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Leading from the front

* APAT over the years has created a moat with its strong execution capability, scalability, a wider distributor network, diversified plant locations and innovation of diverse applications for structural tubes.

* The company is far ahead of its competitor with large manufacturing capacity of 2.6MMT (excluding newly commissioned Raipur plant of 1MMT), a diversified portfolio of over 1,500 SKUs and a huge distribution network of over 800 distributors as on FY22.

* The Indian structural tubes market is expected to reach ~22MMT by CY30E from 4MMT in CY19 (~17% CAGR). APAT is set to capture a larger share of the growing market by adding capacity and expanding applications in diverse areas.

* A majority of the incremental capacity (~1.9MMT) is coming under the value-added product (VAP) segment such as color-coated products (CCP) (~1MMT), which should increase margins from INR4,154/MT in 1HFY23 to over INR5,500/MT by FY25E.

Cashing in on market leadership position

* APAT’s manufacturing capacity of ~3.6MMT (as on date) is almost 4x that of other listed players such as Surya Roshni (SYR), Hi-Tech Pipes (HITECH), JTL Industries (JTLIND) and Rama Steel Tubes (RASTL).

* SYR has Pipe manufacturing capacity (ERW and GI) of ~0.93MMT followed by HITECH/JTLIND/RASTL at ~0.58/0.40/ 0.26MMT.

* Further, APAT targets to increase its capacity to ~4.5MMT by FY25. Its peers HITECH and JTLIND have also announced capacity expansion plans with the target of achieving capacity of ~1MMT each by FY25.

* Accordingly, by FY25, APAT is expected to sustain its market leadership (~55% market share in FY22 v/s 27% in FY17).

* APAT’s market share expansion has been supported by its diversified portfolio (increasing VAP volume share from ~40% in FY16 to ~54% in 9MFY23) and a huge distribution network.

* APAT has over 1,500 SKUs as of FY22 (up from 400 SKUs in FY17) v/s. 1,000/590/350 SKUs of JTLIND/HITECH/RASTL, while the company’s distribution network has over 800 distributors (up from 600 in FY16) as of FY22 v/s. 390/300/300/250 distributors of HITECH/JTLIND/RASTL/SYR.

* The company’s market leader status also helps it in negotiating better raw material prices, as APAT consumes ~2%/10% of total steel produced/HR Coils, thereby keeping its margin profile better than other players’.

* APAT clocked EBITDA/MT of INR5,386 in FY22 (up from INR3,576 in FY17), higher by ~10% from the next best margin player JTLIND (INR4,892). EBITDA/MT of RASTL/SYR/HITECH stood at INR4,839/INR4,648/ INR3,634 in FY22.

Adoption of structural steel tubes in infrastructure picks up pace

* The Indian steel consumption per capita has risen from ~57.6kg to ~74.1kg in the last five years and the government expects to increase it to ~160kg by CY30/31, registering a ~8% CAGR over the forecast period.

* India’s steel structural tubes market stands at ~4-5% of its total steel market v/s. the global average of 10%, as structural steel tubes form only ~10-15% of the building structure in spite of having significant advantages over the traditional RCC (Reinforcement Cement Concrete) structure.

* We believe the Indian structural steel tubes market has potential to grow ~5.5x, from 4MMT in CY19 to ~22MMT in CY30 (~17% CAGR) on the back of increased use in the construction industry, heavy infrastructure spending by the government and a rapid increase of warehouses, airports, high-rise buildings, etc.

* Non-availability of larger sizes and a limited size range are some of the key reasons for the low utilization of structural steel tubes in construction.

* To resolve this, APAT was the first company in India to introduce large 300x300mm tubes. Further, it plans to launch 500x500mm (capacity of ~0.33MMT at Raipur plant) tubes in Jan’23, followed by 1,000x1,000mm tubes later on.

* APAT already has over 1,500 SKUs (largest in the industry), helping it capitalize on this growing industry opportunity by offering a one-stop shop for the entire structural steel tube solution.

New addition in VAP: Color-coated products to drive up margins

* APAT has expanded its VAP segment with the launch of color-coated sheets (manufacturing capacity of ~0.33MMT) and color-coated tubes and pipes (~0.33MMT) in the new Raipur plant.

* Color-coated steel products are more corrosion resistant and minimize the maintenance cost and the environmental risk. Pre-painted steel pipes are painted only in factories under controlled conditions.

* APAT is positioning this product as an environment-friendly and aesthetically superior variant to conventional products like wood and aluminum.

* The global coated steel market is projected to reach USD35.6b by CY28 from USD24.5b in CY20 (4.9% CAGR), as per industry reports, driven by usage increase in the construction industry, growing demand for eco-friendly products and requirement for protection of steel from corrosion and heat.

* Under CCP, APAT recently launched ‘Apollo Navrang’, which, as per APAT, is the world’s first narrow and thicker (>3mm) color-coated coil/sheet with more durability, rust-proof properties and high load bearing capacity.

* It also launched ‘Apollo Color’, which APAT says is the world’s first square angle color-coated tubes, provides safety from in-transit and at site rusting, and is an aesthetically more superior variant.

Valuation and view

* The rapid capacity expansion, leadership position, and high industry growth trends should lead to robust growth in sales volume. While the addition of highmargin products from the Raipur unit and the growing share of VAP should result in margin improvement.

* We expect a revenue/EBITDA/PAT CAGR of 16%/24%/31% over FY22-25. Reiterate our Buy rating and value the stock at 33x Dec’24E EPS to arrive at a TP of INR1,400.

* Key risks to our call: 1) fluctuation in steel prices to impact margins, 2) slower industry growth to lead to a muted demand outlook, 3) an increase in working capital days to result in liquidity pressure, and 4) lower entry barriers.

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