APL Apollo Tubes- A Branding Game -Part 1

A few days ago, while watching TV, I came across a new ad, featuring Mr, Amitabh Bachchan, and the product is a steel door frame. I thought to myself...A Door frame..!!! of steel? that too with a brand?? Then I look at the door frames of my house, they are mostly of wood...I thought, why not look at that this company.

Whether listed!! Yes...

It is APL Apollo Tubes...Incorporated in 1986, APL Apollo is the market leader in the (Electric Resistance Welded) ERW Pipes. 

ERW (Electric Resistance Welded) the name is given due to the Process of manufacturing these pipes. (Hot Rolled Coil of Steel is permanently joint by heating them electric current). 

Now you will be asking, Are there any other types of steel pipes?

On the basis of Applications, the sector is divided into Oil and Non-Oil applications.  

Source: SPA Report

The basic difference between stainless steel and carbon steel pipes lies in the mixture of the basic components, in stainless steel chromium content is higher which acts as a protective layer against corrosion and rust while carbon steel is high in carbon that when exposed to moisture can corrode and rust quickly but is stronger & durable than stainless steel.

Seamless and Welded are just the difference in their production process. Wherein seamless pipes have no joint, welded pipes have joint. In ERW, SAW (2 types-LSAW(Longitudinal Submerged Arc-Welding Pipe) & HSAW (Helical submerged arc welding, i.e. spiral)), the main difference is their production process. For other differences, please check the below table.

Now, let's talk about industry size and its future prospects.

The Global Steel Pipes Industry: The global steel pipes & tubes market size was valued at USD 142.4 billion in 2019 and is expected to grow at a CAGR of 6.2% from 2020 to 2027. Increasing oil & gas production owing to the demand from the transportation industry is one of the prominent growth drivers for the market.

The oil & gas industry is the major consumer segment for steel pipes & tubes. Steel pipes are used for the transportation of gas & liquid in this industry. They are generally manufactured using low alloy or carbon steel. The inside diameter, ductility, yield strength, and pressure rating are some of the key factors considered while selecting pipes for specific applications.

In terms of volume, seamless accounted for a market share of over 54% in 2019. Since the past few years, ERW pipes & tubes are gaining prominence in the market owing to their low prices and modest performance. Modern welding technologies, such as high-frequency welding, that are being increasingly integrated into the process of manufacturing ERW pipes & tubes act as a crucial factor supporting the segment growth.

Application-wise, the oil & gas segment led the market in 2019 and accounted for the highest revenue share of over 51%. The segment will retain the leading position over the forecast years due to diverse applications of the products in the oil & gas sector, ranging from OCTG, transportation to process piping for refining crude oil into petroleum products.

The Domestic Steel Pipes Industry: The steel pipe industry grew with a CAGR of 6-7% over the last 5 years to Rs 50,000 crore in FY20. It accounts for 8% of the domestic steel consumption. The steel pipe industry is equally split between ERW pipes & S&S pipes (seamless& SAW) in value terms. While in volume terms, the domestic market is split in 70:30 between the ERW & S&S pipes.  

The domestic market is expected to accelerate by 7-8% to Rs 70,000 crore over the next 5 years compared to 6-7% in the last 5 years. Growth would be higher for the ERW segment, which is expected to grow at 8-10% as against 5-6% for S&S. 

The domestic ERW Steel Pipes industry demand is expected to touch 10 MTPA (Million Tonnes Per Annum) with a market size of Rs 40,000 crore by 2022 from the current Rs 25,000 crore. This demand will be largely driven by water transportation, oil & gas, fire-fighting, construction, infrastructure, and furniture segment, among others.

More recently, apart from the traditional use for transportation of liquids and gases, steel tubes and pipes, particularly the ERW category has increasingly found application as hollow support structure at airports, malls, metro stations, pre-engineered buildings, etc. Besides these urban infrastructure applications, ERW pipes and tubes are fast emerging as replacements to certain traditional aluminum and wooden parts in trucks and bus bodies. Today India is counted as one of the leading ERW steel tubes manufacturing countries alongside China, Turkey, Italy, and the US.

