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

Ladies and gentlemen, good day, and welcome to the Q3 FY '25 Earnings Conference Call of APL Apollo Tubes Limited, hosted by Batlivala and Karani Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sailesh Raja from Batlivala and Karani Private Limited. Thank you, and over to you, sir.

Thanks, [ Rahul ]. Good evening, and thanks to everyone who have logged into APL Apollo Tubes Limited 3Q FY '25 earnings conference call. Now let me introduce the management participating with us in today's earnings call. We have with us Mr. Sanjay Gupta, Chairman and Managing Director; Mr. Deepak Goyal; Director, Operations; Mr. Anubhav Gupta, Chief Strategy Officer; and Mr. Chetan, the CFO. Now I would like to turn the call to Mr. Anubhav Gupta for the opening remarks, followed by Q&A.

Thanks, Sailesh, and thanks B&K securities for hosting APL Apollo for its second -- third quarter FY '25 earnings call. I welcome all the participants who are joining this call. Well, I welcome everyone with a lot of enthusiasm and excitement because it was a very critical quarter for us because of the very weak earnings in the previous quarter wherein our profitability had declined quite significantly. But we are glad to share that quarter 3 has been our best quarter ever where the all-time sales -- with all-time high sales volume, EBITDA and net profit. During our second quarter earnings call, we had promised to deliver 10% sales volume growth on a quarter-on-quarter basis and report EBITDA range of between INR 4,000 to INR 4,500 per tonne. And we have achieved the same. But I just like to highlight here that this has been only possible because of the resilient business model of APL Apollo Tubes. The macro environment has been very difficult since the beginning of this year due to multiple factors such as weak retail demand and a slowdown in the government spending. Despite this, we have been able to achieve a 20% sales volume growth for the first 9 months. Well, we were well aware of the situation and our focus was to increase sales volume and kill the competition. As you can see that 9 months FY '25 sales volume growth of 20%, which we reported and we can bet that this is higher than any other competitor or players who have been producing and selling steel pipes. This implies that APL Apollo steel pipes has gained significant market share in the overall steel pipe market, which also includes low-grade sponge iron pipes because of the transition from sponge iron to HR coil steel pipes as the prices for primary raw materials have fallen over the last 3 to 4 quarters. Now going forward, we expect sales volume to increase quarter-on-quarter, which is backed by number one, market share shift from sponge iron steel pipes to HR coil steel pipes, where APL Apollo has a clear dominance and line market share. Our international sales volume is also going strong with the commitment of Dubai plant. Now that plant is operating at 58% utilization, if we look at the third quarter volume. This was very much there on the cards because we knew that we must have access to cheaper steel outside India, and Dubai was the perfect destination where we have access to cheap steel from Asian countries. The third factor is our focus on adjacent round pipes, which is part of the building materials portfolio where we have the capacity. We have the same distribution network and the pipes are going to -- into buildings for HVAC and water piping and is part of the overall construction material portfolio, which contractors use while construction. The fourth factor is the ramp-up of our innovative products from Raipur. If you look at the expanded capacity in Raipur, which is 1.2 million tonnes, the utilization rate is 55%, it would have been higher in Q3, but because of raw material situation like lack of raw material availability in Raipur from one of our steel suppliers, there was loss of volume. Otherwise, this utilization rate of 55% would have been definitely better. And lastly, our penetration into Eastern market with the commencement of 2 plants, one in Gorakhpur and Siliguri. Gorakhpur will take care of Eastern UP and Bihar, Orissa belt. And Siliguri plant will take care of Northeast markets where a lot of construction activity is taking place, and it has been the focus area for Indian government. Now talking about the margins, what levers we see are, number one, operating leverage benefits as we ramp up our capacity, which today stands at around 4.3 million to 4.5 million tonnes and ready to reach 5 million tonnes over the next 1 year. Right now, we are producing and selling around 3.3 million tonne run rate. So there is INR 400 to INR 500 per tonne operating leverage benefit, what we see over the next 1 to 2 years as we utilize near 100% levels. Then value-added product mix improvement coming from our Raipur and Dubai plants. Again, it gives us visibility for INR 400 to INR 500 per tonne expansion in our EBITDA spreads. And thirdly is the ongoing discounting, which we shall pull off once we see strong demand pull in the end market, which right now is missing. So we expect that Indian macro situation should improve in the coming quarters as the government starts spending. And as the monetary situation eases out, the retail demand should also recover in the second half of the ongoing calendar year. So based on these factors, we are confident that we shall achieve 3.1 million to 3.2 million tonnes of sales volume for full year. And absolute EBITDA slightly better than last year because there was a lot of mix on the earnings front in the second quarter. So we are trying to make that up in Q3 and Q4. So we believe our full year EBITDA should be better than last year EBITDA. Now that we are ready with 4.5 million tonne capacity going to 5 million tonnes over the next 12 months. So we do maintain our sales volume target of 4 million tonnes by FY '26 and 5 million tonnes by FY '27. The residual CapEx for these new plants and to reach 5 million tonnes is around INR 6 billion, which will be funded from internal cash flows over the next 3 to 4 quarters. If you look at our balance sheet, it remains near debt 0, which is obviously backed by efficient working capital management, now that has been proven over many quarters. The 9-month ROE ROCE looked slightly depressed because of, again, poor profitability in second quarter, but same shall improve over the coming quarters as our earnings expand to normalized level and we ramp up our capacities. That's all from our side. We are ready to take questions. Thank you so much.

