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

Ladies and gentlemen, good day, and welcome to the APL Apollo Tubes Limited Q4 FY '21 Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Urvil Bhatt from IIFL Securities Limited. Thank you, and over to you, sir.

Good evening, everyone. On behalf of IIFL Securities, I welcome you all to APL Apollo Tubes 4Q FY '21 Results Conference Call. On the call today, we have APL Apollo Tubes management team being represented by Mr. Sanjay Gupta, Chairman and MD; Mr. Deepak Goyal, CFO; Mr. Arun Agarwal, COO; and Mr. Anubhav Gupta, CSO. So let's begin the call with the key thoughts from the management. Thereafter, we can open the floor for Q&A session. Over to you, Anubhav, for your opening remarks.

Thanks, Urvil, and thanks, Mallika. It's a real pleasure to be here. I welcome everyone on the conference call of APL Apollo for the FY '21 results. Like I said, it gives us a pleasure to be here and discuss our performance for the fiscal of FY '21, which was one of the most challenging years in our history. At the same time, I'm proud to tell you that team APL Apollo has converted the crisis into an opportunity and delivered the best fiscal year ever. We saw record improvements in our P&L, which was driven by margin expansion; our balance sheet, which was driven by the debt reduction; our cash flows, which was driven by the working capital enhancement. Some of the achievements I want to highlight are: number one, EBITDA growth of 40% for full year and PAT growth of 50% despite flat sales volume. Market share expanded to 50% from 40% in these structural steel tube markets in India. Our net working capital cycle down to 8 days from 25 days as we switched to Cash and Carry model, which has been very well accepted in the industry, and we believe that this should continue going forward. This kind of working capital cycle is best in the building material industry as well. Our net debt, which is down by 80%to INR 1.6 billion from INR 8 billion in the last 12 months. Our value-added product contribution improved to 57% in FY'21 from 45%. Now again, it's a real pleasure to share with you that this journey started 3, 4 years ago when our value-added product mix was 40-60. Now it's moving towards 60-40. Our ROCE jumped to 26% from 18%, and our ROE jumped to 25% from 21%. The company generated operating cash flow of almost INR 1,000 crores, INR 10 billion in FY'21 and free cash flow generation of around INR 6 billion, which helped us reduce our debt. Then we also started the group simplification process with the announcement of Apollo TriCoat Tubes merger into APL Apollo Tubes. This process was initiated in February of 2021 and is going mostly on track. At the same time, we also demonstrated our commitment to the sustainability and ESG compliance for our organization. I'm glad to share that we roped in one of the big 4 consultants who is helping us with the ESG compliance. Over the next few quarters, you will see that how we are going to comply with the GRI guidelines and how we are going to monitor the ESG compliance for the next 2, 3 years. And lastly, what we worked on is a new market creation, which has been the strength for APL Apollo Group towards the high diameter, high thickness tubes, which is one of our most focus areas for the next 4 to 5 years. Specifically on the quarter 4 FY '21, a few highlights we'd like to share is that the quarter 4 has started on a very strong note as the Q3 economy -- Q3 -- in Q3, the Indian economy had started to open up. However, the quarterly sales volume was slightly lower than Q3 because in Jan, Feb, the markets took some breather after a record momentum, what we saw from May of 2020 till December 2020. So -- but after 40, 50 days of breather, we had a strong momentum, which started in month of March, and it continued till early weeks of April as well before the lockdown was initiated again. Our value-added portfolio in quarter 4 was 60%, again, similar to what we had in Q3. So this shows that we are on a sustainable path of having 55%, 60% contribution coming from the value-added products. And our margins were, again, above INR 4,500 per tonne as the unorganized sector continued to struggle due to raw material supply. So this led to strong pool demand in the industry for products of the branded players, and it kept our margin high. Lastly, on FY '22 outlook. We started Q1 with a good momentum, but the second wave hit the country very badly, and we witnessed simultaneous lockdowns, which were being announced by various state governments. Today, as we speak, it seems the worst is behind us, and the market should start opening in month of June and July. So this gives us some visibility for the rest of FY '22. But we are monitoring the situation very closely at the same time as things are changing on a daily and weekly basis. That being said, our long-term strategy remains unchanged for the group, which is based on value addition, cost control, innovation, new market creation and brand equity enhancement. With this strategy, we are confident of sustainable double-digit growth in non-pandemic period with superior net profit growth. With this, we'll finish our opening remarks, and we can open the floor for Q&A. Thank you so much.

