2nd October 2018

APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

Niche Player rides on Innovation

Executive Summary
• Market leader in ERW (electric resistance welded) pipes & one of the lowest
cost producers in country in steel pipes & tubes with 1.75 MTPA capacity
& vision to become global low-cost producer
• 20% increase in volumes over FY14-18 & accelerated increase in market
share post GST as many unorganized players have exited due to mandated
GST compliance
• Focus on improving EBITDA margins through - pioneering use of DFT
technology in India reducing cost by 3-7%, innovation and brand building
• Strong 3-tier distribution network & the only company in this sector to have
PAN India presence of more than 650 distributors to increase customers
• Return ratios improving consistently with declining leverage levels with
ROE over 21% average for the last 4 years

KEY HIGHLIGHTS
Market leader and one of the lowest cost producers in steel pipe & tubes
APL Apollo is market leader in Hollow section and GP pipes, contributing to a market share of 18% and 24%
respectively. It operates with a capacity of 1.75 MTPA focused on the steel pipes and tubes business. This
pipe’s capacity is more than double that of its closest competitor. Competitor sales are half as compared to
APL Apollo tubes ltd. APL enjoys economies of scale in procurement of raw material.

Accelerated increase in market share due to post GST and economies of scale
APL Apollo witnessed 20% increase in volumes over FY14-18. Increase in volume by big players leading to
economies of scale along with mandated GST compliance has led to the exit of many unorganized players
from this industry who were earlier not entirely tax compliant. This has resulted in creating a healthy
competitive environment in this industry.

Focus on improving EBITDA margins through DFT Technology & brand building
APL Apollo tubes Ltd. is the 1st company in India to use DFT (Direct forming technology) to develop
customized designs & increase in OEM & exports sales. By using this technology, the roll over time will
decrease from 4-24 hours to 20min and reduce cost by 3-7%. It plans to improve EBIDTA margin through
DFT technology and brand building. APL has allocated budget of Rs. 15- 20 crore towards brand building
activities like rolling out innovative incentive scheme for dealers & competitive product pricing. To drive the
company’s overall Branding strategy, a Marketing Consultant has been appointed in FY17.

Pan India extensive distribution network

APL is the only company in this sector to have PAN India presence of more than 650 distributors, 29
warehouses and 40,000 retailers located across the country. The company has an advantage of lower freight
costs as the facilities are located close to customer hubs. The company currently caters to nearly 400+ towns
and cities covering 92% of the retail demand.

Financial performance of the company

ROE has been growing over 21% average for the last 4 years and is expected to grow steadily. The company
has witnessed Revenue CAGR of 21% and enjoying PAT CAGR of 28% over FY14-18. Net Debt to Equity
ratio is also expected to decline.

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

INDUSTRY & MACRO OUTLOOK

The Steel sector outlook is covered in detail above. The ERW steel pipes and tubes are used across agriculture,
infrastructure, greenhouse projects, energy, power, automotive and construction sectors. Steel tubes market
globally is expected to grow at over 6% CAGR by 2020 due to high demand from Construction, Transmission and
Distribution sectors. Over the next 2-3 years, ERW pipe industry is expected to grow at 7-8% in India driven by
government capital expenditure in power and infrastructure. Government of India has announced spending
Rs.8500 billion to modernize Railways in the next 5 years. The demand is also expected to increase with the rising
demand in automotive sector because of higher disposable incomes. Owing to continuous innovation in drilling
technologies, steel pipes consumption has also increased in Oil & Gas sector. An investment of USD110 billion is
announced by Government of India to improve its Ports & Ship-building industry by 2020. Thus, we see robust
growth in the demand for steel pipes and tubes in coming years.

COMPANY ANALYSIS

APL Apollo has a wide product basket and has continually

expanded its offerings through product innovations

APL Apollo’s product portfolio is at ~3-4x the product basket of the

closest competitor. The wide product basket combined with patented
designs has led to 70% of its product portfolio to have very limited
competition.

