APL Apollo Tubes Limited (533758) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the APL Apollo Tubes Limited's Earning Conference Call. [Operator Instructions] Please note that this conference is being [ recorded ]. I would now like to hand the conference over to Mr. Anoop Poojari from CDR India. Thank you. And over to you, Mr. Poojari.

Thank you. Good morning, everyone, and thank you for joining us on APL Apollo Tube Limited's Q3 and 9M FY 2020 Results Conference Call. We have with us Mr. Arun Agarwal, Chief Operating Officer; Mr. Deepak Goyal, Chief Financial Officer; and Mr. Anubhav Gupta, Chief Strategy Officer of the company. We will begin the call with brief opening remarks from management, following which we'll have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Deepak Goyal to make his opening remarks.

Thank you, Anoop. A very good morning, everyone. I welcome all of you to the APL Apollo conference call to discuss the operating and financials results for the quarter and 9 months ended on December 31, 2019. I will cover the key development and financials, and then we will open the phone for the questions and answers. We have reported a healthy operating and financial performance during the quarter, driven by steady revival in the demand conditions and stabilizing macro. Our consolidate volume during the quarter stood strong at 4.8 lakh tonnes, as compared to 3 lakh 14,000 metric ton in the corresponding last year. Excluding TriCoat, our volume growth reached 38% to 4.3 lakh tonnes. We believe a combinations of factor have result in delivering this growth, which include improving product mix, branding, [ products ] in new locations, restocking at dealer network and general normalizations of overall environment and market sentiment. Overall, we are on the track to deliver on our guidance of over 20% volume growth in FY '20. On the financial front. Excluding Apollo TriCoat, EBITDA during Q3 FY '20 was healthy at INR 137 crores. And 9 months FY '20 EBITDA stood at INR 326 crores, higher by 24% year-on-year. EBITDA per tonne during the quarter stood at INR 3,157, while on the year-on-year and quarter-on-quarter basis our EBITDA per tonne has improved. We are striving to take it over a better level by further improving the product mix and steady increasing the demand premium that Apollo command in the market. In addition, we'll sustainably look to report better volume going forward. This will be able to register stronger EBITDA per tonne. Our Hyderabad facility also showcased better volume during the quarter, and we are now producing healthy volume every month as per our internal target. This has helped us improve operating efficiency in the plant. On consolidated basis, EBITDA in Q3 FY '20 came at INR 165 crores. And in 9 months FY '20, EBITDA stood at INR 371 crores. EBITDA per tonne during the quarter stood at INR 2,440...

INR 3,400.

INR 3,440. In line with our branding strategies, in -- the company has include -- increased spends towards the brand development and market activities during the quarter. This resulted higher other expenses at INR 154 crores. Profit after tax for the quarter stood at INR 74 crores, higher as compared to the INR 13 crores in Q3 FY '19. Similarly, 9 months FY '20 net profit after tax excluding noncontrolling interest stood at INR 181 crores. We would like to highlight here that the PAT performance is also better, given that we have now moved to the lower tax rate as compared to the full tax rate earlier. Further, there are some deferred tax reversal which also helped the profitability. From a longer-term perspective, increasing contribution from the higher-margin value-added branded products and better utilization will continue to positive impact our profitability. On balance side -- balance sheet front, I am happy to say that during the quarter we reduced our total debt by around INR 100 crores to INR 700 crore as at December 31, 2019, excluding Apollo TriCoat, from INR 800 crores at the September -- 30 September 2019. On consolidated basis, our debt:equity improved to 0.6x, as compared to 0.9x as on 31st March 2019. Improving market sentiment and increasing liquidity in the industry during the quarter result in over INR 100 crore collections for the company. This led to net working capital cycle improving to 21 days, with the debtor days at 22 days, inventory at 29 days and creditor at 30 days. Going forward, the company expects cash flow to improve, driven by pickup in the utilizations of existing capacities, lower CapEx requirement for FY '20, expansion of profit margin driven by increasing contribution from value-added product. The company is also actually -- actively targeting over 80%, 85% capacity utilization on sustainable basis. And we are currently focused on improving cash flow generation and steady debt reductions over the next few quarters. We are also focusing on strengthening our large-diameter pipe segment, ranging from 150 50 mm to 300 300 mm. We believe, as a pioneer for the large-diameter Hollow section in India, we have successfully created demand for this product in the market. The segment still has enormous untapped potential in India and in the export market. To successfully address this, we have established a separate business unit for focus on the branding, marketing and sales aspects of this product. The new team will also focus on creating product awareness among the institutional buyer, bigger projects. And synchronized with this strategy, the company appointed Mr. P.K. Singh as the Executive Director of the company. With over the 3 decade of experience in the steel industry, Mr. Singh as ex-Chairman of Steel Authority of India has held several other leadership position across [ the organization ] in India. The company also signed an MOU with IIT Roorkee during the quarter to provide a platform for the research and training facility to both the IIT Roorkee and APL Apollo. The MOU also aim in fostering the innovation designs and new product development initiative as per the changing requirement of the future. During the quarter, promoter concluded the further infusion of INR 75 crore in APL Apollo via convertible warrant issue to them in 2019. The promoter entity were allotted 5 lakh equities shares, pursuant to 5 lakh fully convertible warrant, at a price of INR 2,000 per share. This will be addition to INR 97 crore infusion in April '19. The total capital infusion is INR 172 crores. The promoter group commitment towards the business and confident in its future growth outlook. Looking forward, as the demand environment and macros further improve, we anticipate our sales momentum to remain healthy. On this note, we would now request the moderator to open the phone for any questions or suggestions that you may have. Thank you.