Crisil Report on Steel Pipes Industry

a.     Driving the Demand through End-User Industries:

• Auto Industry: The automobile industry in India has gradually moved out of the downturn and is witnessing steady growth. The passenger vehicle sales have witnessed robust growth and demand of the commercial vehicle segment is back on the cards. Hence, the growing demand for the automobile industry would push the demand of ERW steel pipes.
• Infrastructure: The central government has significantly increased its focus on the development of infrastructure in India. It has significantly increased the allocation of key infrastructure-focused sectors like roads, highways, and urban development. It is projected that India would need about USD 646 billion worth of investment in the infrastructure sector over the next five years of which 70% would be towards power, roads, and urban infrastructure sectors. The infrastructure sector is amongst the primary consumers of steel pipes and structures.
• Smart Cities: The Government has focused on developing 100 smart cities across India. This initiative is leading towards the development of better infrastructure at a faster rate. There is a growing demand for Airports and commercial complexes which also leads to the growing demand for steel structures.
• Solar Energy: The government’s focus on the usage of renewable energy resources to fuel economic development while reducing carbon footprints has led to the ambitious target of generating 100 GW of solar energy by 2022. This is a mammoth opportunity for manufacturing steel companies to cater to the huge demand of meeting India’s solar power energy requirement.
• Agriculture: In the agriculture sector, steel tubes and pipes are used for sprinkling, drill rods, bore-well, water distribution, submersible pump and water conveyance etc. Agriculture is one the key livelihood sector and one of the major contributors to the GDP growth in India.

Within two years of listing on the stock exchanges, the company became the pioneer in India in pre-galvanized pipes segment and within 5 years become a PAN India company.

Now, let's talk about the company, APL Apollo, We know that the company is the market leader with a 40% market share in the ERW pipes industry. But did you know, that APL Apollo manufactures 4 different types of ERW pipes? Yes, they are Apollo Structural (Hollow Sections), Apollo Z (Pre-Galvanized Tubes), Apollo Standard (Black Round Pipes), and Apollo Galv (Galvanized Tubes). 

 

If we look at the volume share, Apollo Structural is the fastest-growing segment with 29% CAGR over the last 5 years capturing the largest share in the sales volume pie.

1.       Segment – Apollo Structural (Hollow Sections):

    APL Apollo Tubes Limited manufactures high tensile strength structural tubes which are used widely in various construction applications. It is also used in various industries including automotive, machinery, furniture, etc. These sections come in various shapes and sizes and finishes. Most common among them include Rectangular Hollow Sections (RHS) and Square Hollow Sections (SHS).

 

Hollow Sections emerged as an excellent alternative to steel channels, angles, and beams in construction & engineering application owing to high compressive strength, tensile capacity & superior fire resistance.

In the past, the ERW pipes have been primarily used in the water supply and sanitation segment and CGD transportation. Off late, they have found application in newer segments such as structural (construction and infrastructure segments). They are also used to manufacture pre-fabricated structures and in the automotive segment. This  makes structural tubes the fastest-growing segment in the Pipes & Tubes Industry.

The company has been focusing on improving the revenue share as well market share from Apollo Structural segment. It is working to widen its presence in the large diameter (150x150 mm to 300x300 mm) pipe segment. The large-diameter pipes account for about 7-8% of the APL sales volumes as against 3-4% for others.

A recent example of the import substitution opportunities in the section of the large pipe.

As per the management, "It is the fastest-growing segment in the structural tubing space. In developed nations, the large-diameter pipe market is about 25-30% of the structural tubing industry, while in India, it is still at 3-5%. The room for growth, thus, is immense. In the next 3-4 years, we wish to grow this segment significantly so that it contributes 15-20% of our total sales volumes."

