APL Apollo Tubes Ltd Management Discussions.

Economic overview

Global economy: The contraction of activity in 2020 (GDP growth at -3.3%) was unprecedented in living memory in its speed and synchronised nature. The IMF estimates suggest that the contraction could have been three times as large if not for the extraordinary policy support.

Going forward, the global economy is projected to grow at 6% in 2021, moderating to 4.4% in 2022. These projections will depend on the path of the health crisis, the effectiveness of policy actions to limit economic damage, the evolution of financial conditions and commodity prices and the adjustment capacity of the economy.

Over the medium-term, global growth is expected to moderate to 3.3%, reflecting projected damage to supply potential and forces that predate the pandemic, including aging-related slower labour force growth in advanced economies and some emerging market economies.

Indian economy: Aligned to the slide in global GDP, Indias economic progress was expected to contract. According to the second advance estimate by the Government, Indias GDP is expected to contract by 7.3% in 2020-21 against a growth of 4.0% in 2019-20.

But this could have been worse, had it not been for the resurgent rural markets which, once again, supported India in coming out of recession. After a contraction in GDP for the first half of FY21 (a negative growth of 24.4% in Q1 and 7.3% in Q2), India recovered to emerge as one of the select few economies that witnessed positive year-on-year growth in the three-month period October-December20 - it grew by 0.4%. As resurgence gained momentum, Indias GDP growth in Q4 of 2020-21 was even higher at 1.6%.

Among the three sectors that comprise economic activity, the agriculture sector, which largely supports the rural economy, remained robust – it registered a growth of 3.0% in 2020-21 (lower than 4.3% growth recorded in 2019-20).

The Gross Value Added (GVA) in Indias economy shrank 6.2% in FY21, compared to a 4.1% rise in the previous year. Interestingly, the GVA rebounded sharply from the negative zone in the first half of FY21 to 1% positive in Q3 and 3.7% positive in Q4.

In keeping with this uptick, GST collections crossed the B1 lakh mn mark for the second half of 2020-21 – it was B1.23 lakh mn in March 2021, the highest collection since the launch of GST.

The net indirect tax collection in 2020-21 grew 12.3% annually to B10.71 lakh mn, exceeding the previous year benchmark at B9.54 lakh mn.

Indias debt ratio at the end of 2020 was almost 90.0% of GDP (against 74.0% of GDP a year ago). This was a natural fallout considering the Covid relief (US$ 260 billion) and stimulus (B2650 billion) packages announced by the Government to uplift the sagging economy. It is expected to settle to the pre-Covid levels as economic activity gathers momentum.

In view of the economic momentum in Q4 of 2020-21, leading opinion makers had estimated a sharp growth in India GDP for 2021-22. But the outbreak of the second wave of Covid-19 in India, these estimates have been revised downwards.

Amidst the second wave, the Reserve Bank of India (RBI) announced a Covid package of B50,000 mn for vaccine makers, medical equipment suppliers, hospitals, and even patients in need of funds to treat the disease, also opening up another round of restructuring of loans for individual and small borrowers for up to two years. It is expected to boost fund flow to the healthcare sector and ease the pain of small borrowers and units.

Structural steel tube is 100% recyclable and one of the most reused materials in the world.

NATIONAL INCOME ESTIMATES

Industry 2019-20 2020-21 Q4 FY21 Q4 FY20
Agriculture, forestry and fishing 4.3 3.6 3.1 6.8
Manufacturing -2.4 -7.2 6.9 -4.2
Construction 1.0 -8.6 14.5 0.7
Trade, hotels, transport 6.4 -18.2 -2.3 5.7

 

*All figures in per cent

Structural steel tubes

Structural Steel Tubes is widely used in the construction business. Every landscape altering creation across the globe has structural steel tubes being used.

Steel pipes and tubes are preferred because of their durability. They combine high strength with low weight, so they are ideal to use. They are capable of withstanding high heat and pressure, shock and vibrations. The peculiar features of structural steel make it ideal for construction purpose.

In India, the demand for structural steel tubes is expected to gain traction in the coming years. There is a paradigm shift in the approach to steel consumption and increased recognition and acceptability for structural steel tubes and pre-engineered building material in India now.