APL Apollo’s products cater to the key sectors of the economy and
is slated to see increasing demand with building and construction
materials forming ~64% of its volume share
Figure 1 Product Portfolio; Source: Investor Report

Figure 2 Volume Breakup by demand from industry sectors; Source: Investor Report Mar 2018

As a
measure to orchestrate the shift from a Commodity to a Value-Added Branded product, APL Apollo has
allocated a budget of INR 15- 20 crore towards brand building activities over the next few years
APL Apollo has strategized to brand its products under 4 brand names through hiring a aiming to improve visibility
through signage boards and target both B2B and B2C segment as part of its top-level plan. To this effect, APL
Apollo has appointed Marketing Consultant in FY2017 to drive the Company’s overall branding strategy.

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

Figure 3 Brand Strategies; Source: Investor Report Mar 2018

APL Apollo is the pioneer in instituting the latest technology

APL Apollo is having first mover advantage in adopting latest technologies which resulted into lower process time
and reduced cost for the company. Introduced technologies include high speed mills from Europe (which increased
the speed 5 times), Strip Galvanizing lines, and the unique Rotary Sizing Mills.
APL Apollo is the 1st company in India to use DFT (Direct forming technology) to develop customized designs.
DFT technology has considerable advantages and places APL Apollo in a competitive position as it helps
accommodate customized orders / small orders, reduces rollover time to ~20 mins from 4-24 hours and most
importantly results in direct material savings of ~3-7%. In this business, where the margins are an average 7-8%,
DFT has the potential to increase profitability by a huge margin. Presently the company has commissioned 6 DFT
lines across facilities of Raipur, Hosur and Murbad & will be commissioning the another 2 lines by the next year.

Figure 4 DFT Benefits; Source: Investor Report Mar 2018

The technologies employed are expected to improve the EBIDTA margin from ~3300/ton to ~4000/ton.
It is also the first company in the world to commission a fully automated direct forming mill with a capability of
producing 300 mm x 300 mm hollow section with a thickness range of 1 mm – 12 mm. Apart from that, company
has 8 patented products that helped to increase market share and margin.

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

APL Apollo has a strong distribution network having a pan-India presence

APL Apollo has a pan India presence with 7 manufacturing facilities, 29 warehouses, 600 dealers, 40,000 retailers
& 50,000 + Fabricators. No of distributors increased from 100 in year 2007 to 600 in year 2017.

Figure 5 Distribution network; Source: Investor Report Mar 2018

APL Apollo has laid down the future Investment plan to be an even larger player adding to the advantages
of economies of scale
The company is planning to expand the
capacity from 1.75 MTPA to 2.0 MTPA
by commissioning 2 more lines by the
end of FY2018. Being a low cost
manufacturer, the expanded capacity
will create an opportunity to increase the
volume thereby increasing the
company’s profit. Raipur Plant has been
commissioned specially to target to
Eastern market. The company is
expected to have similar capacity
distribution across the geography to Figure 6 Capacity Planning; Source: Investor Report
achieve the diversification benefit.

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

APL Apollo aim to unlock vast potential across OEMs & Export Markets

Introduction of latest technologies, especially DFT, to unlock vast potential

across OEM and Export markets – OEM contribution expected to increase
significantly in next 2 years from the current 3% – High quality customized
shapes and sizes of products, achieved through DFT, to help penetrate OEMs
and export markets

Figure 7 Future potential OEM and

Export markets; Source: Investor report
mar 2018

Management Competitiveness

The Management has been able to position APL Apollo tubes to being the fastest growing steel tube
manufacturer in India through its vision and mission

Figure 9 APL Apollo Tubes Vision; Source: Annual Report 2018

Figure 8 Mission Statement; Annual
Report 2018
APL Apollo management has already started acting on his vision statements with
the future expansion of plans to get to 2 MTPA capacity, reducing leverage to the
lowest D/E ratio in the last decade and by investing in technology, backward
integration and branding to reach higher margins.