Apollo structural is the largest and the fastest-growing segment of the company with a 31% 5-year CAGR to Rs 4093 crore. Also, the company is consistently focused on increasing the share of value-added products (with EBITDA > Rs 4000/ton) and it can be seen in the numbers as its volume sales increased from 13% in FY16 to 17% in FY20.   

2.   Segment – Apollo Z (Pre-Galvanized Pipes):

Apollo Z is a Pre-Galvanized (GP) section of Square, rectangular and circular tubes used for roofing structure. Specially designed for coastal regions these tubes are highly durable, sustainable, and stable that can withstand extreme weather conditions and offer excellent corrosion resistance. Apollo Z is an effective solution for roofing structures to provide protection from rains and sunlight.

GP Tubes are made from pre-galvanized sheets (which were galvanized while in sheet format). APL was the first company to introduce GP Tubes in India in FY04 now in FY20 it is more than a 1MTPA (Million Tons Per Annum) market.

To make pre-galvanized tubes and hollow sections, Apollo Metalex and Shri Lakshmi Metal Udyog (wholly-owned subsidiaries) were backward integrated with in-house sheet galvanizing facilities wherein APL directly manufactures pre-galvanized sheets from HR coils. The tubes are tough and durable, yet light with controlled zinc coating and are popular for a number of applications including fencing, cabling and ducting, automotive (bus body), and greenhouse structures.

Under this segment, the company has launched products under the brand name of Apollo CoastGuard in 2017, creating a revolutionary change in the world of galvanized steel pipes.

Apollo Coastguard products are made of special hot-dipped galvanized steel coil to cater to the need of galvanized steel tubes in the coastal regions. These pre-galvanized tubes have a rich interior as well as exterior coating of Zinc. The Coastguard is primarily being used for the purpose of roofing structures providing protection from rains and sunlight that can last for generations. They are available in Square, Rectangular, and Circular sections.

Product Personality: Coastguard is made of hot-dipped galvanized coil that enhances the life of these tubes to provide better durability and strength. The interior coating of zinc helps in protecting the rusting of tubes from the inside. Built to last for generations, these tubes also provide excellent corrosion resistance against wind, water, and road salts making them 100% rust proof.

The company has a capacity of 5 lakh tons pa for GP pipes. It is already a value-added segment for the company with an average EBITDA of Rs 5500/ton and revenue of Rs 1600 crore with 5 year-CAGR of 18%.

 “An increase in the volume of high-value GP pipes was on account of identifying new applications and new markets for this product. This should help in generating healthy business growth from FY2020 onwards.”

3. Segment – Apollo Standard (Black Round Pipes):

These pipes are also known as MS Black Pipes, where MS stands for Mild Steel and are manufactured by coating it with oil or black lacquer base. Available in sizes ranging from 21 mm to 355 mm. Owing to low maintenance, these tubes are used in boilers, power transmission, and gas distribution system.

 These pipes are more commoditize and very low margins products with a margin of 5-6% only. Also, in the last 5 years the revenue from this segment grew by only a 6% CAGR, and also the revenue share declined from 25% to 13% in the last 7 years.

4. Segment - Apollo Galv (Galvanized Pipes):

Apollo Galv is a range of Galvanized Iron (GI) products suitable for industrial and agricultural usage. Crack-resistant and sturdy, it is made of round, square, and rectangular GI tubes that are used for structural applications in high humid regions. Galv works well for the Greenhouse structure and agricultural system for pumping water and irrigation.

This segment is the worst-performing segment for APL as its revenue declined by 1% CAGR over the last 5 years to Rs 463 crore and with its revenue share declined from 16% to 6% only. But it’s a value-added product for APL as its average EBITDA is Rs 4,580/ton.

“As GI Pipes are typically used for water transportation mainly irrigation, in the year of good rainfall sales of GI Pipe fall as farmers don’t do much irrigation & depends more on rainwater and after the rainy season, the demand for GI pipe rose. It has been observed that whenever monsoons are good, the quarter may suffer but subsequently, particularly from November onwards you will see pick up till next year April/May.”

