APL Apollo. Management meet takeaways CMP `188. Company Update Pipes. Investment Period -

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1 Company Update Pipes March 12, 2013 APL Apollo Management meet takeaways We met the Management of APL Apollo Tubes (APL Apollo) to get an update on its business. APL Apollo is one of the largest Electric Resistance Welding (ERW) pipe manufacturers in India with 5 manufacturing locations spread across northern, southern and western parts of India. Its products include galvanized tubes, pre-galvanized tubes, MS black tubes and hollow sections. The company has increased its capacity by 7.5x from 80k tonne in FY2007 to 0.6mn tonne currently. Its products find application in piping, cabling, engineering, power transmission, construction, automotives, gas distributions, sprinklers etc. On the verge of massive expansion plan: APL Apollo aims to increase its capacity from 0.6mn tonne as of December 2012 to 1.0mn tonne by CY2015 with a capex of `200cr via brownfield expansion at its existing plants. As per the company, it has the required land at its existing plants to meet the expansion plans; the capex is expected to be fully funded via internal accruals. Post expansion, the company targets an annual turnover of US$1bn. Aims to grow sales via market share gains: The current market demand for ERW in India is ~7mn tonne, with APL Apollo being among the largest manufacturers. The unorganized (smaller) players account for 5mn tonne of the market. APL Apollo aims to gain market share from these unorganized players. To drive market-share gains, the company aims to leverage on its economies of scale, increase dealer-network and offer better quality products, going forward. The company aims to nearly double its dealer network from the current level of 300 as a part of its marketing plan. Currently, ~95% of the company s raw material (basic steel) requirements are procured from JSW Steel. CMP `188 Target Price Not Rated Investment Period - Stock Info Sector Pipes Market Cap (` cr) 412 Net Debt (` cr) 291 Beta Week High / Low 232/131 Avg. Daily Volume 36,870 Face Value (`) 10 BSE Sensex 19,565 Nifty 5,914 Reuters Code APLA.BO Bloomberg Code APAT@IN Shareholding Pattern (%) Promoters 45.3 MF / Banks / Indian Fls 8.0 FII / NRIs / OCBs 3.9 Indian Public / Others 42.7 Abs.(%) 3m 1yr 3yr Sensex APL Apollo Low margins, high duties mute down threats from imports: APL Apollo s business model comprises of purchasing simple hot-rolled-coil (steel) and converting it to pipes. Approximately 83-86% of the company s net sales are constituted by raw material costs, 7-8% of net sales is conversion costs, leaving the balance 7-8% as EBITDA margin. As per the company, low margins in the business, import duty on steel products and significant freight costs mute down the threat from imports. The company is aiming to double its capacity. However, margin improvement on account of economies of scale is likely to be insignificant, given the conversion business model followed by the company, in our view. High working capital to keep balance sheet leveraged: The company s business is working capital intensive. In order to maintain the current net sales annual run-rate of `1,600cr, it requires ~`300cr of net working capital (which is funded via working capital loan). Going forward, although the company expects to fund its capex to double its capacity via internal accruals, it will require an additional `300cr of working capital loan in order to grow its top-line. We do not have a rating on the stock currently. Bhavesh Chauhan Tel: Ext: 6821 bhaveshu.chauhan@angelbroking.com Vinay Rachh Tel: Ext: 6841 vinay.rachh@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Company Background Formerly known as Bihar Tubes, APL Apollo was established in It is one of the largest ERW pipe manufacturers in India with 5 manufacturing locations spreading in northern, southern and western parts of India. It produces a range of hollow sections and mild steel tubes in all variants (black, galvanized and pre-galvanized). It has increased its capacity from 80k tonne in FY2007 to 0.6mn tonne currently. Its products find application in piping, cabling, engineering, power transmission, construction, automotives, gas distributions, sprinklers etc. Exhibit 1: APL Apollo products Galvanized Tubes Pre- Galvanized Tubes MS Black Tubes Hollow Sections APL Apollo ERW Tubes Source: Company, Angel Research Key business risks: Decrease in import duties on steel A decrease in import duties on steel can result in higher imports by APL Apollo s customers; thus affecting the company s pricing power and margins. Sharp fluctuations in steel prices Steel is the key raw material for manufacturing pipes. Volatile steel prices may affect APL Apollo s margins as the company may not be able to pass on the increase completely. Higher competitiveness may dent pricing APL Apollo manufactures commodity products which have low barriers to entry. Rise in competition from unorganized players may limit the company s ability to raise prices. March 12,