[Operator Instructions] The first question is from the line of Dhruv Jain from AMBIT Company.

Congratulations on a great set of numbers. I had questions around the value-added product basket. Now in FY '21, we have seen that we have been able to drive this to the targets that were set out for yourself earlier. So just wanted your thoughts that in the last 2 quarters, we've seen volume decline and flattish kind of volume. So as we move to a more value-added kind of product basket, has the growth taken a little bit of hit because of that? And connecting question to that would be that going forward, with respect to value-added products, how do you see this changing? This can be 60% go to like 70%? And what actually changed in FY '21, at least in the last 2 quarters, that led to a significant spike in the value-added product basket?

Dhruv, so coming to the first part of your question that given that our value-added product mix is improving, so does this mean that we are -- our overall sales volume is going down? That's not correct, Dhruv, because if you see that when in Q1 FY '21, when everyone was hit from the lockdown, in Q2, our company had reported the strongest quarter, which was 480,000 tonne of sales volume. And in Q3, we saw the economy opening up, and we, again, did 485,000 tonnes of sales volume. So we could maintain those record volumes. So for -- right from month of May till December 2020, we had a record momentum, okay? We increased our market share to 50% from 40%. Our rural sales contribution improved significantly. We were working on the value-added product portfolio at the same time. So it was pretty much expected, Dhruv, that the market should take breather in quarter 4. And it started from mid of January, right, the distributors who were sitting on a bit of high inventory levels, they wanted to pull down their inventory levels. And like I said, that was pretty much expected. But at the same time, what was happening was that the secondary sales were not impacting because the construction activity in India was still going strong in month of Jan, Feb, okay? So we had our ears on the ground. We didn't bother much because we knew that once the inventory levels come down to normalized levels, there will be a strong demand coming from distributors at the same time. So after the gap of a few weeks, we saw that in month of March, we had a strong momentum building up. And March was very strong, okay? So if that breather hadn't come in Jan, Feb, we would have touched again 480,000, 490,000 tonne kind of volume. With this sales mix, 60-40, it will go to 65-35, also 70-30 also, we don't see a dip in any volume.

Okay. And a question with respect to the growth going forward. So should we assume a mid-teen kind of growth in terms of volumes going forward? I understand that FY '22 can be a little bit of hit because of the lockdown. But on a sustainable 4- or 5-year point of view, should we assume that, that to be the guidance?

So Dhruv, again, I mean, before I answer this question, you had another question when you had raised it like what kind of value addition contribution that can come from our company, right? So today, we are sitting at 60-40, right? The -- and this is not -- this didn't happen in 1 year, okay? It's the hard work which we have been doing for last 4, 5 years. We have been innovating. We have been coming out with new sizes. We have been creating new markets, right? So all of this process takes time, right? And we were continuously investing our time, our energy, our money towards those objectives. And then suddenly, you saw that in FY '21, there is a big jump in the value addition. But if you look at right from FY '16, slowly, gradually, we have been able to improve our mix. Like from 40-60, today, we are 60-40. It's not a 1-year journey, it's a 5-year journey, which started, right, in FY '15, '16 with a lot of planning, a lot of investments, a lot of thought process. And a lot of strategy which came into play as well. So yes -- so this is like pretty much sustainable -- on a sustainable basis. This is not a 1-year phenomenon or 2-year phenomenon. This goes with a very, very clear thought process carved out strategy, which we started in FY '16. And on volume growth, see, I mean, we were so excited when we had started FY '22 that whatever revenue loss, volume loss we witnessed in FY '20, we could make out in FY '21 and FY '22. But again, the country got badly hit. So I guess, today, I mean it's difficult to say that what we're going to do in FY '22. But what I can tell you is that in non-pandemic years, right, when things are normal, our system is well established, well-oiled to deliver high digit double volume growth, with incremental volume coming from the value-added products, right? So the -- so when we say that we are continuously decommoditizing our product portfolio, that journey will continue.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Yes. I exactly didn't have any question, but I wanted to place on record. My appreciation INR 1,000 crores of operating cash flow, almost INR 600-plus crores of free cash liquidity. And just before the minority stake almost INR 65 per share of operating cash. And for INR 43, INR 44 of free cash is a remarkable, remarkable achievement. And I think it has been strategic and not happen since. So congratulations, Sanjayji, and to the entire team.