[Operator Instructions] We take the first question from the line of Rahul Agarwal from ICICI Prudential Life Insurance.

Yes, sir. Congratulations on a great set of numbers. Sir, my first question is basically relating to the demand environment, given that we have seen such healthy volume growth. If you could just give us a sense of where this demand is coming from, be it geography-wise or industry-wise, that will be very helpful.

So Rahul, if you look at our sales volume breakup, okay, 65% of our products are sold in the building material category, which are housing and commercial buildings. And 35% is from infrastructure and some industrial applications. So in the last 3 months, where we have seen such a high growth, it's a mix and match of all the 3 segments which have contributed to this demand. The housing has done well. The commercial buildings have done well, and also the infrastructure. Over and above, we have focused on some of the value-added products which have grown much faster than the overall growth for the quarter. We have been able to take market share away from some of the small organized players and the unorganized players also. And of course, the branding which we started last year has started to benefit us in a big way, and we hope that we could have this sustainable growth going forward.

Is there any aspect of government ordering which added to the growth this quarter?

Very limited because 90% of our sales are through directed -- are directed through our distribution channel. The government ordering would be very limited in this. So this is all the trade channel sales which you are seeing.

Sir, how many distributors would we have added this quarter? And what is our count now?

So we are above 800 distributors, okay? The addition of distributors is a regular exercise, right, we do add new distributors at the same time we consolidate our old distribution list. So definitely, I mean we would have added 20, 30 new distributors in last 4 to 5 months.

Okay. Okay. Just ex of TriCoat, what will be our EBITDA per tonne now?

So ex of TriCoat, EBITDA per tonne is around INR 3,150.

And what did TriCoat end at this quarter?

TriCoat was INR 6,100 per tonne. On sole basis, we did around INR 3,500.

So TriCoat do -- from these levels of margins, is there further room for improvement, or should we take this as pretty much the base now?

So I think conservatively you can assume that, but I mean one point to note is that TriCoat right now is not running at full utilization. So in next 2 years, when the utilization levels go up, there could be slight improvement in the margins rate.

So TriCoat, what is the utilization we are running at?

So we did around 48,000 tonne in the December quarter, when the full capacity of the company is 2.5 lakh tonne.

We take the next question from the line of Anand Bhavnani from Unifi Capital.

Congratulations for strongly bouncing back. I have 3 questions. One is you did some commercial paper issuance. So I think it was at some discount to the face value, so if you can give me what was the yield to maturity that we offered. That is the first question. And then second question is on the EBITDA per tonne ex TriCoat. You mentioned it's INR 3,150 for the quarter. So there was some increase in steel prices in the quarter, so can you give us a sense of how much of this INR 3,150 would have come from some increase like INR 50 or INR 25, whatever number you can give? And thirdly, if I see your other expenses, they have increased quite a bit. So while the gross margin has improved, the other expenses have also like, taken away a lot of improvement in the gross margin, so is it that we are passing on the benefits through some distributor rebates or something, which is leading to higher other expenses?

Thank you, Anand, for asking the question. In the commercial paper front, this time we have issued the commercial paper at the rate of 6.60% per annum; and it will be matured at the March end.

Okay, but I think we issued it at less than face value, 98% or something, right? So yield to maturity will be close to 8-ish, yes? Am I correct in my understanding?

No.

No. It's 6.6%.

No, but was it issued at face value? Or like...

We have issued at the face value. They have given the money at a discounted -- after the discount that is 6.6% [ per annum ].

[ Funded ].

[ Funded ].

And then the third question, relating to the other expenses. Other expenses are mainly increased due to the change in -- some change in the trade policy. Earlier, we have the [ exports ] policy at the branch and plant level. Now in the -- some -- we have changed to the [ FOR ] basis. That's why our trade expenses is increased in this quarter. And similarly, in the last quarter, some impact is there. And some branding expenses are increased in this quarter.

Okay. So in terms of branding expenses, can you give me that comparison? Like what were the branding expenses in...

This -- compared with the year-on-year, last year's is around 1 crores approx. And this quarter is around 17 crores. And last quarter, it's around 10 crores; and now 17 crore.

Okay, so 7 crore higher branding expenses, right?

Yes, as compared to quarter-on-quarter basis.

Sure. And if I got your freight policy changes correct. Let me just rehash and let me know if I'm understanding correctly. So earlier, when used to sell -- you used to sell at a price ex factory levels. Now you sell at a price which includes the freight and delivered to the customer. So it's a gross price that you sell at. Am I understanding correct?

Yes, you are understanding absolutely right.

And lastly, on the inventory gains, how much of the -- I mean there'll be some inventory gains in the INR 3,150 EBITDA per tonne. So if you can give a sense of how much it was.

Anand, so if you look at the steel prices at the start of 1st October and you compare it with 31st December, steel prices have remained neutral. So this INR 3,150 EBITDA spread which we earned excluding TriCoat doesn't include any inventory gain or loss.

We take the next question from the line of Rahul Jain from Credence Wealth.

Congratulations on a wonderful set of numbers. Sir, you have done fantastic volumes at 4.8 lac, but given this quarter, you had extended range and also some kind of disturbances in last 10 days of the quarter, specifically in Delhi and the Northern side of the country, which included UP also. So was there some impact on volumes because of these 2 things? And accordingly, can we see a much better volume -- can we see better volumes coming in the next quarter compared to the third quarter?

So Rahul, if you look at the 3 months October to December, October month was similar to what we had achieved in the second quarter. The volume sales ramp-up happened started from November onwards. So last 2 months were quite good. And yes, going forward, we may have better volume growth than what you've seen in the third quarter.

