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Brief

• APL Apollo Tubes (APL) is India’s leading structural steel tube manufacturer with a capacity of 2.6 million tonne per annum (mtpa) and a pan-India presence. 
• APL’s market share enhanced from 27% in FY16 to 50% in FY21, led by a strong distribution network, branding, offering of customized & innovative products and capacity enhancement. 

Mega Trends

• Growth in construction to drive demand for structural steel : Structural steel market in India and future growth- India’s overall steel market size stands at ~100 mtpa, of which structural steel tubes account for 4 mtpa (~4%) only. The share of structural steel tubes in the overall steel market in India is much lower compared to the global average, which ranges from 9- 10% of their respective steel markets. This provides significant growth potential for the structural steel segment to expand its market share in Indian steel market by replacing the conventional RCC and wood usage (especially across the construction and the building segments), which are labour intensive, prone to high wastage, and time consuming

Actions

• In consolidation phase since Sep’21 at all time high prices/valuations

Competitive Advantage 

• Much ahead of its peers-
• With a 2.6 mtpa capacity and 63% utilisation level, APL is far ahead of its peers with 50% share in the domestic market, which is significantly higher than the second largest player’s (which has 9% market share). 
• The dominance in the competition is largely led by the continuous introduction of innovative products across segments that are largely acceptable in the market. Furthermore, with its large and strong distribution network and reach towards the end customer, the company is far ahead of its peers. Also, nearly 60% of its product mix comprises value-added products (high margin) and ~40% of its products face no competition at all in the market.

Improvement

• With backward integration, APL is not only able to save on the process cost but has also created a barrier for its peers – the company has entered backward integration in structural steel manufacturing process by introducing cold roll milling. Through this technology, it downsizes the standard HRC coil width from 2mm to 1.2mm1.4mm (which is used for manufacturing of high-value products). 
• Earlier, the company was getting these sized customized HRC from Tata Steel and JSW Steel at a much higher price and these products were also made available to competitors

New

• APL has planned a capacity expansion of 1.4mtpa (0.4 mtpa in FY22, 0.6 mtpa in FY23 and 0.4mtpa in FY24). Of this, 1mtpa capacity will be across its Raipur facility while the balance 0.4mtpa capacity will be across other units .Expansion will be towards:
• 0.2 mtpa for 500×500 diameter steel tubes which will be used in heavy building structures
• 0.2 mtpa towards 500×500 diameter color coated structural tubes (first of their kind in the Indian market)
• 0.8 mtpa towards existing product categories.
• All these expansions will be in value-added segments, which are expected to garner an EBITDA/tonne of INR6,000. 
• The company plans to incur Capex of INR3.25bn/INR2.5bn/INR2.0bn in FY22E/FY23E/24E for the same, which would be
• met through internal cash flows.
• Slowdown in economy or government spending on infrastructure.
• Fall in steel prices which could result in inventory losses and, thus, lower EBITDA/tonne for APL.
• Slower-than-anticipated recovery and growth in the real estate market.
• Slowdown in steel demand, especially across building and construction segment, could impact the structural steel penetration within the steel sector. This would impact the company’s volume growth and, thus, margins. 

APL reported strong 12.9%/14.9% CAGRs for volumes/sales over FY16-FY21, led by both capacity expansion (through organic and inorganic route) and improved product demand. Going ahead as well, we expect APL to clock strong volume CAGR of 16.9% and revenue CAGR of 19.8% over FY21-FY24E, led by improved demand from growth across construction activities, large-scale product acceptance by replacement of conventional products, enhanced capacity and utilisation.