Thank you, Bharat Bhai. Thank you.

And phenomenal across the Board on all qualitative parameters, not just quantitative numbers. I think it's a remarkable work. And quality of the disclosure and the level of detail is given, again, deserves appreciation. So many, many congratulations.

Thank you, Bharat Bhai. Thank you.

The next question is from the line of Devvrat Mohta from Capital Group.

Congratulations on solid results. I just have 1 question. So from our channel checks, we've been hearing of raw material shortages. Can you just talk through, firstly, what are you all doing to kind of deal with this challenge of procuring raw materials? And secondly, what does this mean for market share consolidation? Because I'm assuming if you all are finding it tough to source raw materials, smaller competitors will find it a lot harder. I would love to hear your thoughts.

We have a long-term agreement with the steel plants like the Tata Steel and JSW Steel. And we have a long-term MoUs from last 10 -- 15 -- 10 to 15 years. So we have no such as a big problem. But no doubt in this time when the country has shortage of steel, we are -- it's just certainly difficult to increase our quantity. But whatever commitment we have done with the Tata Steel and JSW, they are the -- both are our main suppliers. We have no difficulty to take the -- procurement of the raw material. And now we are slowly and slowly entering with the small quantity with SAIL and Essar also. So I don't think that raw material is a big problem for us.

And what about market share implication from smaller competitors struggling to gain markets -- I mean, struggling to gain raw materials? [Foreign Language] will your market share go up because of this?

Yes, no doubt. In the primary steel, smaller players are getting now badly hit, but they are losing the market shares and the organized big players are getting more and more market.

[Foreign Language] Follow-up question. [Foreign Language] working capital has improved quite substantially last one year. How much of this do you think is sustained versus you think some of it goes back to normal? And I've asked you this question before, would love to hear your thoughts again though.

The first thing is that now we are not going to increase our working capital cycle. [Foreign Language] lockdown, we have a long-term agreement with the steel plants, [Foreign Language] stock level [Foreign Language]. But that we have about 100% in control. We are not -- we don't want to force sale to -- any single ton of tubes. We -- as per the demand and our distribution systems, we are supplying the material. We are not any compromise with the payments. Maybe this quarter, due to the lockdown, some stock [Foreign Language] but we are trying [Foreign Language] lockdown [Foreign Language] we'll cover it.

Devvrat, just one point I want to add here is that, see, I mean, this working capital enhancement, what we have seen. This is -- again, this is not a phenomenon that's going to last probably like a few quarters, okay? It is more like it has become a practice for APL Apollo and its clients also, right? So majority of working capital enhancement what you saw is because of the reduction in the debtor days, receivable days. So the kind of additional margin we are making on cash discounts, right, then we are compensating them against the low inventory levels, what they are keeping in their godowns versus what they have to do with other brands, right? And the overall discipline, which has come in the industry. Again, I mean, with the second lockdown, which took place, that discipline, again, is in the minds of all the participants right from the distributor to the retailer, to the fabricator, right? So I guess, this is a very structural long-term phenomenon, what we are seeing for ourselves. And as long as it is not forced, right, it is by choice, we think that this is going to be sustainable. Mallika, you there?

Yes, sir. Just give me a minute. The next question is from the line of Madhav Marda from FIL.

Congrats on very good set of numbers. I just wanted to get your thoughts on a couple of things. The first one was the Raipur expansion. If you could just give us an update in terms of when that plant starts, and I think how much of the capacity comes in the first phase of the expansion? And also the kind of product portfolio that we will be doing at Raipur, if you could just give us your thoughts on this.

Madhav, now again, due to the corona lockdown, we are behind by 2 or 3 months, I think so. But we are thinking our first production come out with the Raipur plant in the month of December. And in the first phase, we are close to 0.4 million, 0.5 million tonne of capacity. And this is totally different product basket, whatever we have now in our baskets. Like in this, we have been going for the bigger axles, 500 square up to 20 mm for the high-rise buildings and the color for pipe for the decoration -- decorative tubes. So these are a lot of type of new addition, new version in this plant. And hopefully, we start this plant in the month of December. And in the first phase for Q4 or either Q1 FY '22. We are targeting annualized 0.5 million tonne capacity we can utilize.

