APL Apollo Tubes: Innovator in a mundane business

The Indian economy is sluggish; so companies dependent on the country's infrastructure growth should be underperforming, right?

The surprising contrarian is the Delhi-based APL Apollo Tubes.

The company is one of the leading steel tube manufacturers in India. Its products are used in diverse applications - structures of new commercial buildings (replacing traditional materials); liquid petroleum gas cylinders that provide kitchen fuel; wind energy structures providing clean energy; new bridges; airports; mobile telecom towers; pipes leading water to our urban taps; low-floor buses; metro railway bogies; and infrastructure.

There are reasons why the company should not be doing well. One, poor offtake. Two, unorganised sector's undercutting. Three, weak receivables. Four, inadequate scale. Five, logistical inefficiencies (fancy transporting empty pipes). Six, low competitive differentiation (product or process). Seven, decline in raw material prices (inventory losses). Eight, the probability of funding growth through debt and running the company for the benefit of bankers.

Remarkably, APL Apollo Tubes has virtually reinvented itself through diverse initiatives. The company raised capacity from 0.49 million tonnes per annum (tpa) in 2011 to 1.2 million tpa now and a projected two million tpa effective March 2017. It widened its presence across three national zones and extended from one to five manufacturing locations. The company created a portfolio of innovative products hot dipped galvanised, pre-galvanised, electric resistance welded, black and hollow sections across dimensions. It invested in technology to enhance efficiency and quality; customised product applications across sectors (not one shoe fits all); built a strong pan-India distribution network; retailed a wholesale product for the first time; and entered global markets.

The result is evident in the numbers.

APL Apollo Tubes has grown sales successively across quarters (despite declining end product prices): from Rs 499 crore in the September 2014 quarter to Rs 666 crore in the September 2015 quarter. Meanwhile, profit before depreciation and tax has oscillated from a peak of Rs 24 crore in the December 2014 quarter to Rs 7.36 crore in the March quarter and back to Rs 11.67 crore in the September 2015 quarter.

What is the basis of my optimism? One, interest outflow declined from a peak of Rs 15.56 crore in the March 2015 quarter to Rs 11.84 crore in the September 2015 quarter. Two, the company has consistently written off raw material inventory losses each quarter (approximately Rs 35 crore in the first two quarters of the current year). Three, the write-offs notwithstanding, the company reported a cash profit of nearly Rs 14 crore in the second quarter. Four, term loans are virtually nil.

The positive triggers? The probability of steel prices bottoming out following the government's tariff protection that could eliminate inventory losses, investment in seven new mills (batch changeover times declining from 36 hours to 15 minutes!), national dispersal of manufacturing facilities closer to consuming markets, progressive evolution from commodity to specialised products, elimination of one intermediate process in the manufacture of squares - and the best of all, the possibility of generating abundant cash to sustain prospective growth.

The market is beginning to get the drift. Over the past year, the Sensex declined 12 per cent; APL Apollo Tubes appreciated 72 per cent.

So if you don't get put off by inventory losses, there could be a multi-bagger cooking under our very noses.