APL Apollo Tubes Ltd - Stock Valuation and Financial Performance

Key Highlights – Strong Performance Continues

1. Operational Performance:

   • Delivered 20% sales growth in the first nine months of FY25, exceeding the 10% QoQ target. Capacity Utilization was nearly 80%.

   • Dubai Plant Utilization: Operating at 58% capacity with cost-efficient steel sourcing from Asia.

   • Raipur Plant: Operating at 55% capacity due to raw material supply issues.

   • New Plants: Gorakhpur and Siliguri plants began operations, targeting Eastern and Northeast markets.

   • Gained significant market share in steel pipes, transitioning focus to HR coil pipes from sponge iron.

   • Inventory Write-Offs: Significant inventory write-offs, as witnessed in Q2FY25, are not expected in the future.

2. Future Projections:

   • Volume Targets: Aiming for 40 lakh tons by FY26 and 50 lakh tons by FY27.

   • Capacity Expansion: Planning to reach 50 lakh tons by FY26 and 55 lakh tons by FY27, with internally funded capex.

   • Margin Optimization: Expected through operational efficiency, a better product mix, and reduced discounting.

APL Apollo Tubes has reported one of its worst margins, showing a EBITDA per tonne of negative Rs. 24 in highest volume product Apollo Structural (General). However, this does not signal any long term deterioration in the quality of the business, but rather a one off event brought on by a known phenomenon; the sharp reduction in steel prices.

Key Conference Call Takeaways:

1. Lower Steel Prices:  Lower steel prices are overall beneficial to the company as substitution demand has increased. The cost difference between scrap steel and HRC steel has further narrowed to Rs. 2-3 /Kg from Rs. 12-15 /Kg. This would expand the overall market size in the medium to long term.

2. Discounts: Discounts of around Rs. 500 per tonne were given to distributors to increase volumes. Such discounts will not be available in H2FY25. Inventory has not been piled up at distributor level and remains low in the secondary channels.

3. Inventory Loss: Inventory Loss of Rs. 1,981 per tonne was booked due to steel price correction. The adjusted EBITDA per tonne would have been Rs. 3,802. EBITDA per tonne is expected to be higher than the adjusted levels in H2FY25.

4. Guidance: The company is targeting 10% QoQ growth for the next 4 quarters. For FY25, the sales volume target of 3.2 million tonnes is maintained. The company remains bullish in its stance and maintains its guidance of Rs. 5,000 plus EBITDA per tonne for FY27 with a 5 million tonne sales volume.

Overview

APL Apollo Tubes is India’s largest Structural Steel Tubes manufacturer with a 55% market share, capacity of 3.8 million tonnes and production of 2.6 million tonnes for FY24. Its product basket includes a huge variety of colour coated roof tuff, pre-galvanized tubes, Structural Steel Tubes, Galvanized Tubes, MS Black Pipes and Hollow Sections, with more than 800 dealers to distribute these goods. APL Apollo is the world’s only company that makes steel tubes with a size range of 8x8 mm to 1000x1000 mm and a thickness range of 0.18 mm to 40 mm. The company’s operations are predisposed towards housing, which accounts for 63% of sales, while commercial, and infrastructure account for 19% & and 13% respectively in FY24. 

Over the last 10 years, the company has demonstrated high quality performance over the last 10 years through profitable growth and working capital management, which has resulted in superior returns for investors. The annualised price returns over the last 10 years is 48%, making it one of the best performers of the decade.

Industry Analysis

While APL Apollo makes Electric Resistance Welded (ERW) Tubes, it must be classified under the Structural Steel Tubes Industry because 97% of its business is exposed to housing, commercial real estate and infrastructure. Other ERW players are exposed to other sectors such as water distribution and city gas distribution. Structural Tubes account for more than half of the ERW Pipes and Tubes Industry.

Structural steel tubes are hollow, tubular steel sections used primarily in construction and infrastructure projects. These tubes are designed to provide strength and stability while being lightweight compared to solid steel. They are commonly used in structural applications, including frameworks, columns, beams, trusses, and load-bearing structures. Structural steel tubes offer several advantages, making them a preferred choice in construction and engineering projects. Their high strength-to-weight ratio allows for the creation of sturdy structures without excessive material usage, reducing overall costs and making them easier to handle during construction. They are also highly versatile, available in various shapes like square, rectangular, and circular sections, allowing for flexibility in design.

