In this post we look at the Q4FY19 results and share our notes of the conference call of a steel pipe company that we had covered in our taking stock series last year here.
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Results for both the current quarter Q4 and full year FY19 have been impressive. While top line has grown by 38% in the current quarter, it stands at +34% for FY19. Sales for the quarter stood at Rs 2,094 Cr and for the full year at Rs 7,152 Cr.
Let us break up and see from where this growth has come from – volumes or price realizations. Below is the break up of volumes product wise and price realizations for the quarter and full year.
For the quarter one can observe that the revenues have be driven entirely by volumes, realizations have fallen in the current quarter. For FY19, revenues have predominately driven by volumes, though there is an increase in realizations as well.
Hollow sections which form 57% of volumes and 53% of revenues has seen the strongest growth in the quarter and the full year. Revenues have grown by 44% in the quarter and 42% for the full year. This bodes very well for the company and will help the company in the future as hollow sections are sold using the DFT technology as well. The company was the first one to introduce this technology in India and some of the advantages of this technology are – pipes can be customised as per the requirement of the customer in terms of size and faster delivery of the product. EBIDTA per tonne, which is an important metric to follow while analyzing this company for normal hollow sections is Rs 1,885/tonne and for hollow sections using the DFT technology is Rs 2,986/tonne. The company has 8 lines for DFT products with a total annual capacity of 6,00,000 tonnes. In FY19, the company had utilized 53% or 3,20,000 tonnes. This segment will play a big role in the future growth of the company.
GI and GP pipes are important segments as these have the highest EBIDTA per tonne among the 4 products that the company caters too. EBIDTA per tonne for GI pipes is Rs 4,362/tonne and GP pipes is Rs 5,557/tonne. While the company has done well on the GP (Pre Galvanized) segment by growing revenues by +30% in both the quarter and full year, revenues on the GI (Galvanized) segment have grown the least in the quarter and degrown for the full year. This an area of concern and the company needs to have a strategy to increase its volumes and revenues in this segment.
Black pipes performance has been impressive, with the segment registering +30% growth in the quarter and the full year. In the past management has indicated that their focus is on the other segments and they will maintain their share in this segment. The EBITDA per tonne for this segment is Rs 1,336/tonne, the lowest among the all the products that the company caters too.
Below is the volume and value share of products in FY19
Coils and other (trading and scrap) form contributed 4%, 310 Cr to revenues in FY19. The company does not disclose the volumes for this segment, however as per our calculations the company has sold 78,338 tonnes of these products in FY19. Adjusting for this hollow sections contribute 54% of total volumes and 53% of total revenues, value share from this segment should increase from this segment going forward as the company sells more of DFT products.
The company sold 13,39,174 tonnes of pipes during the year, break up of these volumes industry wise is shown below
68% of the volumes come from the construction and building material space. Some the applications in the space would be used for fencing, roofing, ducting, buildings, smart cities and furniture.
Below is the domestic market share of the company across all products in FY19.
The company has +25% quarter of the market in the hollow sections and the GP pipe segment. There is a lot of room to grow in the GI pipe segment as the company only has a share of 9%. In the case of Black Pipes the company expects to maintain its share. The company has an overall market share of 18%.
Gross profits for the quarter stood at Rs 276 Cr, registering a growth of 45%. This is on the back of a slight improvement in gross profit margins (GPM) at 13.17% in the current quarter versus 12.57% in Q4FY18. Some of the factors that lead to improvement in GPM are either or combination of change in product mix (sales of products with higher realizations) and drop in raw material prices, steel prices had fallen in Q3FY19, however these have stablized in the current quarter.
Gross profits for the full year increased by 8% to Rs 845 Cr from Rs 786 in FY18. Fluctuating steel prices and change in product mix have lead to the fall in gross profits and GPM. GPM for FY19 was 12% as compared to 15% in FY18. During the year in Q3 the company had to take inventory losses to the tune of Rs 42 Cr due to sharp fall in steel prices.
Operating profits or EBIT for the quarter increased by 39% at Rs 122 Cr versus Rs 88 Cr in Q4FY18. Operating profit margins (OPM) stood at 6% in both the quarters. Operating profits have grown at 39%, which is below the gross profit growth of 45% for the quarter, this is primarily on the back of increase in other expenses by 69%, from Rs 64 Cr to Rs 108 Cr. Employee expenses have also increased by 22%.