[Operator Instructions] First question is from Amit Dixit.

Congratulations for a good set of numbers and strong rebound after Q2. I have a couple of questions. The first one is essentially, if I still look at your other expenses per tonne, they are practically very static if I compare it to last quarter. So last quarter, you highlighted that there was an element of around INR 493 in terms of per tonne in terms of the discounting. What kind of discounting did we see this quarter? And where it is likely to settle in, say, [ FY '26 ].

So Amit, there are 2 things. The other expenses don't account the discounting, okay? That gets net off in our selling price.

Okay. So what prompted -- yes. No, no. So what prompted these other expenses to remain at a pretty high level of INR 4,045 a tonne.

Right. So if you look at the other expenses, they are around INR 3.35 billion in Q3 versus INR 3.1 billion in Q2. This is like increase of around INR 25 crores on a quarter-on-quarter basis, right? In this, the main element, if we see, one is the freight outwards, which has increased by INR 15 crores, right? And then power and fuel, which has gone up by INR 5 crores. Then, of course, the -- some miscellaneous expenses, which are pertaining to the plant because plant utilization levels were going up. So some INR 10 crores, INR 15 crores increase in the miscellaneous expenses, which pertain to the plant.

Okay. So going ahead, will it remain at the similar level or we can expect some kind of a drop here?

So of course, I mean the major expenses there are freight outward and power and fuel. So they are variable, right? They would go up as the volume expands, right? But rest of the expenses like consumption of stores and spares, branding expenses, legal professional expenses and miscellaneous expenses, they shall remain stagnant. And on a per tonne basis, they will come down.

The second question is on EBITDA per tonne for general structures. Now compared to the loss that we made last quarter. I mean, this quarter, you have shown a very smart recovery. Of course, it might be due to the declining spread between HRC and patra. So can we -- I mean, it's near INR 2,000. So can we see it further expanding as we go ahead? Or you think most of it is done?

Right. So see, I mean, between Q2 and Q3, the difference is the inventory loss, which we booked of around INR 2,000 per tonne, right? That got negated and that's why the margins are up. So going forward, we are very aggressive in taking market share from sponge iron steel pipes, right? And we are being very aggressive in the sales push. So yes, as we ramp up the volumes, the margin in general segment should recover. But it will take a few quarters, right, where you see margins going up to INR 2,500 or INR 2,800 per tonne in this specific segment. Yes, because this is a segment which directly competes with sponge iron pipes.

[Operator Instructions] The next question is from Akshay from Canara Robeco Mutual Fund.

Just 2 questions. So first question is on the rustproof products. So there, at least I see that the margins are still lower. I mean usually, we used to do at least INR 6,500, but still we are INR 1,500 off in rustproof. So any specific reason, is it higher competitive intensity? Or what is it, if you can talk about that, that is first. And secondly, as you said that we are trying to grab market share from the sponge iron side. So practically, it competes with our commodity side products. So then in this backdrop, does it mean that the VAP improvement, which we were earlier envisaging, will it happen at a slower pace versus earlier envisaged? Of course, your value-added products are also improving, but then if we see the overall mix, it doesn't reflect back much. So then how should we understand this VAP improvement?

