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Equity Research: Apollo Pipes Ltd.
APOLP will continue to lead industry performance (15%/16%/23%/27% CAGR in volume/revenue/EBITDA/PAT over FY22- 25E), in our view, through key long-term growth drivers.
Company Overview:
Apollo Pipes (APOLP) is a leading player (among top 10) in India’s piping solution and water management sectors. Headquartered in Delhi, India, APOLP operates large manufacturing facilities at Dadri and Sikandrabad in UP, Ahmedabad in Gujarat, Tumkur in Karnataka and Raipur in Chhattisgarh. These plants have a cumulative annual capacity of 125,200mtpa. The company claims to have the largest manufacturing unit at a single location in North India. Its multiple and efficient product profile includes over 1,500 product varieties of CPVC, UPVC, PPR and HDPE pipes, water storage tanks, PVC taps, fittings and solvents. These products cater to an array of industrial applications such as agriculture, water management, construction, infrastructure, and telecom ducting segments. The company has an extensive distribution network that spans 600+ channel partners.
Industry Overview:
Industry experts believe India’s ~Rs 350bn PVC pipes & fittings market (~2mn tons) is slated to post 15% CAGR over FY22–FY26, growth similar to that registered in the previous five years. The PVC pipes market is seeing demand from multiple sectors such as, irrigation, real estate, as also urban and semi-urban sewerage infrastructure. Given their durability, reliability and low maintenance, an increasing number of residential consumers and farmers are opting for these pipes (over those made of cement, metal, etc). Moreover, Government of India’s increasing focus on irrigation and ‘Housing for all’ schemes are growth engines for the PVC pipe industry.
The share of organised players (~60% currently) is continuously rising, given the wider distribution reach and consistent product quality of these pipes. In the last few decades, plastic pipes have gained prominence over other pipes due to their lightweight, ease of transportation and longer life span features.
Categories Of Pipe Manufactured by the Company:
Plastic pipes come broadly in five categories 1) PVC (polyvinyl chloride), 2) CPVC (chlorinated PVC), 3) UPVC (un-plasticised PVC), 4) HDPE (high-density polyethylene), and 5) PPR (polypropylene). These are generally used to manufacture sewage pipes and for drainage solutions, water mains and irrigation, drinking water transportation, and manufacture of advanced fire-sprinkler systems.
UPVC plumbing pipes are made of Unplasticized Polyvinyl Chloride a low maintenance and low-cost material that is widely used in buildings for distribution of potable water, or water transfer in bathrooms, kitchens, sink, laboratories, etc.
CPVC is produced by chlorinating the PVC polymer; CPVC has 67% chlorine, which imparts strength, rigidity, chemical resistance to the material, and is therefore suitable for both hot & cold-water applications. Per industry reports, the CPVC pipe category is estimated to have registered more than a 20% CAGR over the last decade to more than a Rs 40bn turnover and ~140,000-ton capacity. Despite its premium pricing over normal PVC pipes, it is a preferred pipe category in plumbing due to its unique ability to resist extreme hot and cold water. This category is in the nascent stage (<15% of the total industry size) and is expected to clock 20%+ CAGR over the next few years.
HDPE pipe is a type of flexible plastic pipe used for fluid and gas transfer and is often used to replace ageing concrete or steel mains pipelines. Made from the thermoplastic HDPE, its high level of impermeability and strong molecular bond make it suitable for high pressure pipelines.
PPR pipes and fittings are manufactured using Polypropylene Random Copolymer (PP-RC). try. The superior physical characteristics such as having a working temperature from -20° C to 95°C, along with excellent chemical resistance makes this product ideal for chemical transportation, in pharmaceutical companies and for other industrial use, as well as, hot & cold-water plumbing systems in buildings and industrial piping.
