APL Apollo - Volume Growth Likely To Continue - Nirmal Bang

We held a non-deal road-show for APL Apollo recently in which Mr. Ashok Gupta, managing director, was present. Following are the key takeaways:

Robust growth likely to continue: APL Apollo has shown a robust 49% revenue growth for the 9MFY13 period, driven by a 47% rise in pipe volume. This led to 53% and 66% increase in EBITDA and PAT, respectively, for the same period. The management has given volume guidance of around 450,000tn for FY13, up 39% compared to the previous year. The management has also given volume guidance of 630,000tn for FY14E, targeting a growth of 40%. It indicated a volume of around 800,000tn for FY15E, with exit capacity at 1mt.

Top player in the ERW segment: The management stated that the ERW (electric resistance welded) pipe market size stands at 7mt-8mt. APL Apollo is the top player in the market followed by Tata Steel, D.P. Jindal Group and Surya Roshni Group. According to the company, 60% of the ERW pipe capacity is with the unorganised segment. The company believes its growth is partially driven by capturing the share of the unorganised segment, which will continue in future as well.

Expansion at existing locations gives firm visibility: The company currently has 585,000tn of pipe-making capacity spread across four locations and five plants. It has two plants in Uttar Pradesh with a capacity of 185,000tn, a plant in Maharashtra with a capacity of 120,000tn, a plant in Karnataka with a capacity of 70,000tn and a plant in Tamil Nadu with a capacity of 210,000tn. The company has surplus land available in each of the locations, which will be utilised for capacity expansion up to 800,000tn.

Locational advantage and strong distribution network - key differentiators: Freight costs play a very important role in pipe distribution as it is a voluminous product. APL Apollo has a significant cost advantage due to its presence across various parts of the country. Besides this, the company has a large distribution base compared to peers, which is helping it to capture market share from the unorganised players. The company has 250 dealers and distributors across India.

Other highlights: The company has gross long-term debt of around Rs900mn and gross short-term debt of Rs3,100mn as on 31 December 2013. The management has indicated a capex of around Rs600mn for FY13E and FY14E, each. It also acknowledged that the company has slightly over-borrowed in terms of short-term debt and as a remedial measure, it plans to deploy internal accruals to meet working capital needs and raise long-term debt for capital expenditure. There are 1.5mn warrants due for conversion into equity shares in August 2013 that were issued at Rs145/warrant, which could increase the share capital from Rs219mn to Rs234mn. Government contracts account for less than 10% of the total revenue and hence it is not directly affected by the planned expenditure cut by the government. The company has around 70-day inventory and debtor cycles, which it plans to continue in the future as well. Valuation: APL Apollo stock trades at P/E and EV/EBITDA multiples of 5.7x and 5.1x, respectively, on trailing 12-month basis. We do not have any rating on the stock.

Source : Equity Bulls

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