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

Ladies and gentlemen, good day, and welcome to the APL Apollo Tubes Limited Q4 FY '20 Post Results Analyst Conference Call hosted by AMBIT Capital Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhruv Jain of AMBIT Capital. Thank you, and over to you, sir.

Thank you. Welcome to the APL Apollo 4Q FY '20 earnings call. We have with us the entire management of APL Apollo Tubes here today for the earnings call. Over to you, sir, for your opening remarks.

Thanks, Dhruv. Hi. Good afternoon, everyone. Thanks for dropping by. So from APL Apollo Tubes, we are 4 of us, Mr. Sanjay Gupta, the CMP; Arun Agarwal, the COO; Mr. Deepak Goyal, the CFO; and myself, Anubhav Gupta. So first of all, we'd like to apologize for rescheduling this call, which was planned last week. Actually, there were some cases -- virus cases at our auditor’s office so that's why we had to shift the Board meeting and so forth the call as well. So this call, we'd like to discuss 2 main things: #1 is our Q4 FY '20 performance; and also #2, the Q1 FY '21 performance, which we released the performance this morning on the exchanges. So if we look at the FY '20 results, there are 4, 5 key highlights, which I'd like to discuss. So in general, there was 22% sales volume growth, which came from all the 4 product categories for APL Apollo Tubes. Our EBITDA growth was 23% at the group level. Despite the [indiscernible] prices, our EBITDA spreads were pretty much stable. This shows that the company is moving away from the fluctuation shops, which come in form of steel prices. Our net profit growth was 60%, which was aided by a stronger EBITDA, lower interest costs and, of course, benefit from the lower taxation. The ROE of the company jumped to 21% from 17% last year. And this is 1 big satisfaction at the group level, which we got because over the years, we have always maintained a 20%-plus ROE. Our ROC also improved marginally to 21% from low 20%, so that is also important that our target ROC, which is 25% plus, we move towards that. Next is a big improvement in our working capital cycle. The overall net working capital cycle days reduced to 20 days from 28. Again, we worked really hard to achieve this number. Over the last 2, 3 years, if you see our working capital days have been improving year-on-year. And this year, there was a substantial improvement. This was on the back of better collections, low inventory and lower freighters as well. Despite -- for the full year, we spent INR 450 crores towards the organic CapEx and 2 acquisitions, which was Shankara, #1 and #2 Apollo TriCoat. Despite INR 450 crore CapEx and investments, we could reduce our debt marginally by INR 26 crores. This was because of the strong operating cash flow, which was to the tune of INR 510 crores versus INR 360 crores. So this is the most heartening number for us that the company has been able to generate such a strong operating cash flow. And as the CapEx intensity goes down, we shall reduce our debt with great intensity. Last year, we also kickstarted our branding exercise. We spent almost INR 50 crores for the full year. And we are very satisfied the way the campaign went. Obviously, due to coronavirus, there has been a speed breaker. But last year, our market share gains, our sales volume growth, our premiumization, this all suggest that the branding campaign has been successful. And once the things normalize, we will definitely want to go back to the same intensity, which we started last year. We also released a few Q1 FY '20 numbers, right? So if you look at the sales ramp-up in the June quarter, it has been very strong. We have achieved almost 60% of volume, which we had done in Q4 last year and Q1 of FY '20 as well. So the team has worked really hard at our plants, at our sales to achieve this number. We were the first company in structural tubes to start our facilities from 22nd April. And by the first week of May, all our 10 clients were up and running. So hats off to our production and operations team, which during the crisis, they started our plants so quickly and efficiently. And we got major benefit from the lower competition because we were up and ready. Our tubes were already available in the market. So we beat the competition strongly. And definitely, our market share is much higher than 40%, which we achieved last year. Hopefully, these market share gains will continue as things stabilize further. Also, you would see that we have done great work towards the debt reduction, which is around INR 375 crores versus INR 380 crores. So the primary reason for this is very efficient debtor management and inventory management as a -- when the prices started, the main message from the Chairman was that we need to work on 5 things, right? So the whole team worked regressively on achieving those 5 goals. Number 1 was that we have to have much lighter balance sheet when we come out of the crisis, so that journey has already begun. Number 2 was that we need to cut down our fixed costs, which were nonessential in the system. There were 3 main fixed costs for us: number 1 was the employee cost; number 2 was interest; number 3 was the branding. So we rationalized costs at all 3 parameters. Number 3 was to ramp up the volume. Once the market opens up, once the plants start the production. Again, hats off to our sales team without traveling, they could achieve the numbers which you have already seen. Number 4 was the profitability that -- I mean in the current situation when the demand will be so stressful, we need not impact our gross margins to the extent, given that April was [indiscernible] of sales. So we need to maintain the superior profitability also in the system. And number 5 was the CapEx budget, right. Before COVID, we had 2 year CapEx program, which obviously, now we are regrowing for next 2 years. So idea is that without spanning on cash flow, whatever is required to achieve long-term sustainable growth and to keep on growing our volumes in the value-added product category. We should do minimum CapEx, what is required. So these 5 points helped us to achieve numbers, which we are seeing today. And hopefully, we will come out much stronger than before in this crisis. Regarding the guidance for this year, it's very tough as every day, things are changing. So our focus is that our market share should be higher than 40%, what we achieved last year, irrespective of whatever the structural steel tube industry achieved, right? Last year, it was 4.0 million tonnes, and we did volume of 1.7 million tonnes, which was 40% market share. This year, difficult to predict what the 4.0 million tonnes will be. But what we are working towards is that we increase our market share beyond 40%. And in first quarter of FY '21, we are 100% sure that our market share is much higher than last year. Lastly, update on a small city order, which asked our promoter entity, not to participate in the markets for 2 years. This is pertaining to a -- this is pertaining to a small personal investment, which promotors had done in 2008, 12 years back. So we are disappointed with this order as there was no wrongdoing. We are in talks with our lawyers who will suggest advisers that how do we take it forward. So with these updates, I would like to open the floor for the Q&A.