While globally the proportion of structural steel tubes is around 10% of the total steel consumption, in India it lags at 4-5%. As such, there is further scope for increase in the consumption level.

"The total market size of structural tubes in India is 4 MnT per annum. In the pre-Covid, stage, the industry was growing in double digits. FY20 closed at around 4 MnT. It is expected that FY21 would hover around the same levels owing to the pandemic. In value terms, this 4-Mnt market is pegged at around B20,000 mn. However, in three years time it should grow at mid-double digit of 10-15%."

Sanjay Gupta

Chairman & Managing Director

Benefits

Environmental friendly - recyclable & lower greenhouse gas emission

• No underwater usage unlike conventional method

Highly durable, sustainable, fire resistant & easy to repair

• Swift erection speed helping in lower overhead costs

Elevated stress bearing capacity

• Excellent Strength to Weight Ratio

Light weight

Growth Drivers

Growing vertical model of development; increased spending on skyscrapers

Higher expenditure on infrastructure - highways, bridges, flyovers & public utilities

Growth in E-commerce/Warehouse construction demand

Consumer preference for better quality residential construction

Rising need for housing due to population explosion

Ability to replace wood gives it an edge

Infrastructure… will drive demand for structural steel tubes

The current Union Budget (FY 2021-2022) has been favorable for the infrastructure sector in several ways than previous one.

Not only the capital outlay for the infrastructure sector was increased significantly, but also several other expectations were also met. This includes further allocation towards the National Investment and Infrastructure Fund (NIIF) and the setting up of a new development finance institution (DFI). These will augment the financing avenues for the infrastructure sector and can pave the way for increased private participation thereby supporting the overall infrastructure investment.

The gross budgetary support towards capital expenditure has been increased significantly to B5.54 lakh mn in 2021-22 BE (up

34 percent from 2020-21 BE, and 26 percent from 2020-21 RE) with higher allocation towards the infrastructure sector.

The government has allocated B20,000 mn to set up and capitalise a Development Financial Institution (DFI)—to act as a provider, enabler and catalyst for infrastructure financing and a B5 lakh mn lending portfolio will be created under the proposed DFI in three years.

Structural Steel Market Expansion

Structural Steel Tubes Market expansion linked to construction activity

Uses of Structural Steel Tubes

Global Structural Steel Tubes Uses - Segment wise breakup(%)

New Opportunities to revolutionise construction industry

About the Company

APL Apollo Tubes Limited (APL Apollo) is one of Indias leading branded steel products manufacturers. Headquartered at Delhi NCR, the Company runs 10 manufacturing facilities churning out over 1,500 varieties of MS Standard Tubes, Galvanised Tubes,

Pre-Galvanised Tubes, Structural ERW Steel Tubes and Hollow Sections to serve industry applications like urban infrastructures, housing, irrigation, solar plants, greenhouses and engineering.

What makes us different?

Largest structural steel tube manufacture in India

Largest players in the world with a 2.6 Mn TPA

Pan-India manufacturing presence

A leader in adopting the latest technology from across the globe

A large and growing product portfolio

Expansive and entrenched market presence aided by a three-tier distribution network

Robust supply chain infrastructure comprising warehouses-cum-branch offices in over 20 cities.

A deleveraged financial position

Operational performance

FY21 was period of many firsts. A lockdown followed by a surge in demand which ultimately finished in one of the best fiscals for the Company.

To meet the abrupt lockdown, the Company arranged to minimum workforce to ensure a proper shutdown of equipment and preventive maintenance – a prudent measure that enabled the Company to restart manufacturing operations with ease when the lockdown was lifted.

In the first quarter of FY21, the Company focused on delivering material for the orders in hand. The Company utilised this time to inform customers that its plant operations had been initiated. This initiative worked well as inflow of order picked pace.

Subsequently, as demand gained traction, the Company maintained its policy of manufacturing products as per confirmed orders, minimising inventory. As such capacity utilisation increased from about 40% in May 2020 to about 70% in July 2020.

The operations team continued to work diligently on improving cost efficiencies through various measures. The team also developed two new sizes which were well received in the market.

The proportion of value-added products increased from 40% in FY20 to about 60% in FY21 – it enhanced business profitability.

