APL Apollo Tubes

The shares of APL Apollo Tubes recently enjoyed a significant rally and reached a 52-week high on the stock exchanges. The stock remained in the spotlight due to its impressive performance in the otherwise lacklustre market sessions as well as the majority of brokerage houses’ optimism about its future growth. In the following paragraphs, we will analyse company's financial performance and valuation to arrive at conclusion if it is right time for readers to get exposure to this counter. 

With its headquarters in Delhi NCR, APL Apollo Tubes Limited is the largest producer of structural steel tubes in India, with an annual production capacity of 3.6 million tonnes. The company is able to successfully manage a three-tier distribution and supply network thanks to its network of over 800 distributors and more than 2 lakh retailers and fabricators. It also serves 20 other countries in addition to the domestic market through a network of warehouses and branch offices spread across 29 cities across India. The company operates 11 strategically placed manufacturing facilities in Sikandrabad, Malur, Bengaluru, Hosur, Dujana, Raipur, Murbad and Hyderabad. 

All facilities have access to green energy and two plants are more than 85 per cent dependent on it. The company’s products are grouped into categories such as Apollo Structural, Apollo Standard, Apollo Exclusive, Apollo Galv, Apollo Tricoat, Apollo Concept and Apollo Z. More than 1,100 distinct pre-galvanised tubes, structural steel tubes, galvanised tubes, MS black pipes and hollow sections are among the company’s diverse range of goods. The vision of the company is to replace conventional construction products with new ones that use innovative processes to improve the life of steel. 

Sector Overview

Steel and iron production and consumption are regarded as indicators of economic progress and industrial development and the backbone of any economy. Steel has long held the top position among metals since its usage has been one of the main drivers of industrialisation. Due to its abundant reserves of iron ore and other metals, India is a natural powerhouse and one of the premier destinations for the metals and mining industry. India’s strategic location allows for the development of export potential as well as rapid growth in the Asian markets. It provides competitive advantages to end-use sectors like building and infrastructure, automotive and electricity by supplying them with crucial raw materials at affordable pricing. 

India is the world’s second-largest producer of crude steel as well as the fourth-largest producer of iron. The iron and steel industry has the potential to have a significant impact on GDP growth, foreign exchange earnings, etc. It is therefore a fully-fledged government-backed industry that supports India’s entire infrastructure and development sector. The government imposed export taxes on a variety of metals and steel products in May 2022 in an effort to control high inflation. Metal prices, which had previously peaked, fell precipitously. Numerous factors were to blame for a sudden spurt in the price of metal, most prominently the effects of the war between Russia and Ukraine. It has caused supply chain disruptions, which has resulted in higher prices. 

Later, China had begun to soften its corona virus policy in order to boost its collapsing real estate industry. The domestic industry strengthened on optimism that the reopening of the Chinese economy would result in a rebound of metal industry pricing and demand. We are yet to see that demand boost. The steel industry has reportedly experienced tremendous growth over the last decade. While domestic steel demand has surged around 80 per cent since 2008, production has climbed by a whopping 75 per cent. The steel industry has substantial potential for expansion and is expected to reach the 300 million tonnes target by 2030. It is expected to grow at a CAGR of 3.47 per cent from USD 1,353 billion in 2022 to USD 1,718 billion by 2030. 

Financial Overview

Considering the company’s quarterly performance, on a consolidated basis it reported a modest growth of 5.13 per cent from ₹4,214.73 crore registered in Q4FY22, recording total revenue of ₹4,431.09 crore in Q4FY23. It has reported strong EBITDA growth of 21.34 per cent when compared to the same quarter last year. The net profit for the fourth quarter of FY23 surged 14.27 per cent from ₹176.61 crore to `201.82 crore. In terms of annual performance, the net profit of the company advanced, registering growth of 3.7 per cent to ₹641.86 crore as against ₹618.98 crore during the previous year. Also, net sales rose by 23.75 per cent to `16,165.95 crore as against `13,063.32 crore during the previous year ended on March 2022. 

While the company’s higher PE ratio compared to its competitors and the industry average may be cause for concern, the company’s 31 per cent returns on equity (ROE) and 34 per cent returns on capital employed (ROCE) demonstrate its strong profitability position. The company achieved its highest-ever quarterly net sales and announced that it has signed MoUs with its top distributors for the sale of 2.4 million tonnes of structural steel tubes in FY24. These MoUs do not include sales from the exports division, the OEM division and the sale of coated products from the recently inaugurated Raipur facility. 

Deepak Goyal, Director (Operations) and Chief Financial Officer of APL Apollo Tubes, stated in an interview that the business is on course toward accomplishing significant achievements, including 100 per cent organic capacity expansion and turning debt-free by the end of FY24. At the time of writing, the company was valued on the market at ₹37,150 crore, with the promoters holding 31.15 per cent of the company. Institutional investors have a sizeable stake of 36.80 per cent, out of which foreign portfolio investors (FPIs) owned a significant 25.68 per cent. The shares of the company have experienced significant buying interest and soared more than 16 per cent over the last month, reaching a 52-week high of ₹1,398.55 per share on the BSE. Over the past year, its shares have delivered stellar returns of over 55 per cent. 

Outlook

The Union Budget 2023-24 placed strong emphasis on infrastructure and development, which will benefit the metals and mining sector in the long run. The government granted ₹70.15 crore to the Ministry of Steel in the Union Budget 2023-24. Under the Atmanirbhar Bharat 3.0 package, a production-linked incentive scheme has been introduced in the specialty steel sector. The ‘Make in India’ initiative of the Indian government seeks to boost the manufacturing sector’s share of GDP. As part of this plan, the government has designated a number of industries which use a variety of metals extensively. 

In order to promote research and collaborative efforts to boost the industry, the Ministry of Steel and the Government of India have already signed Memorandums of Understanding (MoUs) with a number of countries. Also, industry leaders are signing MoUs with a number of global leaders to gain access to technology and funding. India has a reasonable cost advantage in steel production and conversion costs. The metal sector, including notably the steel industry, in India is expected to experience a significant transformation in the coming years as a result of reforms such as the Make in India campaign, improved infrastructure development, rural electrification and smart cities. 

Returning to the company, the shares of APL Apollo Tubes are currently trading at a PE that is significantly higher than both the industry average and that of the company’s competitors, indicating an expensive valuation. Also, promoter holding has declined over the past years, which is cause for concern. APL Apollo Tubes, on the other hand, has lined up opportunities, having inked Memorandums of Understanding with its top distributors. Over the years, the company has demonstrated great financial success and plans to expand while also reducing debt. Looking at higher valuation and considering the optimistic outlook for the steel tube industry in India and the company’s growth potential, we recommend HOLD.