So absolute volumes of fourth quarter can be better than the third quarter.

[ We won't be ]...

We wouldn't like to comment on this, but endeavor is to achieve better.

Sure. Sir, what was the approximate tonnage in terms of inventory as on quarter end? And also at what rate this inventory is being valued?

Quarter ended December, the inventory was around 1.5 lakh tonnes. And since there was no movement in absolute prices from 1st October to December, so technically the stock got valued at the base price only.

And the current prices will be a bit higher than your 31st December rate?

Yes.

Okay. So is it also precisely the reason why our overall realization per tonne in the current quarter has been lesser than the previous quarter in spite of the fact that in product mix or percentage volumes some of our higher-priced products, which include [ GPG ] and Apollo TriCoat, were higher as compared to quarter 3 -- quarter 2, sorry?

As Anubhav earlier -- just now said, that October was [ fully ] like what it was in Q2. So we had only 2 months in the quarter wherein demand and other factors improved, so November and December, in these 2 months. October was as bad as Q2. November, it started improving. So only 1.5 months the scenarios improved, and that is why this improving results achieved.

Sure. Sir, in the last quarter, you had mentioned about reduction on the interest cost in the next -- second half of the current year and -- but we are not seeing that. The interest cost is a bit, almost flattish or a bit higher than the previous quarter. So you also mentioned about debt being reduced by almost INR 100 crores. So can we -- if you could give us some kind of color on what kind of debt level do you expect by March end. And do we expect an interest rate reduction in the next 2, 3 quarters to come?

So Rahul, I mean if you look at the debt levels, definitely they have come off, right? We wouldn't like to give any number what we look at March 2020, but our 2 main parameters are debt-to-EBITDA and interest coverage ratio. You have -- you would see that they have been constantly improving quarter-on-quarter. And Q4 FY '20 also, you will see that both debt-to-EBITDA and interest coverage ratio will improve.

Sure, sure. Just a small observation, sir: In your presentation you have mentioned number of plants at 10 versus 11 in the quarter 2. And at one situation -- or at one place in the presentation, it is mentioned 11 plants. So can I say that, that 10 would be an error?

No, 10 is not an error, actually. There has been a shifting of plants at Ghaziabad, which has moved to plant #22 from A2. So in -- on a consol basis, we have now 10 plants running, [ less than 11 ] earlier.

We take the next question from the line of Aashish Upganlawar from Investor (sic) [ InvesQ ] Capital.

Yes. This is Aashish from InvesQ Investment Advisers. Sir, since we don't have a separate call for Apollo TriCoat and the business is kind of in an early mode basically, so can you just tell us some data on how the demand trends are reaching, how the different products are doing? And what's our expectation going forward over the next 2 years, how this can shape up?

So Aashish, if you look at TriCoat, which we started in March of 2019. There are 7 products which we are working in the portfolio. So all these 7 products were being produced in India for the first time. They were all new concepts. And what we have seen in last 7, 8 months is that the ramp-up of these products -- or the acceptance of these products have been better than even what we thought, okay? So some of the products like Chaukhat, Signature, Elegant and Plank -- these 4 products have ramped up quite well. These are all products with new applications which the market, the consumer, our channel partners have liked a lot. And these 4 products are running at 70%, 80% utilization already. Now the focus is on launch of next 3 products, which are TriCoat, scaff and alpha. These we should launch in the next 2 quarters. And like I said, that TriCoat -- the utilization level for the first products is already at 70%, 80%. And for the whole company, we did 48,000 tonne in the third quarter, with capacity of 2.5 lakh tonnes. So next 2 years, our internal target is to take this utilization level at 90%, 100%.

So any softer aspects that you could tell us? Because we are still not able to gauge the potential that you are trying to gauge here, I mean as the business develops and -- because the early feelers on what the dealers are experiencing on the ground or what the ultimate consumers are kind of seeing as a differential to the existing thing that they might be using. So any qualitative stuff will be helping us in terms of gauging the potential of these products actually.

So I mean on this call we can, I can talk about like 2 products which can give you a fair idea. So one is Chaukhat. Okay, right now, on a monthly basis we are producing 4,000 tonne of Apollo Chaukhat. This consists in 2 lakh Chaukhats per month, right? So it's a full replacement for our wooden product which is environment-friendly, fire-resistant, cheaper in cost, so -- and termite-free. So the end consumer, the household owner, they are already attracted towards this product and that's why the demand is good. So how we look at this market is, that in a small 2-bedroom flat with 700 square feet of area there are at least 7, 8 doors, okay? So it can be a huge market. And Chaukhat, right now majority of the sales are coming only from the Northeast. So as we go pan-India, the demand should continue to remain strong. Number two is signature. It's a designer pipe which is being used in homes, in offices for the furniture and other small tube applications. So I mean these are the 2 softer aspects, and then in detail we can have an offline chat.

Okay. One last question. Somewhere in the presentation were mentioned a 40% market share. So I couldn't read what that meant. And is that APL Apollo Tubes' market share in the ERW pipes? Or it's the incremental market share? I couldn't gauge. And then what is the kind of outlook? Because with that market share you probably may not be able to grow at the pace that you have been growing. Is the reading correct, or I'm absolutely wrong on these counts?

So how we have segregated our market is the structural steel tubing market, which in India is 4 million tonne. Our run rate, looking at the first half, 9 months, is around 1.6 million, 1.7 million tonnes. So we have calculated market share on this basis. We are not into water transportation category. Hardly our sales are into that channel, so it's not -- it doesn't make sense to include the whole ERW tube market to calculate our market share.