The Indian Structural Steel Tube market size in FY24 was 9 million tonnes, with the Primary structural steel tube manufacturers, using HR steel as their input, manufacturing 4.5 million tonnes and the secondary structural steel tube manufacturers, using scrap steel as their input, manufacturing 4.5 million tonnes. Over the next 3-5 years, India expects 15 million tonnes of HR steel capacity to become operational, reducing the demand for secondary steel tubes in favour of primary steel tubes, aided by a reduction in HR steel prices compared to scrap steel. By FY30, the market for HR Coil based steel tubes is expected to increase to 13.3 million tonnes. The volume growth between FY24 and FY30 is therefore expected to be around 20% for HR Coil based steel tubes.

Source: Investor Presentation

The share of secondary or scrap steel based tubes is expected to reduce over the next 6 years due to the following reasons:

• Cost of production for blast furnace steel is lower than the cost of production for scrap steel.

• Production of scrap steel is highly polluting, causing significant environmental concerns

• There is an increase in blast furnace steel production which can further lower prices and increase supply of HR Coil based steel tubes

• Scrap steel tubes are of lower quality than HR Coil based tubes

Industry Demand Drivers

Housing

Housing is the major demand driver of the structural tubes industry, accounting for more than 60% of sales for players like APL Apollo. Structural steel tubes are widely used in housing construction for their strength, versatility, and aesthetic appeal. They serve as columns, beams, and braces, forming the framework that supports the entire structure, especially in multi-story buildings where high load-bearing capacity is essential. Steel tubes are also used in roof frameworks and trusses, allowing for larger spans without the need for additional support columns, which enables open designs. Additionally, they add modern, sleek aesthetics to staircases, balconies, and facades. In pre-fabricated housing, their uniformity and ease of customization accelerate construction while reducing costs, making them a preferred material in contemporary housing projects. The cost of steel tubes is only Rs. 41 per sq ft, compared to Rs 125 per sq ft, Rs 50 per sq ft and Rs 43 per sq ft for cement, tiles and paints respectively.

Source: Investor Presentation

The organised housing sector currently faces tailwinds and supply has continuously increased post RERA implementation. Current supply and demand has breached 2010 levels and unsold inventory remains extremely low at only 15 months. The systemic problems in the 2008 cycle seem absent in the current cycle, suggesting that growth opportunities remain in the market.

Source: Annual Report

Reduced Debt: The implementation of the Real Estate (Regulation and Development) Act (RERA) has significantly impacted the debt levels of builders in India. With RERA mandating transparency and accountability, builders are now required to strictly adhere to project timelines and disclose project financials. This has led to a reduction in frivolous or speculative project launches, as developers focus more on viable projects that they can complete on time. Consequently, builders have become more cautious about taking on debt, ensuring they do not over-leverage themselves on multiple projects simultaneously.

Moreover, RERA introduced measures like the escrow account, where a portion of buyers' payments must be held separately until the project is completed. This reduces the risk for builders of cash flow issues but also limits their ability to utilize these funds for other debts or projects, thereby affecting their overall debt management strategy. As builders have to plan their finances more prudently, the enforcement of RERA has contributed to stabilizing their debt levels and improving their overall financial health.

Source: Annual Report

Shift to Organized: With RERA in place, buyers are more inclined to engage with established developers who adhere to the regulatory requirements, such as timely project completion and maintaining quality standards. The stringent compliance measures have compelled many smaller, less organized players to either improve their practices or exit the market altogether. This shift has resulted in a consolidation within the industry, favoring larger, more reputable builders who can navigate the regulatory landscape efficiently. Consequently, RERA is fostering a more structured market, promoting confidence among buyers and attracting investment towards reliable developers.

Source: Annual Report

Increased Affordability:

Residential real estate affordability has improved substantially over the last decade in all top cities. Real Estate remains affordable in all cities except Mumbai. While Mumbai’s EMI-to-Income Ratio is still around 50%, it is substantially lower than 93% in 2010. One the other hand, every other major city has an EMI-to-Income ratio in the low to mid 20s.

Source: Knight Frank

Commercial Real Estate

Steel Tubes are the most important element in commercial real estate, accounting for the highest cost per square foot. The variance in usage and cost between residential and commercial real estate could be attributed to the differences in design. For example, the exterior of residential buildings is made of brick and cement while that of commercial buildings is steel and glass. Even internally, there are less brick walls and more steel support structures in commercial real estate.

Source: Investor Presentation

India’s commercial real estate market stands to benefit from growing demand across key sectors, including office spaces, warehouses, and healthcare infrastructure. The supply of prime office spaces in Tier 1 cities is expected to rise from 700 million square feet to 1 billion square feet by 2030, driven by the demand for Grade A offices.