3 Profit & Loss statement (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011 FY2012 9MFY2013 Gross sales ,536 1,622 Less: Excise duty Net Sales ,392 1,449 Other operating income Total operating income ,392 1,449 % chg Total Expenditure ,278 1,332 Net Raw Materials ,166 1,222 Other Mfg costs Personnel Other (14) EBITDA % chg (% of Net Sales) Depreciation & Amortization EBIT % chg (% of Net Sales) Interest & other Charges Other Income Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (11.8) (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg - 1, March 12,

4 Balance Sheet (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011 FY2012 SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability (Net) Other non-current liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Other Non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets March 12,

5 Cash Flow statement (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011 FY2012 Profit before tax Depreciation Change in Working Capital (18) (50) (43) (62) Interest Others (6) Direct taxes paid (9) (3) (13) (17) Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (30) (54) (78) (77) (Inc.)/ Dec. in Investments - 2 (22) - (Inc.)/ Dec. in loans and advances (35) 16 (8) - Others - (1) (1) (15) Cash Flow from Investing (65) (36) (109) (91) Issue of Equity Inc./(Dec.) in loans 83 (22) Dividend Paid (Incl. Tax) - (5) (5) (5) Others (19) (17) (21) (33) Cash Flow from Financing 152 (44) Inc./(Dec.) in Cash 89 (67) (5) (17) Opening Cash balances Closing Cash balances March 12,

6 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement APL Apollo 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%) March 12,

7 6 th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai Tel: (022) Research Team Fundamental: Sarabjit Kour Nangra VP-Research, Pharmaceutical Vaibhav Agrawal VP-Research, Banking Bhavesh Chauhan Sr. Analyst (Metals & Mining) Viral Shah Sr. Analyst (Infrastructure) Sharan Lillaney Analyst (Mid-cap) V Srinivasan Analyst (Cement, FMCG) Yaresh Kothari Analyst (Automobile) Ankita Somani Analyst (IT, Telecom) Sourabh Taparia Analyst (Banking) Bhupali Gursale Economist Vinay Rachh Research Associate Amit Patil Research Associate Shareen Batatawala Research Associate Twinkle Gosar Research Associate Tejashwini Kumari Research Associate Technicals: Shardul Kulkarni Sr. Technical Analyst Sameet Chavan Technical Analyst Sacchitanand Uttekar Technical Analyst Derivatives: Siddarth Bhamre Head - Derivatives siddarth.bhamre@angelbroking.com Institutional Sales Team: Mayuresh Joshi VP - Institutional Sales mayuresh.joshi@angelbroking.com Hiten Sampat Sr. A.V.P- Institution sales hiten.sampat@angelbroking.com Meenakshi Chavan Dealer meenakshis.chavan@angelbroking.com Gaurang Tisani Dealer gaurangp.tisani@angelbroking.com Akshay Shah Sr. Executive akshayr.shah@angelbroking.com Production Team: Tejas Vahalia Research Editor tejas.vahalia@angelbroking.com Dilip Patel Production Incharge dilipm.patel@angelbroking.com Angel Broking Ltd: BSE Sebi Regn No : INB / CDSL Regn No: IN - DP - CDSL / PMS Regn Code: PM/INP Angel Securities Ltd:BSE: INB /INF NSE: INB /INF Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB / NSE FNO: INF / NSE Member code Angel Commodities Broking (P) Ltd: MCX Member ID: / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID / FMC Regn No: NCDEX / TCM / CORP / 0302 March 12,