Okay, but do you still think that the runway for growth for Apollo is pretty long still, and the growth rate may not come off significantly [ in the near term ].

Yes. So I think double-digit volume growth and superior EBITDA growth are possible in the near future.

Next question is from the line of Dhruv Jain from Ambit Capital.

Sir, great set of numbers. Sir, just had 1 or 2 questions. Sir, with respect to -- you mentioned that your higher share of dia pipes materially contributed to your EBITDA margin expanding. So sir, if you could just quantify what would be the share of dia pipes in Q3 versus Q -- or Y-o-Y and Q-o-Q exactly.

So Dhruv, the large-dia pipes are above 150 by 150 mm. But the whole industry, this will not be more than 3%, 4% of the overall volume, but for us it is like 7%, 8%. The idea is to grow this to 15%, 20% in next 3, 4 years. For this, we have to create market. We have to make architects, engineers, developers aware about the benefits of using steel tube versus TD or the RPC structures. So this campaign we would work on; and we expect the contribution to grow significantly over the next 2 to 3 years.

And sir, in terms of EBITDA, this would contribute higher, so what will be the EBITDA number?

So the EBITDA spreads are like 2x higher than what we get on the blended basis.

Okay, sir. And in terms of, sir -- I mean, if we look at CapEx, you guys have not announced any significant CapEx, while you have seen -- you have a significant capacity yet to be utilized. But if you sustain the current momentum, that would -- you would need CapEx at some point. So any thoughts there?

So I think the first thing first is that, as an internal policy, we want to keep our CapEx spends at 20%, 25% of the EBITDA on annualized basis, number one. Number two, like we did 4.8 lakh tonnes in third quarter. The annualized ended in 19 lakh tonne. And our capacity is 24, 25 lakh tonnes, so we are still 15%, 20% away from the 100% utilization. So I think for next 12 months, we can be slow on the CapEx spends. And if demand -- if there is actual pull from the market, if the volume growth is higher than the double digits, then we may have to go ahead with some CapEx spends, but I mean it won't be more than 20% of the EBITDA at any given point of time.

Next question is from the line of Bhavesh Chauhan from IDBI Capital.

Sir, congratulation on a great set of numbers. Sir, most of my questions are answered. Just on the CapEx: I mean now that for the next 12 months we don't have any major CapEx, should we assume that our debt level should come down? So we'll have maybe increasing dividends by -- probably by the end of FY '20, when we might -- we should have INR 150 crores, INR 200 crores debt lower?

So if you look at FY '20 how it is panning out. Despite such high CapEx spends, the 2 acquisition which we made, with volume growth of 35% in the first 9 months, we have been able to reduce debt. So you can already appreciate the kind of operating cash flows which our business is generating. So in simple words, if the CapEx intensity is low, if there is an acquisition, debt level should come down.

Okay. And on the volume front, can we expect maybe 14%, 15% volume growth for FY '21? Or is it too early to comment?

So like I said, we are looking at double-digit volume growth and superior EBITDA growth.

We take the next question from the line of Urvil Bhatt from India Infoline.

Most of my questions have been answered. Just some follow-ups on CapEx. So I mean -- and we had guided for INR 200 crores in FY '20, so I mean how is the run rate? And what is the guidance for 4Q and '21? And at what stage will we look at further expansion or acquisition? I mean because you guys might be going to the drawing board sometimes in '21 because at that -- around that time, you will be reaching almost 90% utilization. And also wanted to get a sense on how are the Jan volumes so far. I mean is it -- I mean so just want to understand whether 3Q was largely a restocking, or there is some actual recovery in ground demand. And also if you can give some sense on advertising and branding expenses going forward. This quarter, we did INR 17 crores. So I mean what will be the guidance going forward?

So Urvil, on the CapEx front for FY '20, we have already spent around maybe more than 80% on -- of the total outlay, so Q4 will be minimal. Number two is CapEx guidance for FY '21, '22. So like I said, I mean we are still 12 months to 15 months away from placing the 100% capacity utilization on annualized basis. If there is natural pull from the market, if macro factors do play a positive role and help us grow our volume at high rate, we may have to think of CapEx. That being said, we have a large land parcel in Raipur which we have already bought, so putting 1 or 2 mills won't cost us much, right? And there could be some CapEx going forward towards the high-diameter tubes, towards to value-added products, but we are -- that's still on the drawing board. And we need to see that we have a sustainable, consistent performance which we saw in Q3, it gets repeated for next 2, 3 quarters. And then our debt level will be low. And any given point of time, we [ wouldn't ] like to spend 20%, 25% of EBITDA towards CapEx. So we will stick to that.

Okay. And on the volume, are you seeing a very good Jan or a very good start to 4Q? Or it's a bit tapered down from November, December levels? I'm talking about the ground-level demand.

Jan -- the Jan ground-level demand is still robust. And the current -- and then the trend shows that this would continue at least for the next few, 2 quarters.

That's very encouraging. And some comments on the ad expenses going forward?

So ad expense. I mean in Q3, they appeared higher because the Q2 were low, okay? So we stick to our INR 40 crore, INR 50 crore annual spending for FY '20. And probably, we are getting encouraging response from the branding, and we are already seeing this in our numbers. Now we may decide to spend similar amount or maybe slightly lower amount in FY '21.

We take the next question from the line of Saurabh Patwa from HDFC Mutual Fund.

So I wanted to understand one thing. Sir, the realizations in the quarter are very similar to your historical realizations in Apollo Z and Apollo Build, but the margin, EBITDA per tonne, is significantly higher. So any particular reason for that? Though, as I believe, since you are selling it to the consumer base, so that would have been building realization itself.

