Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of APL Apollo Tubes Limited (APL Apollo) at ‘CRISIL AA/Positive/CRISIL A1+’. CRISIL Ratings has also withdrawn its rating on the commercial paper facilities of the company amounting to Rs 300 crore at the company’s request and on receipt of the required documentation, as the same has not been placed yet. This is in line with the rating withdrawal policy of CRISIL Ratings.

 

In fiscal 2024, APL Apollo registered revenue growth of ~12% y-o-y to Rs 18,119 crore (Fiscal 2023: Rs. 16,171 crore), primarily driven by ~15% y-o-y volume growth even as blended realizations dipped by ~3%.  Earnings before interest, tax, depreciation, and amortisation (Ebitda) margins remained flattish at ~6.6% in fiscal 2024 compared to 6.4% in fiscal 2023. Ebitda per tonne for fiscal 2024 stood at ~Rs 4,500, a y-o-y improvement of 1.5%. Going forward, volume growth is expected to remain strong at ~15% with expected ramp-up in Simga, Raipur plant and UAE plant. Further, operating profitability is expected to sustain with EBIDTA per tonne ranging between Rs.4,500 – 5,000 supported by better capacity utilization and higher fixed cost absorption. The company will continue to benefit from its strong market position in the structural steel pipes segment.

 

Financial risk profile remained strong, backed by healthy capital structure as indicated by debt to Ebitda ratio of 0.89 time for fiscal 2024 as against 0.83 times in fiscal 2023. Debt protection metrics remained strong with interest coverage ratio of 11.17 times in fiscal 2024 as against 15.74 times in fiscal 2023. Liquidity also continues to be comfortable, with cash and equivalent of Rs 1,141 crore. Further, cash and carry model followed by the company also lowers overall working capital requirements. It might be noted that company became net debt free as of March 31, 2024, and is expected to remain so over the medium term with growing accruals which should be sufficient to cover all capex requirements and meet repayment obligations.

 

The ratings continue to reflect the leadership position of APL Apollo in the electric resistance welded (ERW) pipes and structural products industry, and diversity in terms of geographical presence, product profile and end-user industries. These strengths are partially offset by exposure to intense competition and to volatility in the prices of raw material as well as finished goods.

Analytical Approach

CRISIL Ratings has taken a consolidated approach and combined the operating and financial performance of all the subsidiaries with APL Apollo Tubes Ltd. This is because the entities are in the same business, share a common brand, benefit from central sourcing policy and there is fungibility of cash flows amongst them. Also, majority debt of all these entities is guaranteed by APL Apollo.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Leadership position in the ERW pipes industry: With a total production capacity of 41 lakhs metric tonne per annum (mtpa) as of March 31, 2024, APL Apollo has the largest capacity in domestic ERW steel pipes market. The company has increased its capacity from earlier 26 lakhs mtpa to 41 lakhs mtpa by commissioning new capacity of 15 lakhs mtpa in Simga, Raipur in Q2 fiscal 2024. It has established presence across India, with plants set up across the northern, southern, eastern, and western regions. APL Apollo is further in the process of increasing its capacity to 50 lacs mtpa by establishing plant in UAE, Simga and other capacity increase in existing plants. Large scale enables the company to enjoy economies of scale with regards to procuring raw materials and better fixed-cost absorption.

 

Diversified geographical presence, product profile and end-user industries: Clientele is spread across residential, commercial, and industrial construction, infrastructure; and industrial and agricultural applications. Furthermore, the company has gradually reduced its dependence on the traditional ERW pipes segment (used for irrigation and fluid transportation) that typically fetches lowest margin; and has increased focus on structural products used in the construction segments (residential and commercial) that have significantly better margins. Business risk profile also benefits from geographical diversity and product mix, thereby safeguarding against cyclicality and event-based risks and leading to the healthy operating profit per tonne among ERW pipe manufacturers.

 

Improvement in operating performance: Product volumes have registered a compound annual growth rate (CAGR) of ~14% during fiscals 2020-2024. This growth has been achieved through continuous efforts to improve market share by increasing production capacities, widening distribution networks, and focusing more on product branding. APL Apollo has tie-ups with around 1,000 dealers.

 

Furthermore, increasing focus on enhancing sale of value-added products has improved profitability: blended Ebitda per tonne was around Rs 4,500 in fiscal 2024, which has increased from Rs 3,000 in fiscal 2020 with share of value-added products increasing to 58% in fiscal 2024 from 45% in fiscal 2020. Favourable industry dynamics and increasing share of value-added products are expected to keep operating performance healthy over the medium term. Ramp up of the new Simga, Raipur and UAE plant is expected to further support operating profitability through higher operating leverage.