5. Segment - Apollo Tricoat:

Apollo TriCoat is a unique product that uses the most advanced galvanizing technology, the ‘Tricoat Process’. Bringing cutting-edge technology for the first time in India, Tricoat pushes existing benchmarks to set new standards. Manufactured using Galvant Technology Apollo Tricoat tubes and tubes ensure that the corrosion resistance offered is top of the line and provides maximum benefit to the user.

Recently, the company announced the merger of Apollo Tricoat and Shri Lakshmi Metal Udyog with APL Apollo Tubes Ltd. The scheme of amalgamation will involve splitting up of one share of Shri Lakshmi Metal of the face value of Rs 10 into five shares of the face value of Rs 2. 

In October 2018, Shri Lakshmi Metal Udyog Limited (SLMUL), wholly-owned subsidiary of APL, had announced the acquisition of 8.0 mn shares and subscribed to 4.3 mn warrants of Apollo Tricoat Tubes. The 4.3 mn warrants were converted into equity shares during Q1FY20 bringing SLMUL’s stake in APL Tricoat to 50.6%. The acquisition was partly funded after the promoter of APL infused Rs970 mn by way of 0.4 mn shares (preferential issue) at a price of Rs1,800. Also, APL has issued 0.5 mn warrants to promoters at a price of Rs2,000.

This merger makes APL among the top 5 global steel tube companies.

As per the management of APL Apollo Tubes, the strategic rationale behind the merger is

·         Simplification of group structure.

·         Creation of a stronger platform for growth.

·         Synergies across plant cost, distribution and go-to-market cost and most important brand name synergy.

·         The management is also very excited about the product synergy like combining the home décor products of Tricoat with the color-coated pipes of APL. This is an innovative product in this segment and can enjoy premium pricing.

·         Ability to offer innovative products resulting in higher margins.

·         Strong balance sheet lowers the overall cost of capital.

·         Increased cross-sell opportunities.

·         Greater financial flexibility for sustained growth.

"We expect business profitability to improve in the long term as the contribution from value-added products and profit contribution from Apollo TriCoat Tubes Ltd will improve." - Sanjay Gupta, CMD. 

Manufacturing Facilities: 

With the state-of-the-art manufacturing facilities, APL Apollo serves as a ‘one-stop shop’ for a wide spectrum of steel products. It operates ten world-class manufacturing units with a total capacity of 2.5 Million MTPA.

The company’s pipe manufacturing facility has increased from 0.2 MTPA (Million Ton Per Annum) in FY06 to 1 MTPA in FY15 to 2.5 MTPA in FY20 (12x in the last 15 years). It has a pan-India presence with five manufacturing plants across the northern, southern, and western regions. APL Apollo is more than double the size of the second-largest producer in India (Surya Roshni with total ERW pipe manufacturing capacity of 9.25 lakhs TPA) and competes with the organized as well as unorganized producers.

Extending to the Central & Eastern region of the country through the newly commissioned Raipur plant in FY18, the company has created a pan-India footprint besides garnering the logistics benefits, Raipur is the centralized location for distribution. It is further geared up to procure the business and reap benefits from the central and eastern regions of India by foraying into West Bengal, Odisha, Jharkhand, Patna, Siliguri and Eastern region.

Since inception, the company has been aggressively expanding its manufacturing capacity. In the last decade, its capacity has been increased with 25% CAGR from 0.2 MTPA to 2.5 MTPA as of 9MFY21 end with an average capacity utilization rate of 65%.

   As per IDBI REport, Historically, APL Apollo has acquired plants that were struggling due to various reasons such as obsolete technology, working capital issues, high cost of production, etc. APL Apollo has been successful in turning around at least three such plants successfully.

 

I know this company looks very interesting from its branded products to point of view and the entrance of Tricoat adds more glam to APL but there is more to come as in this commoditized industry, entry of brand plus growth can be a real game-changing opportunity and first-mover advantage for APL Apollo. I will cover the financials, management, and peer comparison, and the runway ahead in the next part. 

Till then...

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