So Saurabh, the TriCoat series is not exactly same what you see in Apollo Z or Apollo Build, okay? There is more value add, yes. That's why the spreads are slightly higher there.

Okay...

So those are not being exact similar products.

I understand, that's what I'm saying. So your -- but your realizations are pretty similar, so you -- I would assume that gross margins would be significantly higher. Correct me if [ am I ] wrong.

Yes, that's right. And also, see, I mean APL Apollo will be selling Apollo Z, Apollo Build in all the 4 markets, right? So we may have a premium in some markets. In some markets, we may not have the premium, so that's why there will be some difference in the margins between the 2 products.

Yes, okay. And this Apollo Standard volume decline is in line with the strategy, as they are lower-margin products, yes.

There is no decline in Apollo Standard volumes actually. It has grown almost 25%.

I mean the share in the total volume. So it used to be like 25% a few years back. Those are not doing more.

There -- yes, but it does because it's [ normal average are ] not in our focus actually.

We take the next question from the line of Amber Singhania from Asian Markets Securities.

Congratulations on good set of numbers. Just a few things I wanted to understand. One, until last year, we used to give scrap, coils and others volumes separately, which we have not given since last 3 quarters. So is it part of the current volume? Or is it -- that number is separately as a volume?

No, that's not a part of the manufactured volume. And that is a part that comes in other operating income.

And how much is the volume, sir, if you can share, for the 9 month?

It's around 5% of the sales volume, manufactured volume.

On an average, you can take it as 5% [ annual sales ].

Okay. Secondly, sir, can you share the current cash and bank balance overall?

So we have given debt figures in the presentation. And beyond that, I mean we can take it offline.

Sir, why I wanted to understand is, like we have INR 75 crore of infusion from promoters. Plus, we have a very good cash flow in the quarter. Despite that, we have -- our debt repayment is only to the tune of INR 100 crore. And CapEx is also pretty low as you mentioned. So I just wanted to understand. Is it the cash balance is pretty high as of now? Or where exactly the cash is getting utilized on that part?

So the cash is fully invested, in the working capital and in that CapEx, so -- and there won't be much difference between the gross debt and net debt.

Okay, okay. Thirdly, sir, 9 months, the tax rate is 10.3% as of now. So for the full year basis, what will be the guidance on that part? Do we see a very high provision on Q4? Or overall tax rate will be somewhere around 10%, 15% kind of thing or...

First of all, this number, you are getting this 10% because of the skewness in Q2, where we had the credit, okay, when every company had to adjust as per the new tax norms. So [ by ] Q4, we should be paying 25%.

25%, okay. Sir, just last question from my side is on the DFT side. How are we seeing the overall panning out of DFT since now 3 years since we rolled out, where exactly we see the margins, EBITDA per tonne getting stabilized on that part? Or what kind of further scope of margin expansion is there in this particular segment asset? If you can just give some light, some color on that.

So DFT, I mean we launched this product 2 years ago. It has ramped up quite well. There is good acceptance in the market because of the superior quality, because of the sharpness in edges and the customized sizes which we have been able to provide to our customers. So as of now, we command a very large market share in this category. We have started to charge a premium from our clients. And probably next few quarters you will see there is -- we are able to attract more premium in the DFT product category.

For EBITDA per tonne guidance on overall basis will be around 3,500, sir, for next year?

So next year, our guidance is double-digit volume growth and superior EBITDA growth.

We take the next question from the line of Vikash Singh from PhillipCapital.

Sir, congratulation on very good set of number. Sir, I just wanted to understand on the inventory loss or the gain part. You said that there is none, but if I look at the HRC prices and basically you keep roughly 1 month of the inventory, then the average price should have been significantly lower for this quarter as well, what we have seen some of the steel companies' results. I just wanted to understand how -- was we have built up a significantly higher inventory in the last quarter? Or what is the -- why is -- there is -- no difference could be seen in this quarter?

So we said there is no inventory gain or loss in the current quarter. October saw a decline of INR 1,500 per tonne. November saw an increase of INR 500, and December INR 1,000. So on a net-to-net basis, there was no increase or decrease in [ this during ] the quarter.

Okay, okay. And so would we expect some kind of inventory gains going forward, since the prices have ramped up significantly? What kind of price increase we have seen so far since December?

Whatever price increase is there in our input prices, we would normally pass it on to the consumers. There may be a time lag, but it is passed on to the consumers.

Okay. And sir, just one thing more: Last 1 year, we have acquired a couple of assets. So ex of that asset, what is our like-to-like volume growth for this quarter?

For Q3, like-to-like volume growth is 32%.

32%. Sir, that's all from my side. My other question has been already answered.

We take the next question from the line of Rohan Gupta from Edelweiss.

Sir, one question on is rising steel prices. So we have seen historically the scrap realization which generally remains close to INR 27,000, INR 28,000 per tonne. The moment steel prices goes up above INR 40,000, so we'll start seeing the immense pressure from the unorganized market. Do you see that something has changed in the current scenario? Or that still remains a threat with the rising steel prices?

You are absolutely right that the scrap prices move only in accordance with the secondary steel prices. They have got nothing to do with primary steel price movement. So in the recent past is secondary steel prices have also moved in the positive direction. With the derivatives phenomenon, the derivative prices are different.

So you're saying that scrap realization have moved up. The scrap prices in the market also have gone up.

Right. Yes. Scrap prices are related with the secondary steel prices movement...

Right.

In the current scenario, even secondary steel prices have moved.

In the positive direction.

Yes.

Okay, but sir, has been the general scenario because -- scrap realization, even though it's linked with the secondary steel prices, we have seen that they generally don't go beyond INR 27,000, INR 28,000. And then this is an unorganized market which starts coming back in a very big way as soon as...

