APL Apollo Tubes, a specialist in steel products, has developed a wide portfolio of products ranging from handrails, gates, structural members for metros, airports, stadiums, and even steel door frames. It recently forayed into the pre-engineered building segment, which is gaining prominence in the construction industry on account of the speed of construction.

In FY22, the company delivered higher than expected numbers by 6.6% on revenue and 3.5% on EBIT, according to Trendlyne Forecaster. The better-than-expected results can be attributed to orders for six hospital projects by the Delhi Government and the rising contribution of value-added products.

A major development for the steel industry was the announcement of an export tax of 15% on steel on May 23. The Centre also waived customs duty on the import of raw materials, including coking coal and ferronickel, used by the steel industry. This move will lower the cost for the domestic industry and help curb the rise in steel prices. 

After this announcement, most steel sector stocks like Tata Steel, JSW Steel, and SAIL fell sharply, and are trading near their 52-week lows. APL Apollo Tubes on the other hand, rose since the announcement of the export duty. This is because a majority of its production is domestic-oriented.

Quick Takes

• Revenue grew 63% YoY to Rs 4217.4 crore in Q4FY22, and net profit by 37% YoY to Rs 163 crore, while in FY22 revenue was up 53.5% to Rs 13,108.8 crore and net profit by 50% to Rs 557.3 crore
• Value-added products generated an EBITDA/tonne of Rs 5,000 compared to Rs 2,145 for general products
• Order from Delhi Government for prefabricated building for six hospital buildings in FY22 was a major contributor to the prefabricated buildings segment
• The company plans for a capex of Rs 650 crore in FY23 for expansion in Hyderabad, Hosur, Kolkata, Dubai, and Raipur
• Management maintains its guidance of EBITDA/ tonne target of Rs 6,000-7,000/tonne with 4 million tonnes volumes by FY25

The management is keeping to its EBITDA guidance, despite a difficult business environment in the recently completed quarter, which could improve investors’ confidence in the company. But there were some bumps in the road ahead of the company’s confidence in achieving its target in FY23.

A strong Q4FY22 in a challenging environment

The Q4FY22 quarter had its fair set of challenges for the steel industry. The Ukraine-Russia war,  re-imposition of lockdown in China, raw material inflation, and continuing shortages of shipping containers were issues that plagued this industry. Despite this, APL Apollo Tubes’ Q4FY22 revenue increased 63% YoY to Rs 4217.4 crore and net profit grew by 37% YoY to Rs 163 crore. This was on the back of rising demand for specialised or value-added products.
 

Value-added or specialised products contributed to 63% of overall volume in Q4 vs 57% YoY. Significant growth came from rust-proof sheets. 

In FY22, consolidated revenue grew 53.5% YoY to Rs 13,108.8 crore and net profit grew 50% YoY to Rs 557.3 crore. A major boost in FY22 came from the order of six new hospital contracts by the Delhi Government.

The total construction across all six projects is 22 lakh square feet. These are six hospitals that are being built using prefabricated building techniques for these projects. An estimated 10,000-11,000 tonnes of steel will be required cumulatively for these projects. The assembly of these structures will take place on-site with zero welding, while the columns, beams, and other structural elements will be fabricated in the factory and brought to the site. 

This prefabricated construction technique is gaining popularity in India due to its speed and also because it minimizes the use of RCC (reinforced cement concrete). RCC is used to construct the superstructure of a building, which is a labour-intensive process. APL Apollo has a strong pipeline in the prefabricated segment, with around 30 ongoing projects and a continuous flow of enquiries.

Various products for different industries make a diversified product portfolio

APL Apollo caters to different segments with specific application products across each industry type. In the housing segment, apart from structural steel components, it also offers a range of products like gates, handrails, fencing and other allied applications.

In the commercial buildings segment, products include heavy tube sections which are used in superstructures of airport buildings, metros, and cantilever support structures for stadium roofs etc. 

The housing and commercial building products contribute nearly 80% of the total revenue. The rest comes from products like galvanized structural steel products, and greenhouse structures which find application in agriculture, plumbing, and firefighting. Fire fighting pipes are used for sprinkler piping within buildings as well as underground piping for connecting fire fighting pipes to the tanks.

Over the last five years, with the addition of products, the company’s sales with peak sales rose, with FY22 sales at 1,755 Ktonne. (1 Ktonne = 100 tonnes) The EBITDA per tonne over the last five years grew faster than sales volume, and is higher by 30% YoY in FY22.

In a conference call on the Q4FY22 results, the management said that over the last three to  four years, they have invested energy, time and money on development of value added products. They are now seeing the benefits in the form of margin improvement and improving sales mix, and going forward their focus would be on increasing the value added products portfolio.

The value-added products like rust-proof structures, rust-proof sheets, home improvement products, and heavy and light structures contributed significantly to the product mix, and also in terms of EBITDA/tonne.

Higher EBITDA guidance to help the company go debt-free

The company maintained its guidance of an EBITDA/tonne target of Rs 6,000-7,000/tonne, with volumes of 4 million tonnes by FY25. This will be helped by higher volumes from the company’s Raipur facility and value-added products. The company is aiming to be debt-free by the end of FY23.

Capex plans provide multiple growth triggers for the company

APL Apollo will invest Rs 650 crore as capex in FY23 for backward integration in Hyderabad (2 lakh tonne capacity) and Hosur plant (4 lakh tonne capacity). With backward integration, the company plans to produce steel, which would ultimately feed other plants that develop it into value-added products.

Capex would also be spent on expansion in Kolkata and Dubai. The management expects to achieve 50% utilisation at the Raipur plant by FY23, and 100% utilization by FY24.

The Raipur plant is key for the group because it is the largest facility with 1.5 million tonnes. In Q4FY22, production commenced with a small dispatch of 400 tonnes, but dispatches are rising week-on-week, and the management is confident that by Q3FY23 onwards, the Raipur plant’s contribution will rise significantly.

To strengthen its distribution in South India, the company acquired a 10% stake in Shankara Building Products in Q4FY22. With this acquisition, APL Apollo will sell its products through Shankara’s distribution network. According to the management, they wanted to make the largest distributor sell more products because they see scope to increase sales volume on the Shankara network, and a ready platform to launch their upcoming products which are mainly from the Raipur plant.

There are multiple growth triggers in place for APL Apollo despite the tough environment, including growth from new products, rising orders in the prefabricated building segment, and enhanced production from the Raipur plant. How these actually play out will be a test of whether the company can maintain its growth rate in FY23. While APL Apollo has recently forayed into the prefabricated building space, there are existing unlisted players entrenched in the industry.

Whether APL Apollo chooses the government contract route like the Delhi hospitals projects to increase its market share is something that needs to be tracked. The recent decision by the Centre on the export tax for steel industry is also likely to create competitive pricing pressure in the domestic market, which may bring the EBITDA/tonne lower in coming quarters.