India’s warehousing sector presents significant growth potential, with current per capita warehousing stock at just 2.7 square feet, a stark contrast to countries like the United States (54.2 sq ft), Japan (46.3 sq ft), and China (8 sq ft). This gap suggests strong future demand, with projections indicating the warehousing and logistics stock could double, exceeding 700 million square feet by 2030. Growth will likely be fuelled by the expansion of sectors such as e-commerce, third-party logistics, and engineering & manufacturing. Additionally, the share of Grade A warehousing and logistics stock is expected to increase from 35% to over 50% by 2030.

India's healthcare infrastructure also faces a critical shortfall. According to Knight Frank India, the country has a 2 billion square foot deficit in healthcare space to meet the needs of its population of 1.42 billion. The current bed-to-population ratio is 1.3 per 1,000 people, with a shortage of 1.7 beds per 1,000. To meet this demand, India requires an additional 2.4 million hospital beds.

This growing demand across office, warehousing, and healthcare segments highlights immense opportunities for commercial real estate development in India.

Infrastructure

India is projected to spend nearly Rs. 143 lakh crores on infrastructure in seven fiscals through 2030, more than twice the ~ Rs. 67 lakh crores spent in the previous seven starting fiscal 2017. Of the total, ~ Rs. 36.6 lakh crores will be green investments, marking a 5x rise compared with fiscals 2017-2023.

Source: Annual Report, CRISIL (Projections)

Business Overview

Growth

Over the last 10 years, the company has shown remarkable revenue, net profit, Book Value and Net Block growth as shown in the table above. More importantly, the company has achieved this growth while simultaneously decreasing its debt to equity ratio from 1.22 to 0.31. The growth of the company is driven by the presence of a strong management team, as evident from their choice of market, products and their ability to understand the advantages of scale in the business.

APL Apollo’s products are segmented into three broad categories: (a) Apollo Structural (Hollow Section & Black Round), (b) Apollo Z (GP Pipes) and (c) Apollo Galv (GI Pipes). Apollo Structural Pipes as a group have the lowest EBITDA per tonne due to the high share of general category products, while Apollo Z and Apollo Galv have higher EBITDA per tonne.

Source: Investor Presentation

*Numbers may be approximate due to rounding off

The strategic focus of the company has been towards value addition, particularly in the Apollo Structural business through the introduction of value additive products in the light, and heavy sub segments and the introduction of the super heavy segment, while reducing the share of the low value general segment. This has been achieved through product innovation where competition is limited and the first mover advantage of Direct Forming Technology. 

From FY19 to FY24, the overall Apollo Structural revenue, volume and EBITDA/Tonne grew at a CAGR of 20%, 13% and 13% respectively, with most of the volume and value growth attributable to the heavy and light segments. While the overall share of Apollo Structural has reduced from 72% to 68%, all the reduction is attributable to the low value general segment, which suggests strong capital allocation.

In its high value Apollo Z segment, the company not only grew its revenue from rust-proof product at 24% CAGR, but introduced higher margin coated products as well. While this segment did not show strong improvements in EBITDA per tonne, the already high EBITDA per tonne has made this an extremely profitable segment of the business.

The Apollo Galv division witnessed the slowest growth, and it is primarily due to the company’s decision to focus on housing and commercial construction rather than infrastructural requirements.

Competitive Advantages 

Structural Steel Tube manufacturing is an extremely low margin business given the high competitive intensity that results from low capital expenditure. Therefore, small improvements in the business that decrease costs can have a multiplier effect on the bottom line and therefore, overall returns. The competitive advantage lies in asset turns and cost efficiency.

Strong Bargaining Power with Suppliers

APL Apollo is the largest player and is able to leverage it to become the lowest cost producer in the industry. APL Apollo is responsible for more than 10% of India’s HR Coil consumption, which gives it a bargaining power of about 2% against steel manufacturers. In an extremely low margin industry, where PAT margins are around 2-5%, a 2% improvement in margins can lead to nearly double the profitability of undifferentiated players.

Strong Bargaining Power with Distributors

Logistics cost can be as a high as 4-8% of product value, making it extremely high for a business that has a high single digits EBITDA Margin. This acts as a distribution barrier for small players, and while larger players may be willing to bear higher costs, longer distances lead to lower profitability. Therefore, multiple plant locations act as a strong source of cost competiveness, especially for pan-Indian players. APL Apollo has the highest number of plants in India at 11, which are spread across India. Furthermore, APL enjoys a monopoly in certain products, and APL Apollo distributors can churn capital up to 8x in a year which helps them generate high ROCE. These factors help the company maintain strong distribution.