Operating profits for the full year have increased by 4%, at Rs 329 Cr versus Rs 317 Cr in FY18. OPM for the year stood at 5% versus 6% in FY18. For the full year employee benefit expenses have increased by 25%, Rs 108 Cr versus Rs 86 Cr in FY18. Employee expenses have increased on the back of impressive performance by the company for the year. Depreciation expenses were higher by 20%, Rs 64 Cr versus 53 Cr in FY18.
EBIDTA per tonne for the year stood at Rs 3,018/tonne from Rs 3,355/tonne in FY18, fall of 10%. This is because the company recorded inventory losses of Rs 42 Cr in Q3FY19 on the back of fall in steel prices. Below is the trend in EBIDTA per tonne for the company’s products over the last 5 years. EBIT per tonne for the year was Rs 2,453 versus Rs 2,809 in FY18.
Net profits or PAT for the quarter increased by 39% at Rs 62 Cr from Rs 45 Cr in Q4FY18. PAT margins stood at 3% for both the quarters.
Net profits for the full year were 148 Cr versus 159 Cr in FY18, registering a fall of 7%. Interest costs have risen by 40%, at Rs 113 Cr versus Rs 81 Cr in FY18. PAT margins for the full year stood at 2% versus 3% in FY18.
Net working capital of the company has decreased by 3% in FY19. However one needs to analyze as to what has lead to the fall in the working capital. Below is how the working capital has moved over the year
Inventories and receivables have increased by 32% and 26% during the year, however the suppliers of the company are funding the increase in these. Change in inventories and receivables is Rs 303 Cr, payables have increased by Rs 320 Cr. Borrowings have increased by Rs 37 Cr and total debt outstanding at the end of the year was Rs 710 Cr versus Rs 673 Cr in FY18. The D/E ratio at the end of FY19 was 0.7 as against 0.8 in FY18.
Net working capital days (inventory + receivable + payable days) at the end of FY19 was 28 as compared to 30 in FY18. The 5 year average stands at 26 days. The management has indicated that in intends to bring down this to 22-23 days in the next year.
Property, plant and equipment (PPE) has increased by Rs 159 Cr and stands at Rs 1,008 Cr at the end of FY19. This is being funded by internal accruals (equity) as borrowings have only increased by Rs 37 Cr whereas owner’s equity has increased by Rs 126 Cr and stands at Rs 964 Cr at the end of FY19.
The company has a total capacity of 21,00,000 metric tonnes at the end of FY19. The company has acquired facility of Shankara building products during the year and that will add 2,00,000 tonnes to the existing capacity. Sales in FY19 were 13,39,174 tonnes, capacity utilization for the year stands at 64%. Capacity of the company, plant wise can be split as below.
Notes from Conference Call and Company Presentation
On the acquisition front, the company had acquired Apollo Tricoat and we had written about this acquisition here. The company owns 50.26% currently and does not intend to increase its stake further. The process of transferring of shares has started and by the next quarter Laxmi Udyog should have the shares. Company will start full operations in June of this year and it expects to achieve sales of 80,000-1,00,000 tonnes per annum from this entity.
Company has made one more acquisition of a one of the plant of Taurus Value Steel & Pipes, a subsidiary of Shankara Building Products located at Hyderabad. The cost of this acquisition is 70 Cr and the plant is spread across 30 acres of land. If the company were to set up a greenfield capacity for this kind of capacity the cost that the company will have to incur will be Rs 120 Cr. The plant also comes with a cold rolling mill. The company has only paid for the assets of the company and the liabilities will remain with Shankara.
The plant has capacity to produce all the products that APL has a presence in, total capacity that the company will get on this acquisition will be 2,00,000 tonnes. However the GP (Pre Galvanized) capacity is 1,25,000 tonnes and GI (Galvanized) capacity is 30,000 tonnes. This is help the company as GI and GP products are high margin products and the company needs to increase its presence in the GI space. The company expects to start production of 10,000 tonnes per month as soon as it takes over the facility, this translates into capacity utilization of 60%.
Shankara has agreed to purchase 2.5 lakh tonne from APL, Shankara was already a customer of APL before this transaction and used to purchase 1 lakh tonne from the company. Shankara will now purchase an additional quantity of 1.5 lakh tonne. The total capacity of the company after this acquisition will be 23 lakh tonne. The acquisition will be funded through internal accruals and company expects a payback period of 2.5-3 years.
97 Cr has been infused into APL Apollo through an entity belonging to the promoter group. Preferential allotment of equity and convertible warrants have been made to APL Infrastructure Private Limited.