Growth Drivers Of the company:
Industry with High growth prospects:
India’s PVC pipe market has seen demand accentuating from multiple sectors such as irrigation, real estate, as also from the urban and semi-urban sewerage infrastructure. An increased number of residential consumers and farmers are preferring PVC pipes (over pipes made of cement, metal, etc.) due to its durability, reliability and low maintenance. Moreover, Government of India’s (GoI) increasing focus on irrigation and ‘Housing for all’ schemes are growth engines for the PVC pipe industry. APOLP is among the top 10 piping solutions company in India. Its pace of growth has been the fastest among listed peers at 12% volume and 28% revenue CAGR over FY18-22. The company is targeting 25%+ revenue CAGR over the next three years, by focusing on value-added product categories. In the last three decades of its existence, APOLP has vastly expanded its product offerings in the plastic pipes segment and also entered adjacent categories. APOLP has expanded its distribution network beyond northern India to address the pan-India demand, by leveraging the reach and recall of its APL Apollo brand.
Speedy growth on expanded distribution network:
APL Apollo’s brand strength and pan-India distribution network have helped APOLP in expanding fast in regions excluding north India, as APOLP parallelly added dealers to its existing network. Currently, APOLP is already multiplying its existing strong distribution network of 600+ channel partners and 10,000+ customer touch points.
Focus on A&P to enhance brand visibility and pricing:
APOLP enjoys APL Apollo’s strong brand equity, synonymous for structural steel in India. The APL Apollo brand is commonly used by both, APOLP in its plastics category and by APL Apollo Tubes, in its steel category. In tune with industry trend, APOLP has engaged Bollywood celebrities as brand ambassadors - Tiger Shroff for the piping segment and Raveena Tandon for the bathware segment. Advertisements on leading national news TV channels, social media platforms and below-the-line (BTL) initiatives have helped APOLP improve traction for its products. We believe these activities would continue to enhance the brand visibility and pricing of their products. We expect APOLP to increase its advertising and promotional (A&P) spend to ~3% of revenue in the coming years (from 1%-1.5% over the last few years), to keep pace with the rise in ATL and BTL activities.
Fastest capacity addition among peers:
With an aim to set up plants in all regions to serve pan-India demand cost effectively, APOLP has more than doubled its capacities at its plants across the four regions in last four years (from 60,000mtpa in FY18 to 125,200mtpa currently, mostly in non- northern markets). Despite having strong presence in the northern region (77,800mtpa capacity), APOLP has set up almost similar capacities in the markets other than the north in the last decade through organic and inorganic routes. APOLP is planning to set up more plants in the northern and central regions to meet the surging demand in these areas
From north focused to a pan-India player, with plants in all regions:
Supreme has the highest installed capacity share in the plastic piping industry, followed by Finolex. All leading manufacturers have been continuously adding capacities pan India over the last decade to gain a strong foothold in these markets. APOLP began its journey three decades ago through its first manufacturing plant in Sikandrabad, followed by a larger plant in Dadri in UP. To service west India, APOLP set up a 5,800mtpa capacity plant in Ahmedabad in Gujarat, and subsequently increased its capacity to 12,000mtpa. To strengthen its presence in the southern and western regions, the company acquired Kisan’s Tumkurplant in Karnataka in FY20, and further to create visibility it fortified its sales team in Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Kerala in the south and in Maharashtra in the west. In FY22, APOLP commenced operations at its Raipur unit in Chhattisgarh. This plant is expected to strengthen the company’s position in central India, as also help establish a presence in east India, which till now was an untapped market for the company. This unit manufactures pipes and water tanks. The company funded this Rs 150mn project through internal accruals, and the management estimates a 3-year payback period for this project.
Strengthening automation and IT infrastructure to be future ready:
APOLP has made substantial investments in sophisticated and business-relevant IT solutions in the last few years. Widening the use of ERP across the organisation has enabled the company to make smarter and informed decisions. Introduction of Robotic Process Automation bots in the manufacturing space have helped strengthen efficiencies. Comprehensive channel management system has allowed it to fortify relations with channel partners. Apart from this, the company has rolled out various improvement projects like logistics optimisation, sales dashboard, inventory & production process optimisation, etc., which are developed on SAPS4/HANA platform. We believe these initiatives would positively impact APOLP’s margins.
