We bought APL Apollo at Rs 1,269 a share, in Oct 2018, and recently exited at a price of Rs 1,258 a share, however after the stock split of 5 for 1. At an unadjusted price of Rs 6,300, the stock has been a 5-bagger for us in 2.5 years. It’s been a great ride and we love the extra-ordinary execution by the management team in an otherwise slow-growing commoditized industry. We had hoped annual volumes to move closer to 2mn from 1.1mn, EBTIDA per ton to move from Rs 3,000 to over Rs 4,000, and net profit to move from 150 Cr towards Rs 400 Cr. Luckily the thesis played out perfectly and the market cap moved from Rs 3,000 Cr to over Rs 15,000 Cr. What’s heartening is that the majority contribution to the 5x move in the stock price is via earnings growth (based on recent quarter’s trajectory & management guidance), rather than re-rating of price-earning multiple. Below is an executive summary of the key investment thesis we had while making this investment in 2018 and how it panned out till now. We have also made the Initiating Coverage Report along with other management interactions and plant visit notes available on the Guest Dashboard (freely accessible), links shared at the end of the post.
Every product category which was once completely commoditized but is today considered value-add and branded category with higher customer engagement as well as higher profit margins was led by some visionary company, be it Asian Paints in decorative paints category, Cera in bathroom fittings, Symphony in air coolers, Kajaria in ceramic tiles or Astral in PVC pipes.
We believe APL Apollo is the company leading that transition for the steel pipes industry. Steel pipes are a large category with an estimated annual sales of Rs 30,000 Cr., 60% of which is still served by unorganized players whereas large organized players include Tata & Jindal.
APL Apollo, erstwhile known as Bihar Tubes, was a marginal player until 2010 with a 2-3% market share and a large presence in black round pipes (commoditized) with applications in sewage & water transportation for the housing & agriculture sector. 2010 was the turning point for APL with its entry into the hollow section (square & rectangle pipes) which were new innovative products for the Indian market.
Over the next eight years, APL grew its sales volume from 1.65 lac ton to 11.3 lac ton implying a 27% CAGR against industry growth of 10% increasing its market share to 15%. The share of low-margin black round pipe got down to 13% while the share of value-added product steadily rose. It could achieve scale and snatch away market share while maintaining industry-leading profitability; APL’s FY18 EBITDA/ton was around Rs 3,000 while the company was aiming for Rs 4,000 over the next three years.
How did APL Apollo achieve such a feat? By being the lowest-cost producer in the industry; its biggest advantage is having 10 plants across India leading to saving in logistics costs which are 4-8% of the product value. Further, the company enjoys economies of scale and is able to procure raw material at 2% lower cost compared to its competitors, given APL is the largest buyer of HRC Coil (Steel) in India and consumes 10% of the Industry’s production which lends them bargaining power with its suppliers like Bhushan Steel (now acquired by Tata Steel). The sales network is supported by industry-leading distribution reach with warehouses in 29 cities and a portfolio of over 1,500 products with 90% sales happening through 800+ distributors. They have the lowest lead time in the industry of just 48 hours from order to delivery to their distributors.
The recently established facility in Raipur (Chhattisgarh) has helped them capture the hitherto under-penetrated eastern market. The plant is equipped with Direct Forming Technology (DFT), which is the first such plant in India, and directly makes square & rectangle pipes rather than first making round pipe & then molding the shape. This has led to substantial savings in cost as well as time while improving quality.
How has the company performed between 2018 to 2021?
- The annual installed capacity has expanded from 17.5 lac ton to 26 lac ton by organic as well as inorganic route.
- Maintained the decadal volume CAGR trend of 25%+, with the current annualized volume of 20 lacs (FY18 was 11.3 lac tons).
- EBITDA/ton has risen to over Rs 4,500 compared to Rs 3,000 in FY18, with the revised and ambitious goal of Rs 6,000 over the next few years.
- In the value-added category of Structural Pipes, APL’s market share has risen from 30% to 50%.
- APL has brought down working capital from 40 days in FY18 to merely 8 days in FY21. Sales now happen on a cash & carry basis.
- Despite investing heavily in Capex & facing COVID-related turbulence in FY21, the company has been able to deleverage substantially to be almost debt-free.
The group was founded by the late Mr. Sudesh Gupta in 1986 and is currently managed by his son Mr. Sanjay Gupta under whose leadership the company has seen a mega transformation, an 18-fold rise in installed capacity over the last 12 years. We found their track record very impressive in terms of execution as well as capital allocation. Based on channel checks, financial analysis, and management meetings we would rate them high on transparency. For their size, the level of information disclosure in investor presentations, conference calls, and the annual report are commendable from a minority shareholder standpoint.
Nature of the strategy – Lose some, Win big
Every cycle we will have few such outliers which will not only make up for positions where the thesis does not play out but considerably lift the overall performance of the portfolio. This cycle has the likes of APL Apollo (5x in 2.5 years) and a CRAMS Pharma (4x in 1.5 years), the previous cycle had Tasty Bite Eatables (9x in 2.5 years). That’s the nature of the game – lose some, win big. It is important to be at peace with few non-performing or losing positions realizing the outliers will more than makeup for them. No matter how much we try, unfortunately, there is no way we can fully avoid losing positions as it’s all too dynamic.
One cannot, with any certainty, identify at the beginning which positions are going to be an outlier and which ones will be duds. Otherwise, we can simply avoid buying duds to load up more outliers, isn’t it? Honestly, it is all clear only in hindsight. When we buy into a business we see that an opportunity exists today, but will it continue to exist? Will management continue to have a sound strategy to exploit it? Will execution fall in place? Or some well-funded startup disrupt the industry and affect its terminal value? Can regulations turn hostile? Can there be a governance issue/employee fraud or some other negative event that can affect the fundamental performance/intrinsic value of the business leading to a fall in the stock price? All of this is too dynamic and keeps evolving. Besides hard work, foresight, understanding of accounting & economics, temperament, and a whole host of other skill set required to be a decent business analyst/investor, we cannot deny that there is also an element of luck/chance which decides whether we will ultimately make money in a position. We could have been shaken out of this position when there were doubts on promoter integrity regarding Tricoat Transaction (which they eventually fixed), or when it wasn’t reporting any growth, or when COVID struck and the outlook turned so negative. Fortunately, we kept faith and foresight to focus on the long-term fundamental value of the business, rather than short-term disruptions and could ride the story to our satisfaction.
- Initiating Coverage Report – Oct’18: https://investor.stalwartvalue.com/report/apl-icr-guest-user#/
- Plant Visit (Raipur, DFT) – May’19: https://investor.stalwartvalue.com/report/apl-plant-visit#/
All other updates including Management Meeting, AGMs, Quarterly Result, etc. can be accessed for free on the Guest Dashboard – new users need to fill a small sign-up form, we hate to get spammed ourselves so rest assured we wouldn’t do it to you. By becoming a guest user, you would occasionally be notified of new posts, with an option to opt-out whenever you find them irrelevant.
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