The Company continued to invest in enhancing capacities. It invested B1,021 mn in the recent Raipur facility. It moved its GP Lines from the Hyderabad unit to its Murbad and Raipur units which will facilitate these units to increase their volume of value-added products. The Company also installed one heavy mill at its Sikandrabad unit to cater to the requirement from the automobile segment.

The team also worked on setting CRM mills in Murbad and Hosur – these units are to be commissioned in the current year (FY22). These initiatives are expected to increase the production of value-added products, optimise operational costs and enhance business profitability.

Production break-up

d ALIGN=RIGHT>FY20
FY21 % Change
Apollo Structurals (Hollow section & DFT Tubes) 308,182 187,817 64%
Apollo Z (Pre-galvanised tubes -GP) 316,549 335,025 -6%
Apollo Build (Galvanised tubes) 71,242 99,387 -28%
Apollo Standard (Standard Tubes) 712,890 898,321 -21%
Apollo Tricoat 231,490 112,761 105%

Financial performance

(based on Consolidated Financial Statements)

Despite the prevailing headwinds owing to the health emergency prevailing in India, the Company reported a stellar performance raising the bar once again despite being fully operational for only 10 months of the year.

Statement of Profit and Loss

Revenue from operations increased from B77,232 mn in FY20 to B[84,998] mn in FY21 – a 10.1% increase even as the Indian economy entered a recession. While sales volume stood at 1.64 mn tonnes during the year, against 1.63 mn tonnes in the previous fiscal, the Company enjoyed the benefit of successive price increases in the second half of FY21 which bolstered its topline. Besides, Apollo Tricoat performed exceeding well with a surge in sales volumes for all its products which made a healthy contribution to APL Apollos topline – 17% in FY21 against 9% in FY20. The growing traction for value-added products of APL Apollo and growing acceptance of Apollo Tricoat products (all of which are high-value products) helped in registering a 42% growth in EBITDA – from B4,774 mn in FY20 to B6,787 mn in FY21. In tandem, EBITDA margin improved by 180 bps over the previous year.

The Companys interest cost moderated further from B1,073 mn in FY20 to B661 mn in FY21 owing to reduction in debt – long term and working capital.

Net Profit for the year stood at B3,602 mn in FY21 against B2,380 mn in the previous year – a jump of 51%. Net Cash from Operations improved significantly from B5,095 mn in FY20 to B9,771 mn in FY21. This was prudently deployed in retiring debt and investing in future growth opportunities.

Balance Sheet

The strength of APL Apollos business model is reflected in its ability to sweat every rupee at the optimum level. So, even as revenue jumped by 10% over the previous year, the Capital Employed in the business decreased by 9% -- from B24,251* mn as on March 31, 2020 to B21,995* mn as on March 31, 2021. The Return on Capital employed upped from 18.4% in FY20 to 26.5% in FY21.

Shareholders Funds increased from B13,562 mn as on March 31, 2020 to B16,947 mn as on March 31, 2021 on account of plough back of business surplus.

[* Capital Employed is calculated on conservative side (Total Assets- Current liabilities- Cash & Cash equivalent]

Net Debt reduced further to B1,624 mn on March 31, 2021 from B7,881 mn as on March 31, 2020. This was owing to two reasons 1) the Company repaid B3,134 mn of term loans within FY21 and 2) The Company altered its business model from credit to cash-and-carry which significantly reduced its working capital loans. As a result, Net debt-equity ratio improved from 0.6x as on March 31, 2020 to 0.1x as on March 31, 2021 – the Company is firmly positioned to become a zero-debt organisation in the current fiscal.

Fixed asset balance increased marginally from B14,839 mn as on March 31, 2020 to B16,109 mn as on March 31, 2021 as no high-ticket projects were commissioned during the pandemic-ridden year. The Company continued stringent monitoring of its working capital. Inventory at B7,599 mn was at previous year levels even as revenue increased significantly. Trade receivables declined from B4,764 mn as on March 31, 2020 to B1,306 mn as on March 31, 2021 as the Company altered its sales policy. As a result, the working capital cycle improved from 25 days as on March 31, 2020 to 8 days as on March 31, 2021.

