Apollo Tricoat Ltd(ATL)

Beg to differ. Apollo Tricoat is great but it’s business has always been under the umbrella of Apollo group only. It’s brand pull is because of APL Apollo brand. With this merger, the long pending issue of who owns the brand is gone and it will be a much simpler business and more stable in my opinion.

Now, if you believe that APL apollo biz is average, then I can only request you to look at the numbers delivered over the last few years and the consistency with which the management has delivered. It’s a structural story that’s playing out right in front of our eyes. Balance sheet has never been stronger for APL apollo than it is now. WIth steel prices firming up, and end user demand still strong, the runway for growth is still very strong

Disc: Invested in both

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Steel prices firm up during upcycles, they also go down in downcycles. Don’t value a business just cause its doing good at best of time, value it on how it will do when times are bad.

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Its is average business when compared to Apollo Tricoat.
Here are the metrics or APL Apollo

And here are the metrics for Apollo Tricoat

Big difference in both companies.

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Don’t think it’s a right comparison. Astral poly is into CPVC with technology borrowed from Lubrizol whereas Tricoat is into products which are replacing traditional building materials like wood and plastic. End user demand is strong for the products of both APL Apollo and Tricoat. Tricoat will only be stronger with this merger as it gets better reach for its products.

Over all business has become much simpler to understand and should attract more investors who have been on the sidelines because of complex arrangement with Tricoat.

Disc: Invested in both

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Not denying that Tricoat is strong. But these numbers are misleading as Tricoat has started its business only towards the end of 2019. Pls don’t go by these numbers. Tricoat is managed by the son of promoter of APL Apollo. Investor presentations for both the companies look exactly the same. The question of brand usage, royalty payment came up many times in the concalls over the last one year (investors got attracted after the run up in Tricoat share price).

An “average” business cannot have 10 year profit growth of 24% in my humble opinion.

Disc: Invested in both

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Nothing exists in isolation. Compared to tricoat it definitely is average. Look at the ROCE, look at the margins. Please think from a tricoat shareholders point of view. You’re thinking as a apl Apollo shareholder. As a tricoat shareholder this transaction destroys value. Brand question is valid, which is why tricoat should have been paying it’s parent for using the brand and the distribution.

That the management chose to duck these hard questions and said “no merger plans” at all concalls including as recently as in the Q3 concall should be a bit of concern even for apl Apollo shareholders imo.

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Agree with your view. However, there are two points that I would like to put forward.

  1. Chaukat was a great experiment from the house of APL Apollo. Even management was surprised with the rapid growth of this product and all of this was on a low base (started only in 2019). Covid led disruption in the unorganized segment has its fair share in the success of the product. Management has been able to get favorable terms from the buyers (no credit, only cash business, waiting period for the buyers etc.). Brand royalty question came up over the last two quarters only because the base (Tricoat revenue) is getting bigger and bigger and before it becomes difficult to ascertain a suitable royalty rate (which may or may not be in the best interest of Tricoat shareholders), they have decided to go for a merger to bring simplicity to the overall structure of the group
  2. Such royalty% arrived at would be a substantial amount given the strong growth for Tricoat

Even seasoned investors find it difficult to read the minds of company managements. I believe that Tricoat was not asked to pay earlier as the product was still new and the base was low and hence APL Apollo didn’t put too much thought into it. Even as a Tricoat shareholder, I find it more comfortable to be under an established group rather than be a fast growing company with nil experience.

APL Apollo can be a consistent compounder going forward with this merger and I’m happy to receive shares of APL Apollo in place of Tricoat!!

Disc: Invested in both

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The more aggressive among us invested only in Apollo Tricoat seeing the earlier cycle company is in, faster growth and cheaper valuation vs APL Apollo. While one can’t say the management actually deceived any investor, they certainly ducked merger questions previously but in hindsight gave few clues in Q3 FY21 conf call like we’ll decide about merger in March and being ambivalent about Tricoat capacity additions as utilization is already ~80-85%. It’s certainly not in the interest of Tricoat minority shareholders.

As the merger process plays out for another 3 Qs - while management can be trusted to make/sell more Tricoat products with the strong demand, the merger ties Tricoat’s valuation unfortunately to the share swap ratio virtually putting a lid on any faster share appreciation for Tricoat shareholders.

I bought more Tricoat during the recent drop, but won’t any more as the original investment thesis no longer holds.
Note: Ironically, APL Apollo’s adjusted PPS was always considerably lesser than Tricoat during my initial buys and has also appreciated more.

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I think the journey of any Company should be towards High margin, High ROCE business. The whole thesis of investment in Apollo tricoat was

  1. It was small and thus agile
  2. High margin
  3. High ROCE
  4. High growth
  5. B2C
  6. Kind of non cyclical

It has been merged with

  1. Large size business
  2. Low margin
  3. Low ROCE
  4. Moderate growth
  5. B2B
  6. Kind of cyclic all business

So clearly for Apollo tricoat it’s not a good deal but for Apollo tube it’s really good decision.

