APL Apollo Tubes Ltd: 1QFY20 Results – Value-added products panning out well.

Dated: 13th August 2019

• APL Apollo volume grew 29% YoY at 388,511 tonnes for the quarter driven by volume growth from GP pipes, Hollow DFT pipes and Normal Hollow pipes of 33%, 30% and 33% YoY respectively.
• Net Revenues were higher by 24% YoY at Rs 20,716 mn. The growth was driven by an uptick in the domestic and overseas market. The value-added products in the categories of Hollow Pipes, DFT (Direct Forming Technology) pipes and GP (Pre- Galvanised) pipes contributed to the revenue growth.
• The revenues include a contribution from Apollo Tricoat for 13 days of the operation in this quarter which amounted to Rs 117 mn.
• EBITDA for the quarter grew 15% YoY at Rs 1,250 mn. The EBITDA margins were at 6.0% as against 6.5% in 1QFY19. EBITDA per ton stood at Rs 3,334.5 vs Rs 3,584.4 in 1QFY19. The key factors impacting the operating performance were:
• Increased spend on Brand development and marketing activities, which stood at Rs 107 mn during the quarter.
• Stamp duty of Rs 23 mn for the acquisition of the Shankara plant during the quarter resulted in higher other expenditure.
• Raw material prices during the quarter were down by ~Rs 1,500/ ton which impacted inventory valuations
• Depreciation stood at Rs 202 mn in 1QFY20, higher by 33% YoY and interest costs stood at Rs 283 mn, higher by 7% YoY. Depreciation was higher due to the commissioning of new capacities and the establishment of a new warehouse in Dubai in the quarter.
• In 1QFY20, PAT grew by 11% to Rs 521 mn. Net profit growth was impacted by higher depreciation and increased tax rate (36% for the quarter).

Management Commentary

• The management has maintained its 20% plus volume guidance for FY20E & FY21E respectively.
• They have set a PAT target growth of 25% for FY20E & FY21e on the back of the improved operating performance going forward.
• They expect the EBITDA per tonne to remain muted at Rs 3,300-3400 for FY20E considering the slowdown in the economy which will have some impact on the Company. They expect EBITDA per tonne to be around Rs 4,000-5,000 tonne in the long term.
• The Company sees no further Capex requirement for next 2 years. They expect the Capex to be around Rs 500 mn annually for the next two years.
• As per the Company, Shri Lakshmi Metal Udyog, APL Apollo Tubes wholly-owned subsidiary, has concluded the acquisition of Apollo Tricoat in June 2019.
• In 1QFY20, Apollo Tricoat started commercial production of its first two product categories namely, the In-line Galvanized (ILG) pipes and Designer Pipes at the existing Greenfield plant at Malur, Bengaluru. The plant has a capacity of 150,000 tons per annum.
• In the month of July 2019, Apollo Tricoat commenced commercial production of Door Frames at its greenfield manufacturing facility at Dujana, Dadri having a capacity of 50,000 MTPA.
• All three launched product segments are higher-margin value-added products, given their niche product applications in India. The Company is also on track to launch the other innovative products category of Narrow Sections by September 2019. An improved portfolio of all the four value-added segments is expected to broaden the product mix and should enable the Company to deliver a healthy financial and operational performance going forward.
• Kerala contributes around 8-10% to the total sales volume for APL Apollo. As Kerala has been hit by floods, the management expects a negative impact on the sales volume. Thus to cover up the volume loss, the Company will focus on other states for a healthy growth in volumes.

Consensus Estimate (Source: market screener website)

• The closing price of APL Apollo Tubes Ltd was Rs 1,299/- as of 13-August-19. It trades at 15x /11x the consensus EPS for FY20E /21E of Rs 88.1/ 114.0 respectively.
• Consensus target price of Rs 1,981/- implies a P/E of 17x on March-FY21E year ended.