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

Figure 10 APL Apollo Strategy Roadmap; Source: Investor Report Mar 2018

VALUATION

An upside of more than 25% by both DCF & PE

Multiple valuation method
Over the next 2-3 years, ERW pipe industry is
expected to grow at 7-8% in India. And APAT’s
management is confident that APAT will grow more
than double the industry growth on the back of
innovative products. Thus, we assumed sales growth
rate to be 16% YoY for the next 5 year and terminal
growth rate of 4% considering company’s push on
increasing the utilization and capacity. EBIDTA

margin are expected to increase slightly because of

investment in technologies. Commissioning of all DFT
lines by FY 19 will help to expand company’s margin
further. Since utilization is expected to increase,
depreciation rate is also anticipated to increase from 6.1%
in year 2017 to 7% in the coming years. Interest cost was higher in FY 2017-18 due to high import of raw materials
which is expected to come down to long term average of 12%.
DCF valuation are giving around 26% upside for the stock by 2019 while PE Multiple is giving an upside of 32%.
Companies considered for the PE multiple valuation are having the similar product mix as APL Apollo.
Thus, for both the valuations the upside is above 25% in the base case scenario.

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 2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

FINANCIALS

APL Apollo has strong sales, PAT and EBITDA growth showing a positive trend (in the last 10 years) with
relatively stable margins in the last 3 years

Figure 11 Company Financials Table; Source: Investor Report Mar 2018

70,000 4500

4000
60,000
3500
50,000
3000
40,000 2500 EBITDA/PAT
SALES

30,000 2000

1500
20,000
1000
10,000
500

0 0
2009-06 2010-06 2011-06 2012-06 2013-06 2014-06 2015-06 2016-06 2017-06 2018-06
EBITDA PAT SALES

Figure 12 Sales, EBITDA, PAT; Source: EquityLevers

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 2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

APL Apollo tubes has low margins but has taken steps to improve profitability through improved margins
and volume growth
Correlation Matrix
We noted the high correlation between Sales, EBITDA
Sales EBITDA PAT
and PAT.
Sales 1.00 0.99 0.95
So, APL Apollo, with plans to increasing its capacity in a
EBITDA 1.00 0.99 market where it is already the largest producer, will enable
PAT
12 1.00 higher growth in the coming years.
PAT / EBITDA MARGIN

10
8 Also since PAT/EBITDA margins are low and thus prone
6 to volatility and fluctuation in steel prices and raw
4 materials (which makes up ~84% of its total cost of goods),
backward integration, branding strategy and investment in
2
technology will help increase its margins.
0

EBITDA MARGIN(%) PAT MARGIN(%)

Figure 13 PAT, EBITDA Margin; Source: EquityLevers

The company has the lowest D/E ratio in the last 5 years

APL Apollo has lowered its D/E Ratio to the lowest in the last decade. The leverage taken on has been primarily
to add capacity to get to the envisioned 2.5 MTPA production capacity.

8,000 1.4

7,000 1.2 The debt

6,000 1 increased in
2018 as they
D/E RATIO

5,000
0.8 build up
4,000 inventory due to
DEBT

0.6
3,000 favorable steel
0.4 prices
2,000
1,000 0.2

0 0

Debt D/E

Figure 14 D/E Ratio, Debt; Source: EquityLevers

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

It has healthy return ratios with a long-term average ROE of 17%; consistently above the ROE of other
peers

ROE Comparison
30
25
20
15
10
5
0
201509 201512 201603 201606 201609 201612 201703 201706 201709 201712 201803 201806
-5

APL Apollo Tubes Ltd. Gandhi Special Tubes Ltd. Jindal SAW Ltd.
Man Industries (India) Ltd. Rajratan Global Wire Ltd. Ratnamani Metals & Tubes Ltd.
Surya Roshni Ltd. Welspun Corp. Ltd.

Figure 15 ROE APL Apollo and peers; Source: Marketmojo

STOCK PRICE

Figure 16 Stock Price APL Apollo vs. Nifty Small Cap; Source: Bloomberg

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2nd October 2018
APL Apollo Tubes Buy / Target Price ₹1661 (32% upside)

RISKS

Margins are thin and prone to fluctuation of raw materials prices

Margins are thin and raw material prices constitute over 80% of total expenses. Therefore any fluctuation in raw
material prices can increase the volatility in stock price.

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