Disc. Invested

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And 16% price premium is not a compensation for the potential strong growth the comaony Apollo tricoat had.

Note: Solely personal opinion. Not to hurt or contradict any one else.

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I think people are still not getting the game that’s being played here. I hardly see any post looking at the nitty-gritties and nuances of the financial engineering involved.

Let’s start from the beginning - or at least from 2016.

Potential Investment and Finance in 2016 had 1,85,00,000 total shares outstanding and was a penny share of an empty business. The name of the business though might suggest of what was to come - a “potential investment”.

Here are some brief notes on what has happened to Potential Investment when it became “Best Steel Logistics”

  • Saket Agarwal open offer for 48,10,000 shares at a price of Rs.14 (21st Jan to 28 March 2016)

  • Saket Agarwal held 3800000 before May 2016 - Presumably shares purchased in the open offer at Rs.14
  • 4125010 as of May 2016 (Bought 3,25,010 shares off market) - At Rs.14/share
  • 5665010 as of June 2016 (Bought 15,40,000 shares from Kanav Gupta and Manoj Gupta at Rs.12/share) - 30.62% of the company
  • 7222910 as of Dec 2016 (Bought 15,57,900 between Sept and Dec off-market at Rs.12/share) - 39.04% of the company

Dec-16 to Jun-17 - Saket Agarwal sat tight. Occasionally selling a bit

Meanwhile Jan-16 to Jun-16 - RG acquired 28,00,000 shares from open market as Public at same Rs.14/share. This needed no disclosure but you can verify this from shareholding pattern from 2016.

June-Dec '16 - RG sat tight

As of Dec’16 - Saket Agarwal and RG held 1,00,22,910 shares together - at an average purchase price of under Rs.14.

Total Investment so far - Rs.14 Cr

Now the story isn’t over there since there are several holders like ‘Share India securities ltd’ and ‘Integrated Master Securities’ and ‘Sonia Jyoti’ and ‘Vikash Gupta’, ’ Sangeeta Parekh’ who have all bought large holdings totaling of about 80,00,000 shares - around avg. price of Rs.20.

So now overall control via promoter + large public amounts to over 1.5 Cr shares acquired at an average price of Rs.20 or so. Overall spend so far? Around 30 Cr for about 90% of the company. Not bad.

Overall disclosed promoter holding though as of Dec 16 was only 39%. The rest would be transferred in the course of time because market likes increasing promoter holding over time right?

Dec’16 to Dec '18 - Price appreciates from 60 to 120. Those 1.5 Cr shares are now worth 180 Cr - notionally anyway. Its cornered and closely held so what’s its worth is notional.

Then along came Lakshmi Metal Udyoj a fully owned subsidiary of APL Apollo and bought 55% 16970000 shares at around Rs.135 - About 230 Cr? Considering initial cost of just about Rs.30 Cr put in, this is 7x return for the 90% cornered shares which benefited. On top of it whatever else was left is also being offloaded slowly at much higher prices by Saket Agrawal. I can’t even fathom the returns this man has made in 5 years time. He still continues to sell to this day and no has been reclassified from Promoter category to Public once his holding dropped under 10%. Oh there’s also some warrants which were subscribed and later sold.

Clearly someone benefitted quite well from this saga without even looking at underlying business. Now let’s look at the underlying business then.

Here’s the Quarterly PNL trend of Tricoat

and APL Apollo Tubes

There’s about 5% difference in GM which only translates to 2% difference in OPM. This tells me that whatever value-add is being done, costs the business maybe through higher labour or power costs. There really isn’t anything significantly awesome about this business looking at the gross margins in isolation.

But why do the return ratios look better than APL Apollo Tubes?

  1. The company is probably leveraging APL Apollo Tubes ad spends (Looks at Chaukat ads featuring Amitabh Bachchan being featured in APL Apollo’s youtube channel for eg.)
  2. It is leveraging APL Apollo Tubes R&D spends
  3. It is definitely leveraging APL Apollo’s brand equity
  4. It is leveraging the distribution channels of APL Apollo
  5. Its debt is secured by APL Apollo Tubes (Check ICRA’s rating or FY20 AR). In fact even Best Steel Logistics had its debt guaranteed by the promoter of APL Apollo.

So if this business is looking better than it should, understand the nuances that are making it so, especially when buying something like this at 12 times book. Now coming to the amalgamation - this ideally should have always been part of APL Apollo Tubes - But it would never have got the market fancy and some people wouldn’t have made a few hundred crores in the process with a miniscule investment. If you want to know what it would have looked like had this not been a separate entity, simply add the numbers of tricoat to apl apollo and look at the sales/pat growth and think of what you may have paid. It is now being merged because the game is effectively over and all the benefits that had to accrue, have already accrued, although in its wake it has left a huge corporate governance question mark.

