Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of APL Apollo Tubes Ltd (APL Apollo) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’, and reaffirmed the rating on the short-term bank facility and commercial paper programme at ‘CRISIL A1+’.

 

The upgrade reflects CRISIL Rating’s expectation that APL Apollo’s credit risk profile will improve in the near term on the back of a sustained improvement in operating performance driven by above-industry volume growth and improving operating margins. Similarly, healthy free cash flows would result in low net-debt leading to strengthening of financial risk profile.

 

Despite the impact of Covid-19 during the first quarter of the current fiscal, APL Apollo has subsequently been able to post healthy growth in sales volumes on the back of its wide distribution network. Profit margins have also been improving steadily, mainly contributed by higher margins across product categories coupled with portfolio shifting towards value-added products, whose share improved to 60% in the quarter ended December 2020 from 45% in fiscal 2020. The volume growth and margins are expected to sustain with increasing sales of newly launched products that fetch higher margins.

 

APL Apollo has been able to reduce its net working capital days to a negative 9 days as of December 2020 from 30 days earlier by shifting to a cash and carry model. This, coupled with improved inventory management, has resulted in lower requirement of working capital. Being part of a highly competitive segment, the sustenance of this model is yet to be seen. However, working capital shall still remain in a comfortable range even if the company reverts to previous credit terms with its customers. Additionally, with no major debt-funded capital expenditure (capex) over the medium term, financial risk profile should remain comfortable.

 

The ratings reflect APL Apollo’s leadership position in the electric resistance-welded (ERW) pipes and structural products industry, and diversity in terms of its geographical presence, product profile, and the 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

For arriving at its ratings, CRISIL Ratings has taken a consolidated approach and combined the operating and financial performance of all the wholly owned subsidiaries of APL Apollo as well as the step-down subsidiary, Apollo Tricoat Tubes Ltd. This is because the entities are in the same business, share a common brand, benefit from central sourcing policy, and have fungible cash flows. Also, APL Apollo has guaranteed the entire debt of these entities.

 

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: The Company has a total production capacity of 2.65 million metric tonne per annum (mmtpa), which is more than 2 times its nearest competitor. It has established presence across India, with plants set up across 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 highest operating profit per tonne among ERW pipe manufacturers.

 

• Improvement in operating performance: Product volumes have registered a compound annual growth rate (CAGR) of 20% during fiscals 2015-20, while the overall industry grew by 5%. This growth has been achieved through continuous efforts on improving market share by increasing production capacities, widening distribution networks and with higher focus on product branding.

 

Furthermore, acquisition of a majority stake in Apollo Tricoat Tubes Ltd during 2019 and an increasing focus towards enhancing sale of value-added products have improved APL Apollo’s profitability: blended EBITDA (earnings before interest, taxes, depreciation and amortisation) per tonne improved to Rs 4,780 per tonne in the third quarter of fiscal 2021 from Rs 2,923 per tonne in fiscal 2020. Favourable industry dynamics and increasing share of value-added products are expected to keep operating performance healthy over the medium term.

 

• Healthy financial risk profile: While cash accrual increased to Rs 311 crore during fiscal 2020 from Rs 173 crore in fiscal 2019, it increased to Rs 348 crore during the first nine months of fiscal 2021. Also, gearing improved to 0.64 time as on March 31, 2020, from 0.93 time as on March 31, 2019; interest coverage ratio improved to 4.70 times in fiscal 2020 from 3.48 times in fiscal 2019. The strategic shift to a cash and carry model has resulted in lower receivables and reduced dependence on working capital debt, leading to net debt declining to Rs 198 crore as of December 2020 from Rs 788 crore as of March 2020. Financial risk profile will remain comfortable in the absence of any major debt-funded capex over the medium term.

 

Weaknesses

• Exposure to intense competition: Fragmented industry structure, wherein entry barrier is low, has kept operating margin modest at 5-8%. The ERW industry is largely unorganised. Low margin, however, insulates the industry from imports. The Company has the highest market share of 40% in the structural steel tubes market (key focus area) and has been able to expand its reach even during the pandemic, thereby increasing market share to 50%.

 

• 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 400 crore over the medium term. Change in working capital management policy during fiscal 2021 has substantially reduced the dependence on working capital funding, wherein Rs 200 crore was prepaid during the nine months of fiscal 2021 while cash balance increased to Rs 330 crore as of December 2020 from Rs 40 crore as of March 2020. Additionally, at a consolidated level, the group also has access to fund-based limit of Rs 1,465 crore, with average utilisation of 40-50% during the past one year (basis their drawing power limits). Annual cash accrual would be sufficient to repay annual debt of Rs 70-75 crore during the next two fiscals as well as fund ongoing as well as upcoming capex plans.

Outlook Stable

APL Apollo will continue to register steady growth in operating performance while maintaining comfortable financial risk profile, over the medium term.

Rating Sensitivity factors

Upward factors

• Sustained improvement in business risk profile with volume CAGR of more than 15%, along with geographical diversification over the medium term
• Significant improvement in operating performance, with EBITDA per tonne sustaining above Rs 6,000

 

Downward factors

• Larger-than-expected debt-funded capex or working capital debt leading to net debt to EBITDA exceeding 1.5 times
• Operating margin declining below 6% on a sustained basis

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 2.6 mmtpa. The company is a part of the Sudesh group and is promoted by Mr Sanjay Gupta. Currently, APL Apollo has 10 manufacturing facilities, with 3 plants in Sikandrabad (Uttar Pradesh); 1 each in Hosur (Tamil Nadu), Murbad (Maharashtra), Raipur (Chhattisgarh), Hyderabad (Telangana), Dujana (Uttar Pradesh); and 2 plants in Bangalore (Karnataka). It has also established a wide 3-tier distribution network with around 800+ dealers.

For the 9 months through December 2020, the company reported a profit after tax (PAT) of Rs 273 crore on an operating income of Rs 5,936 crore, against a PAT of Rs 195 crore on an operating income of Rs 5,835 crore for the same period previous fiscal.

Key Financial Indicators

As on/for the period ended March 31 (Consolidated)		2020	2019
Revenue	Rs Crore	7737	7164
Profit after tax	Rs Crore	256	148
PAT margins	%	3.3	2.1
Adjusted debt/adjusted networth	Times	0.64	0.96
Interest Coverage	Times	4.66	3.57

 

Any other information: Not applicable

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

## Interchangeable with packing credit up to Rs 60 crore; inland letter of credit up to Rs 60 crore; and performa invoice discounting up to Rs 15 crore

^ Fully interchangeable with non-fund-based facilities

**100% interchangeability between LC and bank guarantee up to Rs 20 crore

! Interchangeable with LC up to Rs 50 crore, buyer’s credit up to Rs 100 crore, sales invoice discounting up to Rs 50 crore, cash credit up to Rs 50 crore and export credit up to Rs 50 crore

Annexure – List of entities consolidated

Type of consolidation	Extent of consolidation	Rationale for consolidation
Apollo Metalex Pvt Ltd	Full	Operational and financial linkages with APL Apollo
Shri Lakshmi Metal Udyog Pvt Ltd	Full	Operational and financial linkages with APL Apollo
Apollo Tricoat Tubes Ltd	Full	Operational and financial linkages with APL Apollo
APL Apollo Building Products Pvt Ltd	Full	Operational and financial linkages with APL Apollo
Blue Ocean Projects Pvt Ltd	Full	Subsidiary