So I'll address the second question first, right. See, I mean, if you look at APL Apollo, we have clear 2 business segments, one in general, second is value-added. Now APL Apollo is a company which doesn't have scarcity of resources, right, whether to produce general segment products or value-added products, right? We have enough capacity for both segments. We have enough manpower to run both capacities. We have enough distribution network to sell both products, and we don't have any limitation of working capital. Right? Anyways, we are working on 2 days working capital. So how we see that both of the 2 segments are operating separately. Then there is good demand for general product because the natural transition is happening from sponge iron pipe through HR coil pipes. So we are being aggressive, right? I'm not growing my value. I'm not growing my general product sales at the cost of value-added products. Please understand that, right? I have enough capacity, enough resources to run value-added product portfolio. It is just that the demand at the macro side is not favoring the overall growth for value-added products. And general segment is growing despite the weak macro because of this transition, which is taking place, right? So this is industry phenomenon. And we are taking advantage of it. But we are not growing at a cost of value-added products. Whenever there is macro support coming, right, and demand for our -- whether it is coated products, whether it is Apollo Z, whether it is heavy structural pipe, whether it is light structural pipes, right. Whenever the demand comes, you will see similar growth to match general segment growth. As far as the mix is concerned, at 5 million tonne capacity, the general segment is around 1.5 million tonnes and 3.5 million tonnes is the value-added product, okay. And as you know that we do not give nameplate capacity, right? We give sellable capacity. So if the demand is more for general segment, we can produce and sell 1.6 million tonnes also from the same machinery, which today we, say, that the capacity is 1.5 million tonnes, right? So as far as the capacity is concerned, out of 5 million tonnes, 1.5 million tonne will be general and 3.5 million will be value-added. But yes, if demand for general is more, we can produce and sell more from the same capacity. I hope this is clear. And coming on question number one, on rustproof. See, I mean, right now, what we do is we give -- we have clubbed 2 segments under rustproof category. One is pipes and second is sheets. So in pipes, we are still making INR 6,000 per tonne spread. In sheet, we are making lower margin. That's why on [ blended basis ], it looks at INR 5,000 per tonne because we don't want to give too much of sensitive data, which can be seen by our competitors. So I mean, we are trying to club the segment. Like this quarter, we also clubbed big and super big into heavy structural, right? So -- but it's not that my margins in galvanized pipes has come off, it's not the case.

The next question is from Shaleen Kumar from UBS Securities.

Congrats on a good set of numbers. Did I hear correctly you say that we will try to improve on the EBITDA of last year and for the full this year?

What do you mean? Sanjay here.

[Foreign Language]. Can it be better than last year's EBITDA?

[Foreign Language] Last year, we had promised this year, we do a volume of around 3.2 million tonnes. So I'm very confirm, we can do between [ 31.5% ] to 32%. [Foreign Language].

[Foreign Language]. Yes.

[Foreign Language]. At any cost, we want to cross this figure. [Foreign Language] we want to beat the number on the absolute amount of EBITDA on the volume basis. We want to take a growth of at least minimum 20%. [Foreign Language] We want to take a growth and if there is in the absolute amount of EBITDA, we want a growth. Number two. [Foreign Language] So in this quarter, we have tried to improve both of the margin. [Foreign Language] So it means we are targeting this quarter more than INR 4,500 per tonne EBITDA.

Okay. Okay. [Foreign Language].

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[Foreign Language] HRC and patra, that is in favor of us. [Foreign Language].

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I want to work on innovation, branding and cost controlling. [Foreign Language]

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[Operator Instructions] The next question is from Rohit Singh from Nvest Analytics Advisory.

Congrats for a good set of numbers. Sir, can you please comment on why this slowdown in government spending like do you see any structural risk here like we were talking about growth. Last 2 quarters were also tough. But everyone was saying like economy will start recovering Q3 onwards. But now suddenly, macro tailwinds are getting converted into headwinds. So what's wrong happening in this space? Can you comment on it?