Okay. Okay. Understood. And the margin, because these are value-added products, the margins would be better versus our existing portfolio?

Yes. Madhav, we have no doubt we'll have far, far better than the existing product. And you also see that the future, in the results, our existing margins are also increasing because our -- too much we are focusing on the margins. We are not compromising with the margins. Some part of our commodity business, we are not taking care of the margins, and we are going for the volumes. But in the value-added product, we are increasing our market share as well as margins both because we have done a lot of innovations, a lot of investment in these sectors and we are getting the results. Very soon, you'll see the results.

And Madhav, these products, like 500 by 500 square diameter tubes or color-coated tubes, these are the products which are being introduced in India for the first time, right? So given that the competitive intensity is going to be so low or maybe 0 for first few quarters or years, so it is like -- it is a clear fundamental that the margin has to be high here.

Got it. And my second question was, our balance sheet will be -- it's almost net cash. And I think in the next couple of years, even if we do the capacity expansion, our balance sheet will have cash building up. So is there any sort of acquisition opportunity that you'll see? Or what do we plan to do with the cash which is building up on the balance sheet?

No, Madhav. I don't think any acquisition is available in India of our nature. Because we are totally innovative type of player. I don't want to go into the -- again, in the commodity business. I want to change in the business with the high margins. So in India, I'm totally focusing on the new type of products, new type of markets, new type of distribution network. So I don't think so Madhav, this can happen in India, any good business available. And we have also a good long-term plan of a 4 million tonne up to EBITDA margin of INR 6,000, INR 7,000 kilo in the next few years. So I don't think so, we are going for any acquisition, small, little bit any acquisition, [Foreign Language] job work [Foreign Language] we can look in this matter. But otherwise, we have no planning.

Understood. That's very nice to hear. And sir, my last question was, we've been investing on building the brand in terms of increasing the brand spending. Could you just update us on what the plan would be for this year in terms of any sort of commercials, et cetera, that you are planning to do? Because that I think...

Yes, yes, yes. For branding, we are not going behind. Branding we are going off more aggressive and aggressive but now we changed our branding now -- to focus up to -- we are now -- want to expand our bigger sections, bigger dia and color pipes. We are more focusing on this type of products, like [Foreign Language] oxygen plants, hospitals [Foreign Language]

So everyone -- I request you to go to Slide #26. That's what we are referring to in our presentation.

We have now -- we have good number of inquiries with us, and this is also very helpful to Government of India to -- helping corona. We are targeting to start hospitals of almost 500 beds in 3 months and oxygen plants within 15 days. And we have -- we received the orders also. We are getting started receiving order also. So we are working on these type of things too much. And in this process, we are very hopeful to -- this may help us to increase the volume of bigger sectors dia.

So Madhav, just to add here, like if you see last 2 quarters, we have been spending around INR 8 crores to INR 9 crores of ad spends per quarter. That was rendered when it was in FY '20 before the pandemic hit. So as the quarters got normalized, we are back on spending INR 8 crores, INR 9 crores per quarter of ad spend. Over and above, what we are trying to do is the targeted branding, targeted marketing for our exclusive products.

The next question is from the line of Pallav Agarwal from Antique Stockbroking.

I just had a question on impact of higher steel prices. So are we seeing some pushback in terms of demand except -- or are people accepting these higher steel prices?

Yes, there is some sectors -- that some sectors there's demand pullback. Because of the secondary steel is also very cheap. So we are playing in the primary steel. So there is some heat in the market stream, I think which I can say is our primary steel structure market of -- in India, is close to 2 million tonnes, is now coming to 1.7 million, 1.6 million tonnes. But we are managing to take the markets, increasing our market share from 40% to 50%. Now I think we have almost crossed 60%. So we are covering from there. But there is pressure in the -- some sectors, there is a pressure due to the steel price hike.

So if I compare, as you said, if I compare with say, secondary players probably using the raw or scrap, so what would be the cost basically advantage that they would be having compared to priming players?

Yes, there's too much difference between secondary and primary steel. I think the difference is almost INR 10,000 per tonne.

Which is like 10%, 12%.

