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Best placed to benefit from growth in the Structural Steel Tubes industry

We visited the site of the Guru Teg Bahadur (GTB) Hospital to observe the shifting trends in the Structural Tube industry, driven by the increasing acceptance of steel tubes and its growing consumption in Construction projects. The key drivers of APAT’s performance include: a) growing demand across product segments, b) increased product penetration, with a robust distribution network, c) an increase in the share of VAP, driving margins, d) the introduction of Apollo Mart, and e) its market leadership position.

APAT continues to prove its market potential and dominance

* Construction at the GTB Hospital began in Jan’22 and is expected to be completed within 150-170 days (refer Exhibit 1). Planned capex for the project stands at INR2.8b and is spread over an area 56,000sq. m. for which 2,700-3,000t of steel tubes will be required. As per our channel checks, consumption will be in the 4.5-5kg per sq. ft. range.

* The Delhi government has awarded seven new hospital contracts in Aug’21 (~2.2m sq. ft.), which will be constructed using the precast building technique (refer Exhibit 5), for which 10,000-11,000t of steel tubes will be required. The assembly of these structures will take place on-site with zero welding, while the fabrication will take place at the workshop.

* APAT being a sole supplier of 100% structural steel tubes will be the key beneficiary. It currently dominates the domestic market with ~50% share. The cumulative market share of the next five domestic players stands at just 38%. It is best placed to benefit from the growing Structural Steel Tubes industry on the back of: i) industry-leading market share, ii) first mover advantage (installation of DFT at plant locations), and iii) strong brand name.

Structural shift towards heavy structural steel tubes

* Globally, consumption of heavy structural tubes is higher (30-40% of overall steel tubes consumption), whereas for APAT, the number is pegged ~6%. Going forward, with higher adoption of heavy structural tubes in Real Estate and Infrastructure projects, the share of structural tubes is expected to improve, leading to an improvement in EBITDA/MT and operating margin for companies.

* India’s Structural Steel Tube industry is pegged at 4MMT, or ~4% of overall steel consumption as compared to the global average of ~9%. As per an IBEF report, overall steel consumption in India is expected to clock an 8% CAGR to 230MMT over CY19-30. With growing acceptance of structural tubes, its share (as a percentage of overall steel consumption) is expected to rise to ~10%, taking overall volumes of structural tubes to 22MMT (17% CAGR over CY19-30E).

* India is currently witnessing growing acceptance of structural tubes in Construction projects due to a multitude of benefits. Structural tubes offer: i) a higher strength-to-weight ratio, ii) a faster completion time, iii) higher carpet areas, iv) 40-50% less dead weight, and v) higher recyclability etc. when compared to RCC structures.

Valuation and view

* The earnings momentum will continue with: a) growing demand across product segments, b) increased product penetration, with a robust distribution network, c) an increase in the share of VAP, driving margin, d) the introduction of Apollo Mart, and e) its market leadership position.

* Kicking-in of operating leverage and growing share of VAP is expected to lead to an improvement in margin and higher cash generation.

* We expect a revenue/EBITDA/PAT CAGR of 25%/25%/34% over FY22-24 and a strong cumulative CFO/FCF generation of INR17.7b/INR9.8b over FY23-24. APLL is expected to turn net cash positive by FY24. We value the stock at 35x FY24E EPS. Our TP of INR1,270 per share. We maintain our Buy rating.

* Key risks to our call: a) Fluctuations in steel prices to impact margin, b) Slower industry growth may lead to muted growth for the company, and c) Maintaining of lower WC can be at risk (around four days in FY22).

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