 

Strong financial risk profile: Despite debt-funded capital expenditure (capex) undertaken in subsidiary, APL Apollo Building Products Pvt Ltd, financial risk profile has remains strong with gearing below 0.50 time as on March 31, 2024. Debt protection metrics continued to remain healthy with interest coverage ratio at 11.17 times in fiscal 2024 as against 15.74 times in fiscal 2023. Annual cash accrual remains comfortable at Rs 908 crore in fiscal 2024 and is expected to surpass Rs 1,000 crore in fiscal 2025 against repayment obligations of ~Rs 200 crores. The strategic shift to a cash-and-carry model has resulted in lower receivables and reduced dependence on working capital debt. This is reflected in reduction in debtor days from 23 days in fiscal 2022 to 3 days in fiscal 2024.

 

APL Apollo has become net debt free as of March 31, 2024 and is expected to remain so in the coming fiscals as well.

 

Weaknesses:

Exposure to intense competition: Fragmented industry structure due to low entry barrier has kept operating margin modest at 6-8%. The ERW industry is largely unorganised. Low margin, however, insulates the industry from imports. The Company has the highest market share of ~55-60% in the structural steel tubes segment and has been able to sustain its reach even during the pandemic.

 

Exposure to volatility in raw material prices: ERW pipe manufacturers are steel convertors and fluctuations in raw material prices are passed on to consumers, but with a lag. Accordingly, as seen in the past fiscals, operating margin is susceptible to fluctuations in the prices of steel (hot rolled coil). However, the monthly pricing mechanism followed by the company and improved inventory management policy are expected to reduce the impact of any significant price movement.

Liquidity: Strong

Annual cash accrual is expected to be more than Rs 1,000 crore over the medium term against debt repayment obligations of Rs 200 crores and capex plans of Rs. 200-450 crore per annum. Further, liquidity is also supported by cash and cash equivalent of ~Rs.1141 crores as on March 31, 2024. Additionally, at a consolidated level, the group also has access to total working capital limit of Rs 2,985 crore, with average utilization of 35% during the last 6 months up to Apil 2024.

 

Environment, social and governance (ESG) profile

The ESG profile of APL Apollo supports its strong credit risk profile.

 

Steel pipe manufacturers have a high impact on the environment primarily driven by high power consumption done during their manufacturing process. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners, and due to its nature of operations affecting the local community and health hazards involved. APL Apollo has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights:

• The company has installed 3 rooftop solar panel units of 2.6 megawatt (MW), 1.1 MW and 1.3 MW at Unit-IV (Raipur), Unit-I (Sikandrabad), and Unit-IIII (Murbad) plants, respectively. It has made substantial investments to purchase renewable energy at all manufacturing units. The company has reduced its energy intensity over the years.
• Nine out of eleven of the facilities have effluent treatment plants (ETP) which helps in recycling water and using it in operations. Due to continued efforts, water output has declined by 8% over the previous year.
• Company has set a goal of increasing the female workforce by 1% in the permanent employee category by 2025.
• Due to its employee-friendly policies, attrition rate is low at less than 5% in fiscal 2023.
• The governance structure is characterized by effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of APL Apollo to the ESG principle will play a key role in enhancing stakeholder confidence given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Positive

CRISIL Ratings believes the business risk profile of APL Apollo will benefit from sustained volume growth further aided by ramping up new plants at Simga, Raipur and UAE which will also support overall operating margins. Further, the financial risk profile is expected to remain robust over the medium term with a healthy capital structure and strong debt protection metrics.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in business risk profile driven by sustained volume growth while maintaining EBITDA per tonne at Rs 4,500 – 5,000.
• Sustenance of strong financial risk profile

 

Downward Factors

• Larger-than-expected debt-funded capex or working capital debt leading to Net debt/Ebitda exceeding 1.0 times
• Significant weakening of operating performance, with Ebitda per tonne declining below Rs 3,000

About the Company

Established in 1986 in Delhi National Capital Region, APL Apollo is the largest and one of the fastest-growing ERW steel tubes/structural products manufacturers in India, with a current production capacity of 41 lakhs MTPA. The company is a part of the Sudesh group and is promoted by Mr Sanjay Gupta.

 

Currently, APL Apollo has 11 manufacturing facilities, with 3 plants in Sikandrabad (Uttar Pradesh); 1 each in Hosur (Tamil Nadu), Murbad (Maharashtra),  Hyderabad (Telangana),  UAE; and 2 plants in Bangalore (Karnataka) and Raipur (Chhattisgarh). It has also established a wide 3-tier distribution network with around 800+ dealers.

Key Financial Indicators

As on / for the period ended March 31 (Consolidated)		2024#	2023
Revenue	Rs crore	18,119	16,171
Profit after tax (PAT)	Rs crore	732	642
PAT margin	%	4.04	3.97
Adjusted debt/adjusted networth	Times	0.32	0.31
Interest coverage	Times	11.17	15.74

#based on abridged financials

Any other information: Not Applicable