Apollo Tricoat Tubes Ltd

Market Capitalization: 1,809 Cr	Current Price:  600 (1 Oct 2020)
Stock P/E: 38	Debt to equity: 0.56
Sales Growth (3Yrs): 121%	Profit Growth (3Yrs): 208%
ROCE: 26.1%	ROE: 26.1%
Promoter holding: 62.6%	Cash Conversion Cycle: 5 days
Asset Turnover: 1.72	Net Profit Margin: 6.3%

Overview of the Company

Apollo Tricoat Tubes Ltd (ATTL), formerly known as Best Steel Logistics, became part of APL Apollo tubes group in FY19. The company’s products find use in myriad applications from greenhouse tubing to rooftop sheds and electrical conduits. Triple coated technology is being used as a substitute for PVC pipes worldwide. The Company has introduced latest global technology, obtained from United States to manufacture steel pipes and tubes with triple-layer of protective coating, consisting of Paint, Zinc and Polymer coating. ATTL produces steel products such as closed door frames or designer pipes that can be used in furniture and designer hand railing, innovative pipes that can be used as tiles or planks in roofs, fences, and steps of a staircase, roofing and tricoat pipes that are used in electrical conduiting. It has 2 manufacturing facilities: one in Malur near Bangalore and the other at Dujana in Uttar Pradesh with a total capacity of 250,000 MTPA. APOLTRI enjoys various branding, marketing and distribution synergies with its parent company APL Apollo Tubes which holds a 50.6% stake in it. ATTL is led by Mr. Rahul Gupta who has completed BCom from Delhi University and executive courses in the field of Management from London School of Economics. He has 5 years’ experience in Steel Tubes Manufacturing Business.

Business Analysis

Differentiated Product with Technological Advantage

ATTL obtained galvanizing technology from United States to manufacture steel tubes with triple-coating of Paint, Zinc, and Polymer coating. The inline technology process covers the interior of steel tubes by zinc paint, outside by zinc galvanization which is in-turn covered by polymer coating making it corrosion resistant with smooth surface. As the tube is wielded before coating, even the wielded area is corrosion resistant as the rest of the tube. This leads to better corrosion resistance, improved yield, and greater tensile strength. This means tricoat pipes have an inherent advantage over Ductile Iron pipes and other pipes. Further, ATTL can command a better margin due to inline process and less use of zinc. ATTL have technology agreement with US company not to sell the technology to any other company for the next five years. The technology itself is so expensive that it is not so easy for any company to acquire this technology. It is eco-friendly in nature and has extended life compared to wood/steel giving ATTL’s products a competitive edge over other construction materials. ATTL is expected to generate steady state EBITDA margins of 12% plus which is higher compared to its parent Apl Apollo Tubes which only has 5-6% EBITDA margins. This is because of the specialized technology company possesses combined with superior durability of its products.

Diversified Product Base at Inflection Point

ATTL started its new product offerings in 2019. Apollo Signature, Apollo Chaukhat, and Apollo Elegant together contribute 95% of the total sales as of June 2020. The company has recently launched Apollo Plank, Apollo Wondoor, and Apollo Tricoat and will launch 3 more products namely Apollo Alfa, Apollo Scaff, and Apollo Hybrid in the next 3-6 months. Each of these products address opportunities in the building materials space with unique differentiated offerings. ATTL is targeting door and window solutions, home beautification, plumbing, and electrical conduiting with first-in-market kind of offerings that can capture significant market share owing to the superior nature of its products. Coated Pipes also find its utility in Irrigation, Water, Sewage, Infrastructure, Oil & Gas, Petrochemicals, Power and Energy. Apollo Chaukhat, the flagship product of the company can be installed post construction as well thus providing opportunities in the replacement segment as well. It is better alternative compared to wooden frames as Chaukhat is fire resistant, termite proof, easy to fit and has better durability and strength. Apollo Tricoat, which is pipes used in electrical conduiting will offer fire-proof conduit solutions and will target skyscrapers and high-end housing projects. The company expects Apollo Tricoat to contribute 25% of the overall sales going forward. Apollo Hybrid will be used in borewell and plumbing solutions and Apollo Scaff will find application in scaffolding and green houses.  ATTL currently has capacity of 2,50,000 tonnes to produce door frames, pipes, and other allied products which it plans to increase to 3,00,000 tonnes in FY21. The company will incur a capex of INR40 crore to expand the production capacity in Apollo Chaukhat and Apollo Elegant. The capex will be funded through internal accruals. It is currently operating at 58% capacity utilization and the ongoing capex signifies the robust outlook for its products.

Leveraging Parent’s Brand Strength

ATTL is looking to utilize the strong distribution network and established brand presence of APL Apollo. ATTL benefits from the operational, technological, and financial support it receives from its parent company as it is already an established brand in the building materials space. All bank limits of ATTL are backed by corporate guarantee from APL Apollo. APL Apollo has a large sales network of around 800 distributors. ATTL will look to tap into 50-60% of APL Apollo’s distributor network to sell its products. The company also markets its products through other retailers and fabricators. ATTL in agreement with APL Apollo has roped in Mr Amitabh Bachchan as the brand ambassador which will improve the visibility and provide impetus for growth. Mr. Bachchan has featured in TVC for Apollo Chaukhat and will gradually be used to market other brands as well. This is important to create and develop a niche market as ATTL’s products are both innovative and unique.

Key Risks

• Fluctuation in raw material prices are passed on to the customer with a lag of 1-2 months. Hence, margins are susceptible to fluctuations in steel prices in near term.
• Demand for its products is linked to real estate, building and infrastructure activity, and overall growth of the economy which is impacted severely due to the Covid-19 crises.
• The products are very much in nascent stage and the demand profile for them is difficult to ascertain.  This could also be viewed as an opportunity though.
• Educating the market and users of the advantages of its products is a challenge particularly as ATTL’s products are priced higher compared to competition.

Key Positives

• ATTL can use its parent APL Apollo’s extensive brand network and distribution to reach end customers much more effectively and with relative ease.
• ATTL’s superior technology and sturdy products lends it competitive advantage over its peers.
• ATTL has managed to ramp-up production considerably within 1 year of its operations with a diversified product profile.
• The company’s financial profile is looking good as it has brought down debt, reduced working capital days, generating healthy cash profits while maintaining healthy EBITDA margins despite the ramp-up in production.

Outlook and Valuation

ATTL’s three products currently constitute 95% of its overall sales. It has six more products in the pipeline and as the revenue contribution from the relatively newer products ramps up, we can expect a decent bump up in the company’s top-line.  The company is ramping up capacity and expanding its marketing spend to improve visibility and gain market share. The company’s financial metrics and return ratios are particularly good and it will become a free cash generator as its capacity utilization improves further. ATTL is currently trading at 38 PE, which is on the higher side but the growth in both revenues and profits could be strong for the next few years. ATTL could be good investment with a long-term horizon as the optionality of its products capturing market share and creating a niche in the building materials space could propel the company into the big league.

Disclaimer: Have personal investments in Apollo Tricoat Tubes Ltd at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.