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APL Apollo Tubes (APAT) is the largest manufacturer of Structural Steel Tubes in India, which finds applications in residential and commercial buildings, warehouses, factories, Agriculture, and other Infrastructure works. It enjoys ~50% market share in India, and operates through a network of 10 plants, over 800 distributors, more than 1,500 SKUs, and 200,000 fabricators serving over 50,000 retailers.

The new normal!

* APAT’s diversified product portfolio and pan-India presence helps in mitigating concentration risk. Higher sweating of assets (capacity utilization at 63%) will lead to kicking-in of operating leverage and better profitability. Robust distribution network, along with warehouses, higher retail network, and SKUs are expected to improve last-mile connectivity.

* The company is the fifth largest player globally and leader in the domestic market, with an aggregate capacity at 2.6MMT. Steady capacity addition, increase in penetration, and gains from unorganized players are expected to improve market share from current levels (~50%).

* The merger with Apollo Tricoat Tubes’ (Tricoat) is margin and RoE accretive and is expected to create value for shareholders. Common ad spends and distribution network, along with other synergy benefits, is expected to benefit APAT in the medium-to-long term. Tricoat’s EBITDA/MT is 1.7-1.9x higher than blended EBITDA/MT, and is expected to further increase revenue share of VAP, improve overall margin, and further de-commoditize the business.

* Marginal increase in domestic steel consumption is expected to have a profound impact on domestic volumes of Structural Steel Tubes, thereby benefitting APAT significantly. Warehousing, modular housing, modernization of rural, semi-urban as well as urban houses, urban Infrastructure, and urban Real Estate are some of the major growth drivers for the Structural Steel Tubes industry.

* We estimate 20%/35% revenue/PAT CAGR over FY21-24E, led by increasing EBITDA/MT and higher sweating of assets. We value the stock at 35x Sep’23E EPS to arrive at our TP of INR2,065. We initiate coverage with a Buy rating.

Diversified product portfolio and presence to drive growth APAT operates across four major product categories – Apollo Structures, Apollo Z, Apollo Galv, and Apollo Tricoat, which helps in mitigating concentration risk and increases product offerings.

It has a strong presence in South and North India (~58% of revenue). Penetration levels are expected to improve, with a shift in the management’s focus towards improving rural sales by adding distributors and warehouses to its existing network. Robust distribution network, along with warehouses, higher retail presence, and SKUs, are expected to improve last-mile connectivity.

The recent merger of Tricoat into APAT is expected to improve sales volume due to newer cross-selling opportunities and higher consolidated ad spends, which is likely to improve its brand presence and image. Currently, APAT operates at ~63% utilization levels. Higher sweating of assets is expected to lead to kicking-in of operating leverage and improve margin and profitability.

Moderate utilization levels leaves room for expansion

APAT is the fifth-largest Structural Steel Tubes player globally and enjoys leadership in the domestic market (pegged at 4MMT). Steady capacity addition and timely inorganic acquisitions have led to increase in capacity to 2.6MMT, with its corresponding market share surging to ~50% (as on FY21).

Thus, APAT has capacity in place to cater to demand as current capacity utilization stands at 63%. In contrast, the cumulative market share of the next five domestic Structural Tubes players stands at ~38%. APAT is expected to gain market share from unorganized players through higher rural penetration and increased branding activities (ad spends grew at 14% CAGR over FY15-21 to INR235m).

Tricoat’s merger to drive the next leg of growth

In Mar’21, APAT merged its subsidiaries (Tricoat and Shri Lakshmi Metal Udyog) under the APL Apollo brand. Tricoat’s acquisition and subsequent merger are part of the management's efforts to enhance its portfolio of value-added products. It is adding capacity to meet increasing demand, and sees an huge opportunity in Chaukhat, Plank, and Signature segments due to the diversified application of products and replacement demand.

The same is expected to support overall portfolio growth. Several synergy benefits such as cost-saving efficiencies (due to 60-70% overlapping in the distributor network), higher cross-selling opportunities, increased size, and stronger Balance Sheet are expected to complement growth in the medium-to-long-term. Tricoat’s EBITDA/MT stood at INR7,072 (in FY21), 1.9x higher v/s that for APAT (excluding Tricoat), and is expected to boost APAT’s profitability. Increasing share of VAP products is likely to de-commoditize the overall business, thereby reducing the impact from fluctuations in steel prices.

Huge opportunity in Structural Steel Tubes to drive sales

Consumption of Structural Steel Tubes in India stands at 4% (as a percentage of domestic steel consumption), significantly lower than the global average consumption of 9%. Domestic steel consumption is expected to double over the next 10 years on the back of greater government focus on Infrastructure, increased urbanization, and corresponding rise in demand for office space (commercial structures). Marginal increase in steel consumption in India is expected to lead to a huge rise in domestic volumes of Structural Tubes.

Warehousing (253m sq. ft. as of CY20), modular housing (market size to touch USD19.3b by CY24), modernization of houses in rural and semi-urban regions, urban Infrastructure (spending on airports is pegged at INR190b over the next three years), and urban Real Estate (1,816 projects launched during FY21) are some of the major growth drivers for the Structural Steel Tubes industry in India. APAT with its lion’s share (~50%) in the domestic market is best placed to gain from the increased consumption of Structural Steel Tubes.

Initiate coverage with a Buy rating

We expect strong volume growth and improved profitability due to: a) higher demand across product segments, b) launch of new products under the parent company and newly merged entity: Tricoat, c) robust distribution network, leading to increase in market share, along with increased cross-selling opportunity from the merger, and d) increase in the share of VAP is driving margin and profitability. We expect APAT to deliver 20%/26%/35% consolidated revenue/EBITDA/PAT CAGR to ~INR148b/INR13.6b/INR9b and generate strong cumulative CFO/FCF of INR31.3b/INR20.8b over FY21-24E. It is expected to turn net cash positive (~INR4b) by FY23E.

APAT’s peers (in the Building Material space) trade at an average FY23E forward P/E of 36x. We value the stock at 35x Sep’23E EPS and arrive at our TP of INR2,065. The stock should fetch similar valuation as its peers in the Building Material space, due to its leadership and low-cost position in the Structural Tubes business, strong return ratio profile, and lower working capital days. We initiate coverage on APAT with a Buy rating.

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