APL Apollo has a negative cash conversion cycle, while other ERW Pipe manufacturers have high cash conversion cycles. This is primarily due to differences in focus areas of businesses. While other ERW players focus on B2B businesses such as Water and City Gas Distribution, Power, Telecom and Infrastructure, APL Apollo’s business depends heavily on housing, which is a distribution based business. Since the company is one the largest manufacturers, has a large variety of SKUs, and efficient distribution mechanisms, it is able to leverage these benefits into better working capital cycles.

Source: Sambhv Steel Tubes DRHP

Technological Advantage

Direct Forming Technology (DFT) offers several advantages that enhance both efficiency and cost-effectiveness in tube manufacturing. It enables direct material cost savings of 2% to 10% by optimizing the production process. One of its key benefits is the ability to produce customized sizes, allowing customers to receive exact dimensions, such as 96 x 48, instead of the standard 100 x 50. DFT also provides great flexibility by allowing modifications to tube dimensions without the need for forming roll changes, accommodating both standard and non-standard sizes. This flexibility enables the production of smaller quantities as well, further increasing efficiency. Overall, DFT enhances productivity while significantly reducing costs in tube manufacturing.

Low Competitive Rivalry

The company has increased its market share in the structural steel tube market to 55% in FY24 from 29% in FY16 as a result of sustained competitive advantages, or competitive weakness of other players. As the benefits of size are evident, debt laden capital expenditure is common in the industry, as evident with APL Apollo as well. However, unlike APL Apollo, competitors were unable to manage such high debt levels especially during Covid-19, which led to insolvency issues or general pressures of debt. Smaller players lacked the resources to pose competitive threats, while certain other players focused on other market segments, allowing APL Apollo to grow at a fast pace. The principal differentiating factor remains APL Apollo’s focus on cash conversion which has allowed it to sustain debt and interest repayments without compromising growth. This is a result of a strong focus on distribution.

Key Concerns and Risks

Raw Material Price Volatility

Source: Sambhv Steel Tubes DRHP

HR Coil prices, both domestic and landed have decreased over the last 2 years, after a sudden jump caused by Covid-19 pandemic led supply disruptions. The fall over the last 2 years, of over 20% in HR Coil prices have put pressure on margins and growth of steel product manufacturers. The fall in price has led to inventory destocking at the distributor. Similarly, APL Apollo has faced lower EBITDA per tonne as a result of the need to push goods through price incentives while also accounting for a certain level of inventory losses. However, lower prices also increase affordability and improve product acceptance.

Between FY22 and FY24, the company’s EBITDA per tonne fell by 16%, while revenue and volume grew by nearly 40% and 50% respectively during the aforementioned period. While other facts related to growth also suppressed EBITDA Margins, HR Coil price deflation was a major contributing factor.

*Numbers may be approximate due to rounding off

As the table above shows, the problem related to raw material volatility is higher in the lower value added segment measured through EBITDA per tonne. Therefore, an increase in higher value added products will serve a dual purpose of increasing EBITDA per tonne overall and reducing volatility in pricing.

Slowdown in End User Markets

The growth of the business is majorly dependent on growth in housing and commercial real estate, which are in turn dependent on the financial health of builders at a microeconomic level, and GDP growth, inflation and interest rates at a macroeconomic level. As mentioned earlier, the demand drivers remain strong for India and growth is expected to continue at a healthy rate. However, changes in the macroeconomic environment should be monitored due to the impact on the company’s growth and valuation.

Future Growth Opportunities

Capacity: The new Raipur and Dubai plants account for majority of the growth to be expected in the next two years, and would majorly produce value additive structural tubes. The Raipur plant has a capacity of 1.2 million tonnes per annum, while the Dubai plant has a capacity of 300 thousand tonnes per annum, with a combined EBITDA per tonne conservative expectation of Rs. 6300 at full capacity utilisation. The overall increase in EBITDA per tonne would improve the overall EBITDA Margins of the business while delivering strong revenue growth as well. The company is expected to increased production from 2.8 million tonnes per annum to 5 million tonnes by FY26-27, and further increase it to 10 million tonnes per annum by FY30 at a cost of around Rs. 2,500-3000 crores. This translates into a 24% volume CAGR. The company’s expectations for FY27 are mentioned in the table below.

Source: Investor Presentation

Given that APL Apollo is already 55% of the market; its ability to grow materially above the market rate would be difficult. However, the primary structural steel tube market is expected to grow in volume by 20% annually until 2030, and the company has enough capacity and cash, making these projections plausible. Additionally, APL Apollo has demonstrated strong growth over the last 10 years, and has done so while reducing its debt and cash conversion cycle, without raising fresh capital from primary markets. Finally, the demand from housing and commercial real estate remains strong, especially due to low debt levels in the real estate industry.