How A Building Material Company Withstood The Pandemic In India

APL Apollo Tubes Ltd. is on a “better-than-expected” rebound from Covid-19, aided by its four-step plan.

The maker of steel tubes and pipes saw its sales, which stood at 3,141-odd metric tonnes in April, grow to nearly 92,000 metric tonnes in May and 1.43 lakh metric tonnes in June, the company said while announcing its earnings for the quarter ended June.

That was possible because of a four-point agenda carved out by the company’s management, according to Chief Financial Officer Deepak Goyal. The plan includes:

• Lighter balance sheet: Focusing on reducing debtors, debts and inventory creditors from the balance sheet, resulting in lower interest and fixed costs.
• Increase in production: With a focus on driving sales, production has been ramped up from April through June.
• Cost reduction: The company has improved efficiency in fixed and variable costs, and those relating to freight, production and interest.
• Wider distribution: The company has revamped its distribution to focus on tier-II and III cities where the impact of the Covid-19 pandemic is relatively low. Apollo Tubes has reached out to smaller retailers and now has an overall bank of 800 retailers. Its peers, in comparison, have an average of 10% of that number, Goyal said.

The company is particular in reducing cost and increasing the margin and cash flow, Goyal said. “As of now, in the market, no one wants to pay more,” he told Bloomberg Quint in an interview.

The pipemaker expects its revenue to grow 20% in the ongoing fiscal compared to the previous year. Half of this, Goyal said, will be from its existing network, while the other half from new developments. The company is also on the path to be debt free in another year as it switched to cash sales. That even led to a drop in its receivable days to 12 from 22.

This comes at a time the Covid-19 pandemic has disrupted businesses, pushing the economy toward its first full-year contraction in more than four decades. Most market veterans BloombergQuint spoke with said this is an opportunity for strong companies to use it to their advantage. And APL Apollo Tubes seems to have done that.

“APAT has been able to perform efficiently and gain market share despite challenges and is expected to see further improvement with its industry-leading capacity, huge distribution network and strong brand positioning,” Elara Capital said. The activity in the industry will only improve in the coming months, the brokerage said in a report.

According to Ambit Capital, the company is gradually heading toward a re-rating as “its outperformance sustains and skepticism over governance reduces”.

Unlike many so-called branded home improvement products, plastic pipes have held their valuations or even expanded as they had two or three demand sources, Ambit Capital said as it raised its earnings expectations from the company in the ongoing fiscal. As the company increases its stock-keeping units and invests for further scale, APAT will gain ground faster among its peers, the brokerage said in a report.

“This could be one of the best re-rating stories in building materials in next 24-30 months,” the research company said.

Prabhudas Lilladhar’s Idea Research agreed as it reiterated that the stock “is a potential candidate for re-rating”.

Of the nine analysts tracking APL Apollo Tubes, eight have a 'buy' rating on the stock, while one suggests a 'hold'. The average of Bloomberg consensus 12-month price targets implies an upside of 2.9%.

Watch the full conversation with APL Apollo Tubes’s Deepak Goyal here: