Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in the ERW pipes industry: The company has a total production capacity of 4.1 lakhs metric tonne per annum (mmtpa) in June 2023. It has established presence across India, with plants set upacross the northern, southern, eastern, and western regions. Large scale enables the Company to enjoy economies of scale with regards to procuring raw materials and better fixed-cost absorption. It is the price leader in the industry.

• 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 ~15% during fiscals 2018-2023. 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 2023. 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 Raipur plant, which houses the value-added product capacity, will remain a monitorable in improving the operating efficiency of the company.

• Healthy financial risk profile: Despite debt-funded capital expenditure (capex) undertaken in subsidiary, APL Apollo Building Products Pvt Ltd, financial risk profile has remained comfortable. Gearing increased slightly to 0.30 time as on March 31, 2023, from 0.25 time as on March 31, 2022 and interest coverage ratio stood at 16 times in fiscal 2023 as against 22 times in fiscal 2022 however, both the ratios remained strong. Annual cash accrual remains comfortable at Rs 780 crore in fiscal 2023 and is expected to remain comfortable above Rs 800 crore in fiscal 2024. The strategic shift to a cash-and-carry model has resulted in lower receivables and reduced dependence on working capital debt.

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% 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 800 crore over the medium term. Change in working capital management policy with a shift to a cash and carry model has substantially reduced the dependence on working capital funding. Additionally, at a consolidated level, the group also has access to fund-based limit of Rs 1545 crore, with average utilization of 40-50% during the past fiscal (basis on drawing power limit). Cash accrual would be sufficient to repay annual debt of Rs 120-170 crore over the medium term.

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. Company has reduced its energy intensity over the years. However, other parameters are performing at same level.
• Company’s Operations, with a target year of 2025, are ensuring all plants have access to renewable energy, ensuring installations of rainwater harvesting at all units, monitoring scope 3 emissions, and ensuring all units to be zero liquid discharge (ZLD) facilities.
• 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.
• Attrition rate decreased from 16% in 2021 to 12.3% in 2022.
• 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.

Annexure - Details of Instrument(s)

*Interchangeable with vendor financing scheme up to Rs 130 crore, export packing credit up to Rs 16 crore, and foreign bill discounting up to Rs 24 crore
#One-way changeable from cash credit to letter of credit (LC) up to Rs 100 crore
%Interchangeable with non-fund-based facilities up to Rs 214 crore
^ Fully interchangeable with non-fund-based facilities
## Interchangeablewith packing credit up to Rs 60 crore; inland letter of credit up to Rs 60 crore; and performa invoice discounting up to Rs15 crore
**100% interchangeability between LC and bank guarantee up to Rs 20 crore

Annexure – List of entities consolidated

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