[Operator Instructions] The first question is from the line of Utsav Mehta from Edelweiss Asset Management.

I just wanted some clarity on the cost-saving measures that you highlighted? What is our current sort of monthly fixed costs? And how has that evolved over the last 3 months?

So hello, good afternoon, everybody. I'm Sanjay Gupta. Before COVID, our fixed cost is including interest almost close to INR 20 crores, INR 22 crores. And now we have cut down this cost to -- bring down to almost I think so to INR 14 crores to INR 15 crores.

Okay. And this includes pay cuts to the salary or?

No, no. We have not done any pay cut of salary to a low level of management, up to salary up to INR 50 lakh. We have just more than 50 lakhs of salaries, we have just done some corrections on the both side of the promoter salaries and the senior top management salaries. This, I think, almost this hurt 10 people, that's all. But we -- before COVID, we have the enough capacity. We have a capacity of almost 2.5 million tonnes. Fortunately, after the COVID, there is lots of main power shortage in the system. So we carry with the shortage of the main power. So our salary costs go down because we have the enough capacity, this not hurt us.

Understood. My second question was on the press release that you just released today. The working capital, I noticed, has come down quite meaningfully as the mandate. So is it fair to say that broadly, debtors will continue to track the level of sales that we do through the year?

Sir, what happened earlier, we know this -- we have to done this thing. [Foreign Language] But the trade is going on a speed of 200-kilometer. Everybody is feared. [Foreign Language] But when the things stopped in the month of April, we decided [Foreign Language]. Now we are not going to sell the material on the credit basis, we are going to sell the material on the cash basis. [Foreign Language] It's came out, I don't think [Foreign Language].

The next question is from the line of Madhav Marda from Fidelity Investments.

So my question was, in the presentation, you all have mentioned that building material categories, in general, can decline by 25% to 30%, but structural steel tubes can do better than that. Could you give us some sense on why you think so and why it could outperform the other building material categories?

