Sometimes how a company has expanded over time helps us imagine how another company can attain the same growth and create investor wealth. I’m analyzing APl Apollo Tubes here and I think Riddhi Steel Tube Ltd has the potential to grow on those lines over the next 5-10 years.
APL Apollo Tubes had a capacity of 80,000 MTPA in 2007 and expanded this to 400,000 MTPA by 2010. This company was earlier known as Bihar Tubes. They have also been buying companies as I mentioned in an earlier post. Now, after their recent acquisition, their capacity is 2.3 million MTPA.
Here are some threads which you can read:
I invite other members especially those who disagree with me to join this discussion.
We need to take into consideration several factors for this:
Macro factors
Micro factors as below:
Range of pipes
Profitability
Customers - acceptability among
Distribution network
Capacity - utilization, expansion plans, ability to expand
Access to funds and cost of capital. This is a capital intensive industry
Management quality
Cash flow
Valuation - I’m considering valuation per 1000 MTPA as the yardstick. Divide the total capacity by 1000. Take the answer and use it to divide the market cap to arrive at the final figure. For example Riddhi Steel is at Rs.16 crores valuation for 100,000 MTPA (on single shift basis). This is about Rs.16 lakhs per 1000 MTPA.
I think it may be better if Riddhi Steel Tube continues to grow organically by increasing capacities. Acquisitions are exciting but come at a high price. Look at the recent acquisition of Taurus by APl Apollo. They paid Rs.70 crores for 200,000 MTPA. This seems slightly higher than average but may be worthwhile for them because they have economies of scale. Especially if the acquiring company takes on debt for acquisitions, it may not be a good idea. I don’t know if that was the case here.
Please join the discussion.