organized market for household usage of steel products (steel doors, window frames, planks etc.), hence Tricoat might actually have much more headroom for growth.

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