Yes. So Madhav, that 15% to 20% decline. That is not our number. We took this from our peer building material companies, be it in paints or plywood or cement, et cetera, right? So why we do believe that structural steel will outperform the other building materials, there are 2, 3 factors. Number 1 is that in this whole crisis, if you talk to developers, contractors, engineers, architects, there is a strong will to reduce the prices, right? Structural steel tube provides good alternatives for the conventional construction metrologies, right, be it concrete cement, RCC, be it wood, okay, or be it aluminum. So we are talking to various agencies, right, wherein we are convincing them that steel can replace high-cost conventional products at cheaper cost, it is environmental friendly, okay. So this is what gives us confidence that structural steel will outperform other building material sectors. And number 2, structural steels are used at various stages of construction, right? Right from filing to building the structure towards the end of the construction where there is like home decor, et cetera. So when -- after the lockdown, when the builders, contractors, they started the work, cement and steel structural steel tubes were the first product which they had come to buy, right? And as the construction pick up, today, Lars & Toubro is talking about 90% of their sites, which are operational, 90%, right? So I think the demand will continue to come for tube as various projects reach various levels of completion.

Okay. Okay. That makes sense. And the market share gains that you're seeing can continue? So can we expect any more M&A that can happen during the year? And still what level of net debt-to-EBITDA are we comfortable with to keep the balance sheet if an acquisition at a good price comes?

So see, I mean, if you look at the Q1, of course, I can't talk about net debt-to-EBITDA. But even if we take EBITDA of INR 500 crores in FY '20, which we achieved and INR 375 crore of debt, which we have reported today, so I mean, it is at 0.6, 0.7x, right? And we believe that at whatever working capital cycle we have achieved, why can't it be 0 going forward. And we won't be surprised ourselves if we make it 0.

Okay. So net wise we are comfortable but, say, some acquisition comes and you've mentioned in your PPT in terms of some players being stressed on the balance sheet side. So till what level of net debt-to-EBITDA can we go till and we'll be comfortable at those levels?

So acquisitions, Madhav, see, I mean, we don't want to buy any company just to add the capacity, okay? We have enough capacity available in our system already, right? I think for next 2 years, we may not be able -- we may not want to acquire any company unless until there was a good overprice. Like it's at a 4-way price so that we can cut down the supply, right? We don't need machines, we don't need any brand, okay? Any capacity which will we add, it will be to cut down the capacity, which we have done it, right. So I think any such opportunity will be very small, chances are very low, number one. Number two, the amount will be very less. So I don't think that it will increase our net debt-to-EBITDA number substantially. First target is to become 0 debt as soon as possible.

All right. And then 1 last question from my side. The -- if I look at the Apollo TriCoat volumes in the press release that you've given that has done pretty decently, quarter-on-quarter decline is 20% maybe versus the other categories. So is it because it's for the initial stages of ramp up for the volumes or better versus other categories? Or what's passing them?

So again, there are 2, 3 reasons Madhav. Number 1 is, of course, we were up and ready by end of April, okay, with our plants at the Malur and Dujana. Number 2 is that market caters to a premium roofing industry in south region, right? Normally, this is a very strong season for TriCoat products because before monsoon in southern market, the contractors, builders, household owners, they want to finish the renovation construction before monsoon, right? So there was very good demand because of that. And number 3 is, of course -- I mean TriCoat just started last year, right? So even last year, it was operating at 50% capacity. So we won't benchmark FY '20 as -- we won't take FY '20 as benchmark for TriCoat definitely because it was operating at 50% utilization.

The next question is from the line of Saurabh Patwa from HDFC Mutual Fund.

Great set of numbers, sir. I just wanted to understand 2 things. One is, how -- as you mentioned in the previous response, that partly TriCoat volumes are good because of the roofing segment. So how much would be roofing as -- which you would be targeting as roofing as a segment for the whole year of the total volumes?

Yes. So Saurabh, in TriCoat, there are 3 main products, which have given us the volume. One is Signature. Signature is what is used in the roofing, okay? Number 2 is Chaukhat, which is our door frame product. Chaukhat, of course, normally, we launched in north region, okay? So not picked up later than south. If you look at the overall India trends in April and May, May and June, for that matter, South was the first market to recover fastest, right? So that's why you would see that Chaukhat ramp-up will take place in next coming quarters. Regarding Signature, we have total capacity of 85,000 tonnes, right? We -- if you look at the Q3 of FY '20, the December quarter when TriCoat registered 48,000-tonne volume, at that time, we almost hit 90% of the capacity. So I think Signature by end of this year should touch near the 100% utilization level.