Sure. And the margins itself or EBITDA itself is INR 4,000 to INR 5,000 per tonne. So in that context, quite significant. Yes, sir, thank you. And sir also just on, so what will be your CapEx guidance for the next 2 years? And any debt to EBITDA -- I mean now we are net debt, almost net debt free. But any net debt-to-EBITDA targets that we have over the long term?

Our target is close to 20% to 25% of the EBITDA margin.

And the CapEx spend?

Yes, for the CapEx.

Sure, sir. Okay. And I mean, as you said, because of the lockdown maybe this year, there will not be any volume guidance versus our normal 15%, 20%?

No, no, no. We are not afraid from the lockdown. We're just waiting for our term. Because I'm still hopeful we are good -- almost achieve our numbers. We're very close to numbers.

Okay. So can we assume so that this year, I mean, despite the lockdown, we'll have probably a 10%, 15% volume growth in FY '22 over FY '21?

Still [Foreign Language] there is no third wave, we can manage it.

The next question is from the line of Rahul Agarwal from InCred Capital.

Just 2 questions. So firstly, on the CapEx which the earlier participant was asking. So basically you said 20% to 25% of EBITDA is your annual budget, that does basically translate into about INR 175 crores a year. Is that correct?

Yes, that's right.

Okay. And on the Raipur plant, what is the total CapEx we planned for?

No. As in total CapEx, as in?

Yes, I thought the total capacity planned about 900,000 tonnes to 1 million tonnes, phase 1 was about 500,000 tonnes as...

Total plan is going to 4 million tonnes across the group. Like today, we have 2.6 million tonnes. In the next 2, 3 years, we are targeting to achieve 4 million tonnes.

Okay. So basically, if I look at March '22, we will be close to 2.6 million tonnes? So we'll increase our realization?

So we are close to 3 million tonnes.

So Rahul, right now, we are at 2.6 million tonne. There are 2 mills which are being added, 200,000 tonnes of 500 by 500 square diameter and 200,000 tonnes of color-coated tubes. This will take our capacity to 3.0 million tonne by FY '22, and then we have further expansion plans, which is budgeted in 25% of EBITDA and CapEx spend. So that will take our capacity to do 4.0 million tonnes over the next 2, 3 years.

Got it. Any specific guidance would you provide specifically in terms of capacity additions? Any thoughts?

So the product basket is going to remain in the value-added products, new market creation. And within the existing portfolio, where we think it requires optical expansion, right, so we'll set up new mills there. So it will be mix of brownfield expansion and new product addition.

Okay. Got that. The second question was on EBITDA per tonne. So when I look at -- look back 5 years, fiscal '17 to '21, EBITDA per tonne moved between INR 3,600 to INR 4,200 per tonne. This year, we existed at possibly INR 4,750 almost. And on average for this year was about INR 4,200. Given your increase in value-added products share as well as the new Raipur CapEx is also higher-margin business, this INR 5,000 per tonne of target, Sanjayji was also talking about INR 6,000, INR 7,000 per tonne into next 3 years. Sir, what is the...

Not overall, for the Raipur new project.

For the new project only? Okay, okay.

INR 6,000, INR 7,000. This 2.6 million tonne, we are targeting INR 5,000 per tonne.

Okay. Got it. So what role does the higher steel price play here as in if, let's say, there is correction in steel prices, what really happens to this number? Any sensitivity?

Rahul, now we have a very less stocks -- very less inventory we are carrying. We are carrying almost 15 days or 14 days or 20 days -- less than 20 days inventory. And 6, 7 days to 8 days, we have order book also in our hand. So 10 to 12 days inventory, I don't think so, give me any major hit or major gain.

Got it. The only difference is between inventory gain and losses. Otherwise, there is no...

Inventory gain and loss [Foreign Language] stock [Foreign Language] inventory gain [Foreign Language] loss [Foreign Language].

[Foreign Language]

Rahul, that's what we have done over the last 2, 3 years that how we are making our systems shockproof, okay, by becoming more efficient, by keeping lower inventory in absolute terms and converting commodity into our value-added products at much faster rate in much efficient and effective manner. So this reduces the overall risk of any fluctuation in the steel prices when we are sitting on such low inventory levels.

The next question is from the line of Sujit Jain from ASK Investment Managers.

Yes. Sanjayji and team, congratulations. I'm very delighted to see your OP per tonne. Sanjayji [Foreign Language] quarter [Foreign Language] so you achieved that, so congratulations.