Significant changes (i.e. change of 25% or more as compared to the immediately previous financial years) in Key Financial Ratios, along with explanation are as under:

Particulars FY21 FY20 Change Reasons
Interest Coverage Ratio 9.3 3.8 146% Repayment of debt
Debtors days 5 19 -75% Increase in turnover & change in sales policy
Inventory days 33 37 -12%
Current Ratio 1.2 1.2 0%
Debt-Equity Ratio 0.1 0.6 -84% Repayment of debt
EBITDA Margin (%) 8% 6.2% 180 bps
Net Profit Margin (%) 4.2% 3.1% 116 bps
Return on Net Worth (%) 24.8% 21.2% 363 bps

Where our products are used

Urban infrastructure

Indias vertical growth pushed high-rises buildings with G+20 floors or more to record highs 2019 onwards

The Government has formed a panel to look into the upward revision of FSI norms in all major cities

Warehousing

A_ordable housing

Trends for affordable housing with low cost & faster completion is picking in India

Modular Building will be the future construction methodology

Modular steel structures are constructed in-house with final assembly occurring on-site, where the steel modules are stacked and connected together

Airports

The Government plans to start 100 additional airports by 2024

• To invest B190 bn in upgrading airport infrastructure in the country, especially in smaller cities over next three years

Human Resource

APL Apollo continues to invest in its people – building their capability, sharpening their expertise and nurturing the spirit of leadership, which makes it a learning and delivering institution and facilitates sustaining its industry outperformance.

APL Apollo stresses on continuous learning and employee trainings at all levels for building technical and behavioural competence, self-development and leadership development. Despite the challenges that prevailed in FY21, the Company continued its knowledge-enhancing initiatives for its team.

The Company continued to maintain its record of good industrial relations without any interruption in work.

Information Technology

Information Technology gained centre stage as the pandemic transformed the working ecosystem across India from ‘Work in Office to ‘Work from Home. At APL Apollo, with the announcement of the lockdown, the IT team worked diligently to prepare the systems and processes, data management and security for this New Normal. This became increasingly challenging as it needed to be done remotely – both at the server and user levels. The software and hardware (systems) needed to be realigned for this sudden change.

In addition, the IT team successfully implemented the SAP rollout in Apollo Tricoat (its subsidiary) at its offices and operating units. In addition to the accurate data transfer from the legacy system to the new system, the IT team also trained the Apollo Tricoat team for operating the new platform. This changeover went live in May 2020, as the pandemic was spreading across the Indian landscape.

The Company also invested in Robotic Process Automation solutions. As the name suggests, these tools automate manual and mundane processes that do not require application of the human mind. As a first step, the Company launched the solution for Goods Received Note, which is now made by robots – eliminating human intervention.

With the announcement of the Government policy on e-invoicing, the IT team aligned it systems and processes to allow for this regulation well before the Government stipulated timelines.

Going forward, the Company plans to strengthen its footprint on the digitalisation journey by introducing new solutions at its plants and offices.

APL Apollo is ready for a riveting journey ahead

Opportunity Size Where we are... Our strengths...
Potential structural steel market size of: FY21 sales volume was 1.6Mn ton New innovative products
Branding
• 13Mn ton by 2033 Current capacity is 2.6Mn ton Fixed costs of unutilised capacity factoring in
22Mn by 2030 Future capacity addition linked to market potential Low gearing
Solid FCF generation

Internal Control & its adequacy

At APL Apollo, the internal control mechanism is designed to protect its assets as well as authorise, record and correctly report all transactions on time. It conforms to the local statutory requirements and meets the highest global standards and practices to remain competitive in an evolving business dynamics.

The internal control framework monitors and assesses all aspects of risks associated with current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks.

While ensuring flawless competition of accounting and financial processes, the internal control mechanism reviews both the manual and automated processes for transaction approval.

The Audit Committee carries out periodic reviews of the internal audit plan, verifies the adequacy of the control system, marks its audit observations, and monitors the sustainability of the remedial measures.

Risk Management

Risk management is integral to any business. APL Apollo has devised its risk management mechanism to predict, preempt and prevent financial or commercial risks, errors and frauds. It simultaneously strengthens the Companys business model with the objective of making profitable growth sustainable.

The framework involves an integrated risk appraisal system and mitigation strategy with all key managers being part of the mechanism. The control measures are placed before the Companys board for periodic review and improvement.