So absolute numbers don't define anything actually. If you say INR 27,000, INR 28,000, then the lower range may be INR 18 and -- or INR 19 also. So absolute numbers is a subjective thing. It will change every day or every month or every quarter.

It's a very wide range actually.

It's a very wide range.

Okay. So in general, do you see that the unorganized markets have been constantly losing the market and that's where we have been marking a -- such a strong volume growth?

I think this phenomenon is across industries.

The move from unorganized to organized.

Yes.

Sir -- and so it would be fair to say that in many other industries, but yes, definitely it's working in your industry. Sir, second is on this brand expense. You mentioned that -- though this year you're looking at roughly INR 40 crore to INR 50 crore spending on brand, but you also mentioned quickly that next year you're looking lower amount. Did I hear you rightly, and is that so?

So what we said is, it won't be higher than that. It will be same or slightly lower, because now we know that -- which all categories we have to focus. We tried 2, 3 attempts last year. And we know which categories have performed best for us, so we want to have more focused spending on those 2, 3 categories.

Okay. And just as last thing. Sir, essentially I travel to UP across the roads on 500 to 800 kilometers. I saw a great amount of visibility of your Board and holdings. Just was wondering, is there onetime event in UP you have running any campaign? Or is it nationwide phenomena which is there that such a great visibility across some, I mean, roads or even the interiors you are having?

It's a nationwide campaign, but as a part of our branding strategy, whatever we do, we have some focused campaign also.

So were you running any special campaign in UP? Because I saw that great visibility there. I'm not sure about the other markets.

Not particularly UP, but we do it as part of the UP also. In other instances also we have done a similar thing, but we -- when I say that we have done our campaign as a national part, we have done everywhere. And at certain areas wherein we have some strategic plan, we have done it very focused and at a little greater depth.

We take the next question from the line of Pratik Singhania from SageOne Investment.

Congratulations for a good set of numbers. My question is pertaining to the average inventory that a dealer distributor generally stocks. So what is the inventory level that he will be having on a normalcy when the prices won't move up or down? And what is the current restocking that he would have done? Because obviously when the prices go up, he would be buying more than what actually in the normal scenario he would be doing, just to get some bit of inventory gain. So I want to get your sense on that.

Normally, our dealers have stock for 15 to 20 days of his monthly sales. And any price movement, he'd -- normally he has that flexibility to switch over that 5 to 7 days of inventory. Because beyond that, if it reduces beyond that, he can already able to service his customers. And if -- provided he -- if he's got a price to increase, he wouldn't be short of what he has.

Okay. So basically -- because the prices have gone up, so do you think that he would be only at, say, 20, 21 days? Or it would be much higher, say, 30, 35 days of inventory, that he would...

As I said, normally, any -- if you take it on an average basis, people will be short of working capital to increase their inventories even beyond that, even if they want to do.

Okay, okay. So basically, if this -- even though price, say, stabilizes at a particular level, then this 25 or whatever excess inventory that he is having, he might reduce that further to the normal level of, say, 15, 16 days what you mentioned.

But then there is a minimum inventory beyond -- below which he cannot work. So that, this minor tinkering is a regular phenomenon that a dealer does at his own wisdom.

Next question is from the line of [ Ankit Gupta from Bamboo Capital ].

Congratulations for a great set of numbers. I wanted to get a sense on EBITDA per tonne for the quarter. I think excluding TriCoat, we have done, INR 3,170 per tonne. And if we look at in this quarter, we haven't had any impact of inventory loss or profit. So despite increasing the ad spends, plus focusing more on higher-value-added products, we seem to have been below our average EBITDA per tonne of around 3,400, 3,500 per tonne this year than before and without any impact of inventory loss or gains. So I just wanted to get a sense on why did we report lower EBITDA per tonne during the quarter? And how do we see trend going forward?

So the last quarter, October was -- as we've said, that October was as bad as Q2. So only in November the demand started picking up and the market sentiment improved. So we got only half of the quarter wherein we had our better EBITDA margins. So on a [ stand-alone ] basis it is INR 3,150.

Okay, but do you think we're going back to 3,400, 3,500 EBITDA per tonne in going forward, given the kind of demand we are seeing? And then not even factoring the impact of inventory gains on this because of increasing steel prices.

Well, that's a fair assumption to make on...

Okay. And wanted to get a sense on how much are the acceptances as on December 31 in our balance sheet? Or if you can give us the data of gross debt, plus acceptances, as on 31st December 2019. And how much was that amount as on 31st December 2019?

So can we take this offline, please?

Sure, sir. So I just wanted to get a sense whether the trend is -- also will be similar to our gross debt decline that we have seen of INR 100 crores. Or there has been a [ change in that ].

Yes. It's in similar trend on quarter basis if we calculate 30 days inventory, 30 days debtors and 30 days creditors. So net-net, we are like 25, 30 days of working capital cycle.

Next question is from the line of Dhaval Shah from Girik Capital.

Sir, my question is on the government receivable. You have seen a good improvement compared to FY '19. So a, what is this, the improvement is driven by? Is it largely to do with the channel financing, what we have been doing and [ increasing that ]? And b, in terms of the government receivable, what is the situation? How does it stand? Yes, yes, firstly these 2 questions.

So we can look at our collections, which have improved significantly in last few quarters or probably years now, it's because, of course, channel financing is playing a small role here, the [ nongrowth ] -- the core channel financing, but I think the broader point here is that APL Apollo now commands 40%, 50% market share in the structural tubing category, right? So any distributor who needs to have a full range of structural tubing, he has to have APL Apollo as a brand in his [ go-down ], right? So we are able to command better payment terms with our distributors, and that -- which has helped us bring down our overall collection days.