Disc: Traded in Apollo Tricoat short term in 2019. No holdings since.

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Let’s see this in different perspective. Now, what is the need for promoters to give equal share in original entity ? I do not see if someone sees an opportunity , turns around a company , make it a high growth entity and benefits it immensely. To be fair to the promoters they are also merging at peak valuations and expecting it to be beneficial to larger entity. Had it been a different scenario (Tricoat - After acquisition remained a loss making entity) it was not a fair deal to original shareholders of APL APOLLO (to assume new business risks). They always had a choice to become APL TRICOAT shareholders at that moment.

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I think looking it the way you are looking at is a little lopsided. Allow me to explain.

Both are under essentially the same management. Initial idea was to keep them separate, son will run tricoat and APL Apollo will be run by father . You can refer to the concalls of those times. That should answer most the question that you had. Then due to investor pressure or otherwise, mgmt decide to bring it under the fold of APL.

While i do not deny or confirm any wrong doing or intention of the management, but the fact that you called financial engg seems to be a disappointing.

If you compare the business dynamics and the growth that both the business have shown over the years, i do not feel that business are as such bad. Far worse business are trading more expensive then these two. APL is trading at 45X earning, for a business which has 50% market share in indian pipe’s market. Tricoat is growing handsomely again. I think market is right in rewarding both the businesses.

So unless you are convinced that numbers are not correct, it should not matter if management is doing things legally by merging . Besides the reason that you raised, tricoat using APL brand is precisely the wrong thing for two listed companies to indulge in. Tricoat shareholder getting benefited by APL business. This is bigger corp gov issue for me, which with the merger is going to get corrected.

I would guess the X which management has gotten over the initial cost is a function of the capability management has displayed to run the business. I am sure if mgmt really wanted to cheat people they would have not looked to merge. Besides if mgmt holds 33% of the business they would be worth 4k cr, i do not think they really would want to indulge in cheap trick and jeopardies the net worth developed over the years for few crs.

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Besides one more small nuance, what if tricoat product had failed? Would this hypothesis remain valid? Isnt it surprising to think that mgmt was so confident that they will be able to pull thru all this, that even before doing capex in tricoat they knew they would make so much money? What of intention was to protect apl apollo incase dft product line failed? Do not have an answer but worth pondering before levelling allegation against the managment,imho.

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Right, in an ideal world, it’d have been some form of compensation back to the parent company from Tricoat. I also believe, Tricoat being newer, benefited disproportionately from the branding/advertising than the already established parent.

I also believe APL management may not have been initially confident enough of Tricoat’s success, and the way it has succeeded since must have been a pleasant surprise to them too. It’s plausible they wanted to protect their main brand if Tricoat failed - while at the same time giving it every helping hand to succeed.

Tricoat’s unexpected success may have just accelerated the timetable of inevitable merger which gives more complete control over Tricoat, and makes APL Apollo’s growth numbers look better too…

Concall regarding the recently announced merger

Mostly about the candy that apl apollo has got.
Less about tricoat.

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Hi sir don’t you think that for every equity share of apollo tricoat will get one share of apl apollo which have higher price.

Hi,
From what I understand is “would you choose a gift of ₹116?” Or would you like a ₹100 business that is growing your capital at 40%?

My 2 cents as I am still trying to figure all this out beyond the corporate lexicon

Apollo Tricoat’s minority shareholders will receive one equity share in APL Apollo for each equity share held in Apollo Tricoat. This implies a premium of 16 per cent to the previous closing price for Apollo Tricoat’s shareholders. The merger will result in an increase of 10.8 per cent in APL Apollo’s share capital.

According to ICICI Securities, in a medium-term to the longer-term horizon for APL Apollo, this transaction is margin accretive (Apollo Tricoat’s higher-margin products to lift overall APL Apollo’s margin) and would lead to the addition of innovative value-added products to APL Apollo’s portfolio.

Disclosure: invested in tricoat

Being invested in Tricoat, my 1st reaction was of disappointment, as Tricoat clearly seems like 30-40% growth story for next few years.

However management spoke about lot of synergies that Tricoat will get --both in terms of costs as well as geographic reach/time to market to west and east regions. Also, it cannot be denied that the reason Tricoat could grow so fast in last few years was by leveraging APL Apollo’s brand, expertise and reach. So we shouldnt be too harsh to management, specially when they have in essence given 16% discount to Tricoat’s minority shareholders in this transaction.

Clearly, APL Apollo on itself has been a consistent compounder over 2 decades, and that’s the reason market was valuing it better then Tricoat, despite lower growth rates. In medium term , i trust the management to walk the talk and move towards being a full fledged home decor company.

Disclosure - Invested from lower levels. Not a SEBI registered advisor.

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