It's very tough for us to -- I mean, tell you the exact answer. But we also read a newspaper, et cetera, what everyone is or everyone must be reading that the government spending on infrastructure for the first 9 months has been below budget, right. That is one. And second, of course, because of new government formation and the delayed budgets and delay in release of funds, that is impacting some overall demand for the construction sector. But that being said, some of the segments continue to do well. For example, railways, aviation, which have been the core focus areas for the government. There is some slowdown towards the water transportation infrastructure or other segments. But yes, I mean, everyone is hoping that with this budget, which is due over the next few days, the release of funds will start and that will give a push to the overall spending from the government side.

The next question is from [ Gargiv ] from Value Investments.

My first question was that we buy HRC from steel companies, and it is usually supplied at a standard size which is then later reduced to see APL's requirement via this cold rolled mill that we have. So with respect to that, what is the standard thickness size that you buy. And in cold rolled mill, how much you we reduce the thickness?

So Sanjay ji, she is asking like what is the standard size of coil thickness, which we get, right? And we have to cold roll reduce the thickness.

We have taken a different type of thickness for different type of material. [Foreign Language] We are taking all the different types of thickness with the different type of finished product we required. There is no standard method.

Sir, I actually wanted to ask it because in the previous calls, I've heard that [Foreign Language] because of the cold roll mill, the cost of production [Foreign Language] So what percentage of total APL product portfolio requires low thickness coils? And are the products of light structures and Apollo Z.

Almost 30% we require for the thinner [ gauges ]. 30% material we are doing the cold rolling.

Okay, sir. And as per the requirement, entirely, we are doing in house or cold rolled, are we also outsourcing.

No, no. So slightly, we are taking the house. We are now short of supply so our capacities full. So we are taking some in the south with 5,000 to 10,000 tonnes per month. Otherwise, we are totally equipped with our finished product. So we are putting a plant in South also for this product.

Okay, sir. So the 5 million tonnes of capacity, [indiscernible] what percentage of the product portfolio will require the cold rolled mill and if it is in-house [Foreign Language].

This is depend on the market. But [Foreign Language].

[Foreign Language]

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[Foreign Language].

Sir, second question is with respect to [Foreign Language] With the current sales volume, Shankara and [ OJ Mart ] [Foreign Language].

[Foreign Language]

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Okay. Okay. And last question is with respect to in previous call [Foreign Language] our intention to expand distribution in U.S., Europe and Middle East. [Foreign Language] export opportunity in these regions and what is our competitive strength?

Yes, Middle East, we are already -- we are doing 60,000, 70,000 tonnes per month. [Foreign Language] delivery or supply system [Foreign Language] destocking. [Foreign Language] I think February or March, August, we have a good response from the Middle East market. And Saudi also, we are now doing 4,000 to 5,000 tonnes per month volume [Foreign Language]. Dubai, we can talk freely because [Foreign Language].

Okay. So if you can expand. Destocking is happening, and imports have reduced in those regions, Middle East region. So what is our [ late fees ], Is our cost of production lower or the project [Foreign Language].

[Foreign Language] Like India, [Foreign Language] From last 1, 1.5 months [Foreign Language] The same change, what we bought in Indian markets in 2017 with introduction of DFT.

[Operator Instructions] the next question is from Devvrat Mohta from Capital Group.

Congratulations on a good quarter. I have 2 questions. [Foreign Language] What gives you confidence that you go from INR 350 crore EBITDA to INR 400 crores EBITDA in Q4? That's my first question.

[Foreign Language]

Understood. And some [Foreign Language] EBITDA per tonne. Should we work with this [Foreign Language] as the base for FY '26?

My target is INR 5,000 minimum. Going forward, INR 6,000. [Foreign Language] I'm not happy with 4,500 or 4,000. My aim is minimum INR 5,000. And going forward, INR 6,000. [Foreign Language]

Worst case [Foreign Language] you should be able to deliver INR 4,500 and [Foreign Language].

[Foreign Language] We built our policies according to INR 5,000 per tonne. [Foreign Language] Marketing team, COM. [Foreign Language].

Next question is from Sneha Talreja from Nuvama.

Congratulations on great set of numbers. Just a couple of questions. On the previous participant's question, you put discounting [Foreign Language]. Q3, where are we at this point of time?