Okay. So the improvement of 6 days compared to last financial year, what is it driven by?

I'm sorry?

Working capital at 28 versus 34. For the 9 months, it is 28 versus 34 for the last entire year. So the reduction is driven by which component?

Better collection and obviously higher or better inventory management as well.

Got it. And on the receivables from the government side, how is the payment terms? I believe government is back in the market with large orders for this Water For All scheme and also for the other infra. What is -- please share some thought on that.

We don't have any exposure to -- directly to the government agencies. Almost [ all contract ].

Mostly via contracts...

Via intermediaries, with -- normally in certain intermediaries to do government businesses, almost [ all contracts ].

And sir, second question -- got it, sir, great. Second question is given over past few years we have been building brands and trying to strengthen your B2C connect. So any plans to get awards and increase your exposure on the B2C side by having physical presence with the stores? Any thoughts on that? I mean given you are increasing your product by becoming a more -- offerings are increasing towards building material category. So any plans to be on the B2C completely?

So we may not want to do it directly at the first go. We are talking to some of our distributors who are willing to have APL Apollo experience centers in respective cities. So probably we can follow that model first, and if it works then we can think of having our own experience centers, but in the beginning we will -- like to go through our distributors who are willing to [ stay ] on these setups.

Any inorganic plan?

No.

And your next question is from the line of Shailee Parekh from Prabhudas Lilladher.

Heartiest congratulations for a brilliant set of numbers. I had just one question. Globally, we have seen that a lot of -- that steel manufacturers often tend to forward integrate into manufacturing pipes. Do you see that kind of a scenario play out in India? Or do you see any kind of a pertinent threat from something of that kind happening here?

So, sorry? I mean we are not seeing any suspect we're being followed by steel producers in India, globally also. I mean if you look at the large tubular companies, they are not the steel manufacturers or steel producers, number one. Number two, steel is used in so many wide application that [ by ] only structural tubing they could go into precision tubes. They could go into automotive tubes. They could go into stainless steel. They could go into API pipes. These -- and these all categories are better margin than what we are making in structural tube today. So for a steel producer, probably who are already making 15,000 per tonne EBITDA kind of spreads, they would like to do more value add into other applications. Globally, I can name 4, 5 top steel tube producers who are not -- which do not belong to any steel manufacturing group.

Okay. So you haven't heard of anybody, any steel manufacturer in India wanting to set up a capacity, or following into a similar category that you are in.

Well, so Tata Steel already has, okay. Ocean's -- Ocean Power also has a small tubing unit, then JSW as well. So I think this has been the structure for many years now.

All right. So yes, I just wanted -- because I mean I'd heard vaguely that there is a certain group that intends to start to follow into a similar -- into the same segment. And I was just wondering because that would tip the scale, and -- I mean it could tip the scale. And I was just wondering if there was any kind of -- if you all have heard of...

No, we haven't. And competition is always welcome. They might help us expand the market. So structural tubing market in India, like I said, is 4 million tonne on a steel consumption of 90 million tonne. So it's only 4%, 5% of the overall steel consumption. Globally, this average is 10%. So if India doubles its steel consumption in next 10 years and the structural tubing as a percentage of market grows to 10% from 4%, so we are looking at 4x size the market today. I mean we welcome the competition if they help us grow the market.

We take the next question from the line of Ankit Gor from Systematix Shares.

Yes. I have 3 questions. We saw improvement in our profitability in terms of EBITDA per tonne. Were you able to quantify trend-wise what was the -- our -- is contribution coming from DFT or probably CRFH mill? Or any logistic costs which we might gain because of Shankara plant taking over, introducing logistic costs? So does these three factor also pricing in? And how much that would be.

Ankit, the best way is to look at our presentation where we have given the product-wise EBITDA generated, okay? So you will see that our value-added products like Apollo Z, Apollo Build, Apollo Structural, which have contributed the growth, they are better margin. And that's what is driving the margin improvement.

But how about CRHF mill? We probably have set up mills in -- 3, 4 mills...

So CRHF is very new, Ankit, okay? I mean yes, it has started to contribute, but very little. So probably next 12 months, when the volume ramps up, you will see the benefits coming out in a major way. Right now, it's very minimal.

So you have the stripping mill for -- in how many locations? And do we expect to expand to -- across plants? Or how it is?

It is at 2 locations as of now, North and South.

Okay, okay. And any major logistic savings coming in from Shankara plant? Or that also yet to come?

It's negligible.

It's negligible. It was we had several -- or we have several plant in the South and they have also [ probably contributed ].

Okay. And that -- particularly, that plant is at what capacity utilization now, at 2 lakh tonne capacity, which used to be...

We are doing around close to 10,000 tonnes per month.

Okay, okay. And secondly, with regards to large-dia pipe [ thing ], how big is the market, overall India market, for large-dia pipe? If you can just give some insight about it.

It is the fastest-growing segment in the structural tubing industry. And globally, all the developing nations, the market is quite large, or say 25% to 30% of the structural tubing industry. Here in India it is still at 5% to 7%, so there is a great scope of improvement going forward.

But if you say tonnage-wise, does it come under structural tubing? Or it's completely -- that comes under the 9 million, 10 million tonne of overall ERW pipe market? How do you segregate...

[ It is part of ] is very much part of the structural tubing. High-diameter tubes, you will only require to make buildings, to make skyscrapers, to make bridges, to make railway bridges. So this is very much part of the structural tubing.

So that 4 million, 5 million tonne in this large dia would be how much of that number?

