Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in the ERW pipes industry: The Company has a total production capacity of 2.6 million metric tonne per annum (mmtpa). The company is currently undergoing capex of 1.5 million MT (project cost of around Rs 1000 crore), upon completion of the capex by March 2023, the company will have total installed capacity of 4.1 million MT. 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 10% during fiscals 2017-22, 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 around Rs 5396 in fiscal 2022 from Rs 4141 per tonne in fiscal 2021 from Rs 3031 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: Annual cash accrual increased to Rs 720 crore during fiscal 2022 from Rs 510 crore in fiscal 2021. Also, gearing improved to 0.25 time as on March 31, 2022, from 0.31 time as on March 31, 2021; interest coverage ratio improved to 22.3 times in fiscal 2022 from 11.3 times in fiscal 2021. 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 196 crore as of March 31, 2022, from Rs 788 crore as of March 2020. Financial risk profile to remain comfortable even after debt funded capex undertaken in subsidiary APL Apollo Building Products Pvt Ltd.

Weakness:

• Exposure to intense competition: Fragmented industry structure, wherein entry barrier is low, 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 market (key focus area) 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 500 crore over the medium term. Change in working capital management policy with a shift to a cash and carry model during fiscal 2021 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 one year (basis their drawing power limits). Annual cash accrual of over Rs 500 crore would be sufficient to repay annual debt of Rs 120-170 crore per annum going forward.

Environment, social and governance (ESG) profile

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

The steel pipe manufacturers have a high impact on 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 local community and health hazards involved. APL Apollo has been focusing on mitigating its environmental and social risks.

Key ESG highlights:

• The company saved 1577 MWh in fiscal 2020 and 2258 MWh in fiscal 2021 through various energy efficiency initiatives. Their current renewable energy portfolio stands at 17.3 MW and have a target for all their plants to have access to renewable energy by 2025.
• APL Apollo has implemented water recycling at all their plant, wherein every plant is equipped with their own Effluent Treatment Plant (ETP) and Sewage Treatment Plant (STP). APL Apollo has set target for setting up rainwater harvesting at all unit by 2025
• The company has set a target to achieve Zero incident and Zero harm by 2025.
• The company’s governance structure is characterized by 50% of its board comprising independent directors, dedicated investor grievance redressal system 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 – List of entities consolidated

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