Okay. So -- and part of this will be led by the -- in the Q1, which you would have already done?

Yes.

Yes. And second is on your [ CPC ] last year volume growth for the company as a whole, last 10 years, volume growth has been close to upwards of 20%, last 5 years is 15%. And -- but your EBITDA margins have remained fairly stable. There's no growth as such. So why -- do you believe that going forward the trend would be maintained or you believe these numbers can be improved? Because we have -- the volumes have improved -- have grown up significantly. So all operating leverage kind of benefits, synergy benefit within the product, within the distribution team, you have -- we have done acquisitions during this pre-release period, tried new technology. All of these have already come into the picture, but the EBITDA margins per tonne have remained very stable. So that's a very good thing in some sense. But I think in past contraction, you guys have mentioned that you believe the EBITDA margins can go up to INR 4,000 also. So do you still believe that is possible? And why you believe so?

Yes. Saurabh, this is Sanjay Gupta. [Foreign Language] If you see our capacity in the last 3 years, we've tripled it our capacities. [Foreign Language] Now I'm very sure days are not far away from us.

Sir, INR 5,000 at sustainable level can be done. [Foreign Language]

[Foreign Language] Our vision and our target is that. We are trying our level best, our -- my son is trying level best, but I can't comment or committed any number on this. [Foreign Language]

And sir, opening comments, you guys also mentioned that we are moving away from the fluctuation in the steel prices, but sir, in this quarter also, if you exclude the TriCoat, our EBITDA per tonne and other income also, our EBITDA per tonne is close to INR 2,650, which is down almost INR 400 from the Q3 numbers. And in Q2 also, we -- also, we had a sharp drop. We were down to almost INR 1,700 per tonne. So this is -- this shows a bit of volatility, which is still there, right?

No, no, no. [Foreign Language] We have done a lot of job in the branding. What we see in the last few months, the price fluctuation [Foreign Language]. As a product comes, we can sell the material. [Foreign Language]

So I think the inventory loss -- we have this number will not be there over time?

Now we are not using this words, the inventory loss, like [Foreign Language] so our stock valuation is devalued by almost INR 3,000 [Foreign Language]

INR 6,000.

[Foreign Language] Our stock prices devalued by INR 6,000 per tonne after this number.

Okay. So this number include also -- already include that kind of number, but you'll be able to sustain that.

[Foreign Language]

So what would be the current pricing of steel? What is your current realization around?

About INR 36,000 per tonne [Foreign Language] Basic price is INR 36,000 landed.

Okay. And what was it before -- pre-COVID?

Yes. Today, the price is INR 35,000, pre-COVID is INR 36,000. Today is the price level is INR 35,000. Last year, this price is -- 1st April, 2019, this price close is to INR 42,000.

Anubhav here, one more clarification. When you compare Q4 FY '20 versus Q3, right, that is not -- Q4 shouldn't be the benchmark because in Q4, we lost 15 days of sales, right, whereas there was a full [indiscernible] plus 15 days of profit there, right -- 75 days, right. But whereas fixed cost was for all the 90 days, right. So Q4 will definitely look lower.

And, frankly, I wanted to compare Q2, Q3 and Q4 all 3 because there was a volatility, that's the only thing which I wanted to highlight. Because Q2 maybe -- the numbers were sharply down. I think it was partly due to inventory loss, I think that's what I think we had mentioned that time also.

See, in Q2, in September quarter, the EBITDA per tonne declined because of the collapse in our sales volume, right? In Q4 of FY '19 and Q1 of FY '20, we achieved a 400,000 tonne plus sales volume on a quarterly basis. Whereas in September quarter, the sales volume declined to 335,000 tonnes, right, because of slowdown in GDP, which was surprising at 4%, floods in Kerala, et cetera. Since our system was having capacity of 2.5 million tonnes, right, which is 6 lakh tonne per quarter, and we did 3.5 lakh tonne, right? So fixed cost is what had hit us badly. Plus there was some change in the product mix also. So that's why the EBITDA per tonne collapsed in September quarter, it was not because of inventory loss.

