Company Update | Pipes

March 12, 2013

APL Apollo
Management meet takeaways
We met the Management of APL Apollo Tubes (APL Apollo) to get an update on its business. APL Apollo is one of the largest Electric Resistance Welding (ERW) pipe manufacturers in India with 5 manufacturing locations spread across northern, southern and western parts of India. Its products include galvanized tubes, pre-galvanized tubes, MS black tubes and hollow sections. The company has increased its capacity by 7.5x from 80k tonne in FY2007 to 0.6mn tonne currently. Its products find application in piping, cabling, engineering, power transmission, construction, automotives, gas distributions, sprinklers etc. On the verge of massive expansion plan: APL Apollo aims to increase its capacity from 0.6mn tonne as of December 2012 to 1.0mn tonne by CY2015 with a capex of `200cr via brownfield expansion at its existing plants. As per the company, it has the required land at its existing plants to meet the expansion plans; the capex is expected to be fully funded via internal accruals. Post expansion, the company targets an annual turnover of US$1bn. Aims to grow sales via market share gains: The current market demand for ERW in India is ~7mn tonne, with APL Apollo being among the largest manufacturers. The unorganized (smaller) players account for 5mn tonne of the market. APL Apollo aims to gain market share from these unorganized players. To drive market-share gains, the company aims to leverage on its economies of scale, increase dealer-network and offer better quality products, going forward. The company aims to nearly double its dealer network from the current level of 300 as a part of its marketing plan. Currently, ~95% of the companys raw material (basic steel) requirements are procured from JSW Steel. Low margins, high duties mute down threats from imports: APL Apollos business model comprises of purchasing simple hot-rolled-coil (steel) and converting it to pipes. Approximately 83-86% of the companys net sales are constituted by raw material costs, 7-8% of net sales is conversion costs, leaving the balance 7-8% as EBITDA margin. As per the company, low margins in the business, import duty on steel products and significant freight costs mute down the threat from imports. The company is aiming to double its capacity. However, margin improvement on account of economies of scale is likely to be insignificant, given the conversion business model followed by the company, in our view. High working capital to keep balance sheet leveraged: The companys business is working capital intensive. In order to maintain the current net sales annual run-rate of `1,600cr, it requires ~`300cr of net working capital (which is funded via working capital loan). Going forward, although the company expects to fund its capex to double its capacity via internal accruals, it will require an additional `300cr of working capital loan in order to grow its top-line. We do not have a rating on the stock currently.
Please refer to important disclosures at the end of this report Bhavesh Chauhan
Tel: 022- 3935 7800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

CMP Target Price

Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

`188 Not Rated

-

Pipes 412 291 0.5 232/131 36,870 10 19,565 5,914 APLA.BO APAT@IN

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 45.3 8.0 3.9 42.7

Abs.(%) Sensex APL Apollo

3m 1.1 3.3

1yr 11.2 3.2

3yr 14.0 100.0

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

APL Apollo | Company Update

Company Background
Formerly known as Bihar Tubes, APL Apollo was established in 1986. It is one of the largest ERW pipe manufacturers in India with 5 manufacturing locations spreading in northern, southern and western parts of India. It produces a range of hollow sections and mild steel tubes in all variants (black, galvanized and pre-galvanized). It has increased its capacity from 80k tonne in FY2007 to 0.6mn tonne currently. Its products find application in piping, cabling, engineering, power transmission, construction, automotives, gas distributions, sprinklers etc.

Exhibit 1: APL Apollo products

Galvanized Tubes PreGalvanized Tubes MS Black Tubes Hollow Sections

APL Apollo ERW Tubes

Source: Company, Angel Research

Key business risks:

Decrease in import duties on steel
A decrease in import duties on steel can result in higher imports by APL Apollos customers; thus affecting the companys pricing power and margins.

Sharp fluctuations in steel prices

Steel is the key raw material for manufacturing pipes. Volatile steel prices may affect APL Apollos margins as the company may not be able to pass on the increase completely.

Higher competitiveness may dent pricing

APL Apollo manufactures commodity products which have low barriers to entry. Rise in competition from unorganized players may limit the companys ability to raise prices.

March 12, 2013

APL Apollo | Company Update

Profit & Loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortization EBIT % chg (% of Net Sales) Interest & other Charges Other Income Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 1.1 1 1 8 2 29.3 5 5 2.9 19 11 8 3.3 2 15 504 451 20 3 30 17 FY2009 575 54 522 522 FY2010 662 48 614 614 17.8 561 507 24 6 24 53 210.1 8.7 4 50 329.4 8.1 17 13 45 486.6 45 10 23.0 35 35 538.9 5.7 14 14 1,300.0 FY2011 985 80 905 905 47.4 816 736 34 12 34 89 67.9 9.9 6 83 167.7 9.2 23 2 63 37.7 63 14 21.9 49 49 39.6 5.4 21 21 50.0 FY2012 1,536 144 1,392 1,392 53.8 1,278 1,166 42 17 52 115 28.1 8.2 9 105 126.5 7.6 34 1 72 15.8 72 13 18.3 59 59 21.1 4.3 23 23 9.5 9MFY2013 1,622 172 1,449 1,449 4.1 1,332 1,222 102 22 (14) 117 2.2 8.1 9 109 103.0 7.5 31 78 7.1 78 25 32.7 52 52 (11.8) 3.6 24 24 3.6

March 12, 2013

APL Apollo | Company Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability (Net) Other non-current liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Other Non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 67 7 59 12 2 298 94 87 117 20 278 351 111 10 101 20 273 27 87 159 36 238 1 359 200 18 182 19 2 31 321 22 51 248 59 262 495 250 27 223 46 48 389 5 58 326 80 309 625 20 146 166 179 6 351 20 171 191 157 11 359 20 209 229 7 239 18 1 495 21 270 291 8 296 28 2 625 FY2009 FY2010 FY2011 FY2012

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APL Apollo | Company Update

Cash Flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Interest Others Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and advances Others Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 13 2 (18) 19 (6) (9) 1 (30) (35) (65) 88 83 (19) 152 89 5 94 FY2010 43 4 (50) 17 2 (3) 14 (54) 2 16 (1) (36) (22) (5) (17) (44) (67) 94 27 FY2011 63 6 (43) 21 (13) 33 (78) (22) (8) (1) (109) 7 89 (5) (21) 71 (5) 27 22 FY2012 72 9 (62) 33 (17) 37 (77) (15) (91) 19 57 (5) (33) 37 (17) 22 5

March 12, 2013

APL Apollo | Company Update

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

APL Apollo No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

March 12, 2013

APL Apollo | Company Update

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Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Shareen Batatawala Twinkle Gosar Tejashwini Kumari Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production Incharge tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com shareen.batatawala@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com

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March 12, 2013