Less than 5%. For India, it will be like 3%, 4%, not even 5%.

Okay. And next 3 with regards to other expenses. After accounting in the change in trade policy and higher branding expenses, what could be the run rate, quarter run rate? Can we expect this 150 [ CRs ] should be the quarterly run rate? Or how do you see that?

So I think...

Linked to volumes actually.

So one way, this is linked to volume. And I mean you will see that our EBITDA growth is superior than the volume growth. So I think that's how you should look at the company's guidance.

Okay. And lastly, with regards to -- last call, we were talking about some royalty or some arrangement with TriCoat in terms of -- since the same distributors selling, mostly same distributors selling our TriCoat product, do we able to come down to some conclusion in terms of what sort of royalty payment -- or some arrangement in terms of royalty or some commission? Or how it is?

[ You can take that, Anubhav ].

See, TriCoat is APL Apollo's baby right now, okay? We hold 51%. We treat this company as like fully consolidated. If you'll see, there is a line-by-line consolidation. So we are not talking about any such arrangement with TriCoat.

Okay. And mostly, the distributors are 80% common. Can we assume that way, TriCoat and APL Apollo?

I think it will be like 50%, 60%.

Okay. And remaining 50, 60 which we have developed over the years, over the months, that will...

Right. Remaining 30%, 40% will be quite new.

Okay. And as you are speaking, the majority of our volume must be from the existing APL Apollo guys. Just to clarify.

Yes, 50%, 60% are from APL distributors.

Next question is from the line of Dipan Mehta from Elixir Equity.

So what -- any thoughts on merger of Apollo TriCoat to the company considering its similar products? Maybe you can get better synergy and even from value addition -- from creating value for minority shareholders of APL Apollo.

See, TriCoat has ramped up quite well in last 3, 4 quarters. The ramp-up has been better than our expectations also. APL Apollo owns 51% in TriCoat. That, this is the fact. On future course of action, I mean we wouldn't like to comment right now.

So is it on the -- I mean, are you considering at some point of time to -- for merger?

I can't comment now.

We take the next question from the line of Ronak Vora from AUM Advisors.

Sir, can we go above 100% utilization currently?

Above 100%. So how we are looking at it is that we did 4.8 lakh tonne in December quarter. If we annualize it, we reach at 19 lakh tonne, which is still lower than the rated capacity of 25 lakh tonnes. I think depending on the size, the SKUs -- because we have 1,100 SKUS, right? So it would be fair to assume that we can operate at 90%, 95% at some point of time, but if we keep on making only one product, then yes, we can hit 100% utilization but not with the SKUs where we are targeting [ in ].

Next question is from the line of Karpit Shah (sic) [ Arpit Shah ] from Stallion Asset Management.

Sir, this is Arpit Shah from Stallion Asset. I just wanted to understand, what was the cash flow from operations for 9 months and for H1? Because there was a difference of about INR 40 crores, INR 50 crores since we had a really good quarter. And our working capital cycle was actually down. So for 9 months, it was INR 259 crores, and for H1 it was INR 305 crores. So what was the difference for? Why was it a reduction?

TriCoat...

This is because of the merger of -- I mean the line-by-line consolidation of TriCoat, okay? Because for TriCoat this is the first year, okay? So we start from minus 1, year minus 1, right? So any addition is all negative impact on the cash flows.

So what will have been comparable for H1 FY '20 and for 9 months FY '20? Or what will be the comparable, sir?

We'll take this number out. Meanwhile, moderator, can you put another question? And then he can come back when we have the answer ready.

Sure, sir. We'll take the next question from the line of [ Dev Kumar Swamy ] from Systematix Shares.

Sir, this is [ Kumar Swamy ] calling from Systematix. I have a question regarding the realization across the products. That is hollow section and black round pipes. So could you please state those realizations?

Sorry. Come again?

Sir, realization across products like hollow section, black round pipes, GP and GA.

Right. So we have...

What is the realization for the quarter?

We have given this in our presentation. You may refer to Slide #16.

Next question is from the line of Aashish Upganlawar from Investor Capital (sic) [ InvesQ ].

Yes. Sir, I just wanted to ask. In Apollo TriCoat we've mentioned that the working capital on net basis is about 20 days. So is that all? Or that doesn't take into account the other parts of working capital, except for the core working capital.

Yes. So this is core working capital. If you include everything, it is around 28 days.

So should we assume that, that will be the normal working capital for this business as such?

Yes...

For 30 days?

Yes, 30 days. That's right.

Okay, sure. And sir, on the other participant's question on merging TriCoat with the parent company. This product basket is entirely different and it operates probably very differently, so is it fair to assume that you'll be treating it as a different entity? Because that's very important from a shareholder of TriCoat point of view. I mean just in case there are plans to merge it [ or ].

So like I said, no comments on a merger, but yes, the company is different. It is separate. Products are different than APL Apollo. And it is our baby. We own 51%. This is the structure. I mean no comments on acquisition, merger. I don't think it makes any sense to talk today.

Yes. Because there will be a thought process of keeping it separate or combined, which will define the road map, whether you, I mean decide on anything else.

Yes. So right now, there is no internal thought process.

Thank you. Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

Yes. So before that, we'd like to address the question on the cash flow excluding TriCoat. So for the September quarter, the operating cash flow was around INR 300 crores. And December also it is around similar levels, around INR 300 crores. Then we had good cash profit, but there is slight decrease in the creditors. And we paid some advance money to the steel producers to buy raw material. That's it. And thank you all for your time, for standing by. We'll connect for anything, or you can reach us offline.

Thank you very much. On behalf of APL Apollo Tubes Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.