Greater focus on value-added building product segment:
From traditionally high dependence on the irrigation sector, APOLP has sharpened its focus to cater to the high-profitable value-added building segment. Towards this goal, APOLP has been introducing and expanding its CPVC pipes, fittings, water tanks and bathroom products since the last few years. Today, these products are manufactured at all its plants to cater to pan-India demand.
Fittings (~20% of revenue at ~Rs 1.5bn, 11,000mtpa capacity with ~Rs 2.5bn potential) has been one of the fastest growing (~50% CAGR over last 5 years) categories for APOLP, per our understanding. Owing to the growing demand for its products, the company doubled its capacity in the last 1-2 years by widening its range of products, adding more than 50 stock keeping units (SKUs) every year over the last three years. Today, it has a large portfolio of plastic taps, showers, faucets, cisterns, WC seats and solvents. After strong acceptance and growing demand for these products, APOLP is planning more capacities for plastic bath fittings in FY23.
The CPVC pipes (~5% of revenue, 5,000mtpa) category has grown multifold since it was introduced in 2015. On improving acceptance of the brand in all regions, we believe this category will continue to grow fast and gain market-share ahead.
With the launch of water tanks (~5% of revenue at ~Rs 350mn, 4,800mpta capacity; ~Rs 600mn potential), APOLP has transitioned from a mere plastic pipe manufacturing company to a complete water-management solutions enterprise.
Focus on improving capacity utilisation after setting up plants pan India:
APOLP has more than doubled capacities in the last four years (from 60,000mtpa in FY18 to 125,200mtpa currently) by establishing capacities in all four regions, in a bid to become a pan-India player. While its old Dadri and Sikandrabad plants are operating at above 50% utilisation levels, its new capacities at Tumkur and Raipur are operating at below 50% levels, taking the company level plant utilisation to ~46% in FY22. APOLP’s capacity utilisation should improve to 65% in FY25E, in our view, on the back of strong demand for the company’s products.
Management Profile:
Estimated Financials:
Valuation:
APOLP will continue to lead industry performance (15%/16%/23%/27% CAGR in volume/revenue/EBITDA/PAT over FY22- 25E), in our view, through key long-term growth drivers, which involve 1.) focusing on the high-margin value-added building product segment, and 2.) fulfilling pan India aspiration of setting up plants in all regions, and achieving higher capacity utilisation. With its large capex behind, strong earnings growth and better capacity utilisation should enhance its return ratios (~17%/~22% RoE/RoCE in FY25E). The Rs 1.5bn FCF expected over FY23E-25E should be able to fructify its future capex plans.
Key Investment Risks:
1. Slowdown in real estate activities and the economy: The demand for plastic pipes broadly comes from plumbing (~35%), irrigation (~45%) and sewerage & water transportation (SWR) and other (~20%) applications. Any slowdown in demand for new housing units, and government expenditure on sanitation and water transportation could have a bearing on PVC pipe demand.
2. Unfavourable monsoon; high prices led to agri pipe demand softening: Agri pipes being a seasonal business (Mar-Jul), its demand depends on the quantity and quality of rainfall. Also, as it is a price-sensitive segment, high product prices act as dampener.
3. Keener competition: Intensifying competition from large, organised players, as well as small regional players in an attempt to expand market share (via under- cutting prices) could hurt APOLP's growth and profitability.
4. High volatility in PVC prices: PVC, the key raw material, accounts for over 70% of the total cost of pipe manufacturing. While APOLP has a policy to pass on any changes in PVC prices with a lag of two weeks, any sharp volatility (as seen in the last two years) could induce inventory gains or losses and positively or negatively impact the company’s margins.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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