- 4,00,000 equity shares have been allotted at Rs 1,800/share, leading to 72 Cr infusion
- 5,00,000 convertible warrants at 2,000/share, leading to 100 Cr. 25% of the amount has to be transferred now and the balance when warrants are converted to shares. 25 Cr infusion currently
CAPEX for FY20 will be about Rs 200 Cr, this includes the 70 Cr acquisition of Shankara’s plant. The maintenance CAPEX will be about 130-150 Cr. The company does not see any huge CAPEX for the next 1.5-2 years. The capacity utilization of the company in FY19 was 64%, the company wants to utilize this capacity fully before committing on any further CAPEX. The management has also stated that they will now focus more on improving margins, increasing ROE and ROIC, efficient working capital management than focusing solely on volumes.
EBIDTA per tonne in FY19 was Rs 3,018, this was due to inventory loss. Adjusting for the inventory loss the EBIDTA per tonne works out to Rs 3,350. The company aims to achieve an EBIDTA per tonne of Rs 3,600 – 3,700. It aims to achieve this by
- Higher sales of GP and GI pipes
- Hollow sections using the DFT technology
- Backward integration – the company is setting up a cold rolling mill facility in UP with a capacityof 2 lakh tonnes. This will enable raw material cost savings for APL Apollo
- Brand building – company intends to spend 20-25 Cr in FY20 versus 8-10 Cr in FY19 on advertising and promotion. The company was also the principle sponsor of the Delhi Capitals team in the recently concluded IPL
Demand for DFT products looks very promising and this pipes produced from this technology are going to grow faster than steel and pipe consumption. The reasons for the same are
- Products made from wood and cement are being replaced with products made from steel. For instance furniture can now be made of steel
- Ability to provide pipes in customised sizes to the customer
- Faster turn around time, delivering the product in 3-5 days versus few months earlier
These products also fetch higher realization to the company. Premium on realizations range from Rs 500-5000/tonne. Realizations are dependent on the size of the pipe. For instance the company mentioned that recently the company received an order for a large size pipe, where in the APL was able to deliver the product in 3 days versus 4-5 months if the company had to import the product from Europe. The company’s realization on these larger size pipes is also high and can fetch Rs 5,000 premium to normal pipes.
The company expects steel prices to be stable in FY20, this is because lot of domestic players are setting up capacities of HR coil in the country. Sail – 2 Mn tonnes, NMDC – 3 Mn tonnes and JSW – 5 Mn tonnes is the upcoming capacity. The company is cautious on this front as it already has suffered an inventory loss of Rs 42 Cr in Q3FY19, to counter this the company intends to bring down its inventory days to 30 from 40 currently.
The enterprise value of the company as on 23-5-19 is Rs 4,597 Cr, the operating profits (EBIT) for FY19 was Rs 329 Cr, earnings yield of the company is 7%. Full year EPS of the company was Rs 62, at the current price of Rs 1,610/share the company trades at 26 times earnings, far stretch for a commodity company. However some of the things that are working for the company are
- Consistent sales and profit growth – the 5 year and 10 year sales growth is 23% and 30%, profit growth during the same period is 20% and 50%. The 3 year CAGR for sales and profit has dipped at 23% and 14% respectively
- ROE and ROIC of +15% consistently, these have improved over the last 3 years
- Strong dealer and distribution network – 790 dealers and distributors, 50,000 retailers and fabricators and present in 300 towns and cities
- Lowest cost producer in the country and intends to be the lowest cost producer in the world going forward
- DFT technology and scaling up of GI and GP pipes to improve profitability
- 8 manufacturing units across the country, aim of the company is to make its product available quickly
However on the flip side fluctuations in steel prices can cause losses as it was seen in Q3FY19, the company works on very thin margins and raw materials as cost of sales was 88% in FY19. The company has to be efficient in managing its raw materials – stocking of right levels of inventory so as to not suffer losses when input prices were to fall. The company has also not been able to scale up its GI business for the last 5 years and has been facing road blocks on this front.
One needs to be cautious in these type of businesses trading at higher multiples as slip in any one of the parameters – decline in sales and profit growth, build up of debt, deterioration in working capital, capital misallocation – wrong acquisitions and expansions will lead to derating of the stock quickly. The company has shown no signs of these as of now and investors need to keep a close look at these.
NOTE: As a disclosure some Capitalmind authors may own the above company in their stock portfolios. There is no other relationship between Capitalmind and the above company. Please do not consider this article as a recommendation, It is purely for informative purpose only.
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