Understood. And what's the kind of volume we are targeting for the whole year, sir? Broadly?

Yes. Again, I mean, difficult to say. Our focus is to increase the market share.

Market share. We are targeting to increase the market share to 40% to 50%.

But market itself is expanding, sir, right? Because we are getting into new categories, that is actually impact. We are...

This is also -- we are very hopeful, but Saurabh, [Foreign Language]

The next question is from the line of Dhruv Jain. Dhruv, I would request you to please unmute yourself, if muted from the...

Yes. Just wanted to know more details about this ban on the promoter entity, which SEBI has put any impact on the company? And if there are any more such litigation that the promoters are facing?

So Dhruv first thing, there is no impact on APL Apollo Tubes Limited, neither on the subsidiary, okay? This was a personal investment done by the promoters in 2008, 12 years ago, right? So that investment went back and it came under SEBI radar. There was no wrongdoing on the -- on any of these fronts. We are 100% sure about it. And we are very much disappointed by the order. We are already talking to the lawyers, okay, to take this ahead, and we are hopeful that, this will change, right? At this point, we won't like to comment much on it. Secondly, regarding that if there are any other litigation, there is no any other such litigation on any of the person related to the group.

Okay. And sir, my second question is that we've seen great debt reduction in this quarter, in 1Q FY '21. So is it fair to say that you guys will become debt-free by the next year? I mean by FY '21?

We are targeting -- in this year, we'll be near to debt-free. And next year, we are near to liability-free.

The next question is from the line of Aadesh Mehta from Motilal Asset Management.

Congrats on great cash management. Sir, we understand that you said that your focus will be more on market share improvements. [Foreign Language] what is your outlook on the market itself? What I understand is, sir, half of your revenues come from retail housing, another 25% comes from commercial building and another 23% comes from infra projects. So in each of the 3 verticals [Foreign Language]?

[Foreign Language] Our total focus is on the supply chain management system. [Foreign Language]

Right. [Foreign Language]

We are surprised that demand is very good. We are surprised. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Yes.

The next question is from the line of Ankit Merchant from Reliance Securities.

Congratulations on good set of numbers considering the situation. My inhibitors, most of the questions have been answered, but I had a few questions. One was obviously related to the distribution, so -- which you highlighted. But can you shed more light that how come the top 50 contributors have gone down significantly? And another point over here is that how much of this demand is just a pent-up demand? And do you think that this volume growth or the volume which we have achieved in this quarter 1, the similar performance we can expect in going ahead in quarter 2?

[Foreign Language] Then we decided to use our strength. [Foreign Language] So volume is not a problem for us, then we can achieve any number.

Sure. And what gives you the confidence that the quarter 2 will be better than quarter 1? And the numbers that we have achieved is more due to pent-up demand or something?

Well, I can't say that right now, quarter 2 is better than quarter 1 [Foreign Language] Like we have done in the month of April, 6,000 tonnes, in the month of May, we have done 93,000. And this month, we have done 143,000 tonnes. [Foreign Language]

Definitely. And just 1 last question related to channel financing. So out of -- again, out of the top-50 dealers, how many of them have availed that and through that, they have given you the payment? Because we have seen a very significant reduction in the collection days. So 1 is obviously...

[Foreign Language] We are not believing the channel financing system. [Foreign Language] We are not helping them. Hardly INR 150 crores [Foreign Language]

So Ankit, that number remains the same. It has not increased.

[Foreign Language]

The next question is from the line of Viraj Mehta from [indiscernible].

Sir, if you look at your Q4 presentation, you have written in the presentation, the focus will be on channel financing. But you said that we don't believe in channel financing. Can you help me solve that?

Deepak can explain.

Yes, we are mentioned we are focusing the channel financing. And accordingly, we strengthened the channel financing [indiscernible] different banks and give to the over dealers network. Now we are not contacting. We are not pushing it to the channel. We have the approved limit [indiscernible] to the company. And if the dealer want the channel finance, they're directly contacting to the bank and [indiscernible].