Stock Review: APL Apollo Tubes

 

Co posts robust double-digit earnings in the December 2010 quarter

 

The commissioning of new capacities helped diversified steel pipe manufacturer APL Apollo Tubes post robust double-digit earnings in the December 2010 quarter.

The full impact of the new capacities will be reflected in the March quarter numbers; this means the company will repeat its impressive performance in the coming quarters despite higher input costs. Hotrolled coils and zinc are its key raw materials.

During the third quarter, APL's consolidated sales and EBITDA both increased by 74% year-on year. Consolidated net profit rose by 55% to . 13 crore. It also maintained the operating margin at 10% since it could pass on the rise in raw material costs to its customers.

The company was able to maintain its margins since its exposure to fluctuations in raw materials is limited to a mere 5-6%. The company has a procurement policy to buy raw materials once orders are booked. With the adoption of the new conveyor belt technology, the management expects to improve operating efficiency further through higher OEM business. The business, which contributes about 20% to total sales, includes servicing clients like BHEL, Hindustan Petroleum, L&T, Ashok Leyland, Gammon India and others.

During the quarter, the company completed the acquisition of Lloyds Pipes, which will add 90,000 metric tonnes per annum to its capacity, taking the total installed capacity to 5.8 million tonnes per annum. This should help the company meet the increasing demand from both the government and private sector customers.
The company's hollow pipes account for about 38% of its sales. It also produces ERW (electric resistance welded) pipes and galvanised tubes, which contribute 18% to sales. Its key competitors are Tata Steel and Jindal Industries.

The company's sales have grown at a compounded annual rate of 30% over the past three years and it has given a return on capital of 12.13% for the year ended March 2010. The company is not very highly leveraged with a debt/equity ratio of 0.64. APL Apollo's stock price has fallen 19% over the past three months in line with the weakness in the broader market. At the current market price, APL trades at a 12-month trailing PE of 6.2. With new capacity and firm demand, the company is expected to maintain its growth in the near term.