[Foreign Language] Whatever trends we see in the first 20 days of the quarter, ongoing quarter, we see INR 100 to INR 200 per tonne discounting pull off [ year end ] by our sales team.

Okay. Okay. So currently, we are around INR 300-odd discounting on the channel..

INR 300, [ INR 350 ], yes.

Understood. Secondly, just wanted to take some flavor. I know you have been mentioning one fact that HRC capacity is in India are getting added up. But what is -- still there's an ADD implementation? How do we make sure that the gaps will still remain. So just some comfort on the gap of Patra prices and primary prices remaining.

I mean, the logic says that even with the ADD, there will be recovery, right, not to the extent what we saw during COVID levels, where HR coil prices started going above INR 60,000 a tonne and then Russian-Ukraine war taking HR coil to INR 70,000 a tonne. That was the period which hit us the most, right? So whatever happens at the policy level, we don't believe that the spike in steel could be to that extent.

Number 2, in the secondary type of material, we never think about these products because [Foreign Language].

Next question is from Pallav Agarwal from Antique Stockbroking.

I had a question on the realization. So this quarter, on an average, HRC prices did fall from the previous quarter. But we have shown our blended realization, there's an increase over the second quarter. So any particular reason for that? Is it due to our value-added product or what has led to the better realization?

So if you look at our NSR -- So if you look at NSR, there is a stock in trade like in our cost, right, if you see. So if you remove that, then you don't see increase in the NSR. We've got to see it without increasing in stock in trade.

So I have to reduce the stock in trade, what was the purchase even from the sales to come to the blended kind of.

That is right.

Okay. And will this trend continue of external purchases because I would guess the margins over there would be lower than in house products or this was more tactical thing or short term in nature?

Say it again, please?

Will this trend of higher purchase of stock in trade continue because I thought that margins on a trading portfolio would be lower than our in house products.

Trading is almost 0.

So you did this because of to gain market share or any particular logic if it was not very [ prompting ].

So this is not manufactured product. This is raw material, which gets traded, right? So 828,000 tonnes for the quarter 3 is by manufactured volume, which we give. And you remove stock in trade from the revenue, you will get the NSR for the manufactured.

Okay. So the stock in trade was HRC, not the finished?

That is right.

Okay. Also, in our presentation, you are mentioning about talking about the solar opportunity. So right now, what would be the proportion of volumes that go into the solar pipes?

So there are like 3 products, which APL Apollo manufactures today, which go into solar sector. One is from Raipur, which is our [ all zinc ] coils which go into the solar mounted structures for ground-mounted solar park, right? So that capacity started 6 months back, and we have started selling specifically for the solar sector. Then there are some specialized tubes, which go for the solar trackers, right? So that's a slow-moving product. That's a slow-moving product because you get -- we need a lot of approvals from the consultants of the independent power producers who are installing trackers and solar tracker is anyways a new product for the Indian market. Although we have exported a lot of pipes for international trackers, but Indian tracker market is very new, and it is expanding at a slower pace. And third product is our standard pipes, which go on the residential rooftop solar, right? They are replacing angles and channels. Again, we have -- what we are doing here is that we are educating the EPC installers, EPC contractors to go over rooftops for -- at residential terraces and install small solar plants, right? So yes, a new segment for us, but these are 3 categories, and we are working across all the 3 categories to boost volumes. Right now, the proportion is small. But over the next 2, 3 quarters, we see good volume coming from solar segment.

Okay. Because I think the tracker, is that the top tubes that we are talking about which we need approvals from?

That is right. That is right.

Because there, I think the opportunity could be pretty big once you get the approvals in place.

Of course, and again, here, the idea is to come up with like just -- not run of the mill tubes which a lot of our competitors are in the market and selling run of the mill [ tubes ], right, where margins are very less. And they are selling to the large players, very large conglomerates who don't give margins, right, to their OEM vendors. So we are not talking to those large customers. We are talking to midsized customers, right, where we help them with the design, right? So then they are bound to buy tubes from us at our margin. Otherwise, whatever some players are in the market trying to sell solar top tube, there is no margin, which any large developer will offer. Now we also tried, but we backed out because margins were like as low as [ INR 2,000, ] INR 3,000 a tonne. There could be some freight arbitrage, some players may be getting if they have their mill near to the solar park. But otherwise, it's not a profitable segment with the large conglomerates. They have their design and they just ask you to roll the material to make [ pipes ].

The next question is from Bhavin Pande from Athena Investments.

Congratulations for a wonderful set of numbers. So sir, when we look at heavy structure as a category even when we look at difficult quarters we had, metrics are fairly consistent. So how do we look at the demand scenario here and the customer base that we have because it seems pretty much immune to demand scenario in the general space.

You're talking about heavy segment, right?

Yes, heavy and premium products.

Heavy and?

The premium products.

Premium products, which segment are you referring to in specific?

Coated in Apollo Z and Apollo galvanized.

Yes. Okay. So see, heavy [ structural ] tubes are definitely prone to the macro environment because these pipes go into infrastructure projects like railway stations, airports, health care infrastructure, et cetera, okay? So the first 9 months have been tough in terms of demand from the infrastructure projects, like any other building materials. But because of our high market share, we've been able to grow this segment at 20% in first 9 months, okay? Then comes the Apollo Z or the light structure, this is a residential product, okay, that goes into homes. This is part of our 60% of our portfolio that goes into residential homes. Now again, the demand from retail side has been weak over the last 3, 4 quarters consistently, right? So here also, we are not getting any tailwind as such, right? We expect consumer demand to pick up from the second half of the current calendar year. And then we'll see good pickup in light structures and Apollo Z. Light and Apollo Z are like maximum going into residential segment.

When we look at our ability to penetrate into markets where the market still has not grown or there's no mature market like we are doing for Eastern market. So is it safe to assume that we can put up more plants wherever we feel that demand visibility is there?

The Eastern market, we are starting with 2 new plants, right. Normally, any company would go for one plant, right? But we being Apollo, we are straightaway putting up 2 plants, right? One in Gorakhpur to capture Eastern UP and Jharkhand. And then we are putting our plant in Siliguri, which will take care of the sister states. And some exports maybe to Burma, et cetera. [ Bhutan ], we keep on getting good inquiries from there. So yes, I mean, the idea is to seeding these plants first, so the minimum investment. If -- I mean the response would be good because our market share in that market is very low, right? And then we don't mind expanding capacities as our plants ramp up. That has been our strategy, right? We go slow and then we become aggressive once we see the trends for market share gains.

[Operator Instructions] The next question is from [ Andre Proshodam Koito Advisors ].

My question has been answered.

The next question is from Aditya Welekar from Axis Securities.

Yes, sir, just one clarification on the residual CapEx. So in the last call, if I recall, it was near about INR 3 billion to INR 3.5 billion. And now it's INR 5 billion. So that is for the capacity expansion earlier it was 5 million tonnes. Now it is 5.5 million tonnes, right?

That is right.

The next question is from Arpit Kapadia from IGE Family Office.

Congratulations on a great set of numbers. My question is, as you highlighted in your opening remarks about the scarcity of raw material availability in our Raipur plant. So what exactly is that raw material and how scarce it is. And what the company is able to mitigate the same?

So that was like a minor shutdown from our Tata Steel plant, which impacted our volume. So this was not a significant -- this was not a significant loss, right, to the volume, which would have made us to change our strategy in sourcing of steel. Yes, I mean the volume could have been higher 5,000 to 10,000 tonnes, right? But it is stable now from Jan onwards, it's been pretty stable.

The next question is from [ Manhajan ] from [ growth ventures ].

Congratulations for the set of numbers. I just wanted to understand as the demand is shifting from, say, secondary prices to HR coil pipe. So how do you see narrow-width HR coil pipes as a market because there are competitors emerging from that area and the pricing is very much similar in the market to HR coil prices. And so just wanted to understand your view from a competition perspective, of that particular segment.

You mean the patra, right?

Narrow width HR coil.

Well, there is no quality of narrow width Hr coil. There is HR coil or there is secondary. Whatever you share narrow width, patra, secondary whatever. But there is only 2 type of material in the market, one is primary, one is secondary.

We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Thanks, everyone, for dropping by and listening to our Q3 investor call. And thanks to B&K for hosting us. We look forward to speak to everyone during the earnings call. Thank you so much.

On behalf of Batlivala and Karani Private Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.