It started as a small rolling mill on the outskirts of Delhi and has now become a leader in steel structure pipes in India. Founded in 1986, APL Apollo Tubes initially found it a challenge to operate in a market segment promoted by large-scale brand companies that mainly serve the water, oil and gas sectors. At that time, it decided to become a square nail in a round hole. In a market dominated by round pipes, it decided to break the convention and manufacture square and rectangular pipes, which may replace traditional steel structure products such as angle steel and channel steel, as well as several other building materials such as wood, RCC, aluminum, and PEB. . Anubhav Gupta, Chief Strategy Officer of APL Apollo Tubes, said in a conversation with Steel360 that the company is focusing on strengthening its value-added product portfolio and is committed to capacity expansion. extract:
Question: Please outline the company-its development, manufacturing capabilities, product portfolio, best sellers, etc.?
A. Our main focus is structural steel pipe, also known as hollow section steel (HSS). If we consider the evolution of this particular market segment, before 2000, the main applications of steel pipes were water transport and oil and gas. At that moment, all round steel pipes were therefore very suitable for transporting water and oil and gas in addition to their industrial applications. APL Apollo was established near New Delhi in 1986 as a steel rolling mill and began to manufacture circular pipes to cater to the water transportation sector. When the current chairman and general manager Sanjay Gupta was in charge, he decided to do something different because at that time, there were already very large existing players in the field of round steel pipes. Therefore, since 2000, he began to focus on the structural application of steel pipes. His strategy is that the company should focus on square and rectangular pipes, which can be used as building material products, provide load-bearing support for many structures, and replace traditional steel structure products such as angle steel and channel steel. Therefore, this is the new product he brought to the market-rectangular and square hollow section steel. Since then, a typical B2C franchisee model has been created to distribute these products in various cities in India. Subsequently, plastic pipes appeared, and their appearance greatly disrupted the steel pipe industry, because, first, in pipe applications, these can easily replace steel pipes because it is very easy to cut plastic pipes. Secondly, they are about 30% cheaper, and thirdly, they are easier to handle. However, plastic pipes did not affect APL Apollo Tubes, because it is not suitable for this market anyway. On the contrary, our goal is the application of structural steel pipes as building materials. Since the strength of steel pipes cannot be replaced by plastics, no interruption has been encountered. At that moment, the competition was indeed disrupted, but we continued to grow. We see a very clear business growth path, but the competition is far behind. We are one of the few players with square and rectangular hollow sections. Competition did try to emulate us, but because of the damage caused by plastic pipes, they were slowed down. Today, APL Apollo has a 50% market share in structural steel pipes, and the second player has a 10% share.
Q: Please tell us your distribution network
Answer: We have a typical B2C franchisee model, just as the paint, tile, plywood or cement industries follow. We are in a leading position as a brand/manufacturer and sell our products to approximately 800 pan-Indian distributors, which in turn sell to 50,000 retailers. These retailers sell to 200,000 manufacturers. Below the manufacturer are the end customers, who can be individual homeowners, real estate developers, contractors or engineers. Many of these distributors are exclusive distributors of APL Apollo, while others are multi-brand distributors.
Q: APL Apollo is the leader of structural steel pipes in India. What is the USP of this tube?
A. Five traditional building products have been replaced by our pipes. These are angle steel and channel steel, wood, aluminum profiles, concrete columns and prefabricated building structures made of combined parts. USP is APL Apollo is the lowest cost steel pipe manufacturer. Our products are sold as brands. We can provide 1,500 SKUs. Our products provide our dealers with 24×7 service. Therefore, our USP can become our SKU range, our brand value and innovation to these 1,500 SKUs, the technology we bring to India in the pipe industry, and the services we provide to our distributors. We are close to the end market.
Question: Please specify your manufacturing facilities
A. APL Apollo's total production capacity is 2.6 million tons per year (MnT). Last year, FY20, our output was 1.6 MnT. Historically, our compound annual growth rate in the past 10 years has been around 27%. However, due to Covid in the 2020 calendar, April and May are highly disruptive months. This year, we will see what is the best. We do not provide guidance. We have 10 manufacturing factories-4 factories are located near Delhi. Although they are located in Uttar Pradesh, there are 3 factories in Bangalore and 1 factory each in Raipur and Murbad near Mumbai.
Q: How will Covid-19 affect your business? Have you reached the level before Covid?
Answer: Yes, we have exceeded the level before Covid. In April and May of last year, when the lockdown was complete, we developed a strategy to focus on the rural market because we knew that a lot of reverse migration had occurred. Approximately 150 million Indians who make up the migrant working population are returning from cities to their homes in villages and small towns. Therefore, we expect that the rural economy will outperform the urban economy in the next 3-4 quarters. Therefore, we reinvigorated the entire rural sales network from April to May, and we were able to reap the benefits from June to August. In March, our market share has been around 40%. However, when the market is unlocked, this percentage will increase to 50% between May and December 2020.
Q: What is your estimated income at the end of this fiscal year?
Answer: We plan to end this fiscal year with a market share of 50%. This is the base, and our goal is to protect it.
Question: What is the company's value-added product strategy?
A. Our value-added portfolio currently accounts for approximately 60%, and the remaining 40% is commercialized. Our goal is to increase the value-added share to 75%, so we are de-commoditizing our product portfolio through more brands and specialty products. For example, products with unique shapes such as door frames, designer tubes, fence tubes, high diameter and thick tubes. These will replace wood and RCC. The profit margin of value-added projects is almost twice that of commercial products, and there is almost no competition.
Question: Please introduce India's overall pipe industry, market size, growth rate, etc.
A. The total market size of structural pipes in India is 4 MnT per year. In the pre-Covid phase, the industry grew at a double-digit rate. Due to the pandemic, the 2019-20 fiscal year will close at around 4 MnT, and we expect the 2020-21 fiscal year to be flat at 4 MnT. In terms of value, the value of this 4-Mnt market is approximately INR 20,000 crore. However, in three years, it should grow in the mid-double digits of 10-15%.
Question: Looking ahead, what factors can become the driving factors for the structural management industry?
A. After the blockade was lifted, the Indian market recovered. Even when the cases reach the highest level in history of 100,000 per day, all markets are fully operational, not only in structural steel pipes, but also in construction materials or any other related industries. The performance of major Indian companies in the first and second quarters surprised everyone. We are also surprised by the V-shaped recovery path followed by the market. This shows that despite the lockdown for 30-40 days, the Indian economy is still resilient. The pent-up demand is so strong that the market can recover quickly. The situation will only improve as the vaccination campaign unfolds in full. The pace has been determined, and this momentum is expected to continue into fiscal year 21-22.
Question: Looking to the future, where do you think the challenges lie?
A. There are more macro challenges. By fiscal year 22, government spending should continue to improve. I think inflation is a big challenge for the Indian economy. As global commodity prices have risen, prices have become expensive. To increase government spending, the key trigger will be the management of fiscal deficits. If some funds were raised through divestment, that would be an additional trigger. Interest rates are at the lowest level in history, and the private sector should come forward to take over big projects. This is a cycle-first the government intervenes, then the private sector, and then the government plays a role again. The purpose is to promote this cycle.
Question: The government vigorously promotes infrastructure construction. How will this affect your business?
Answer: It did affect our business. Infrastructure accounts for approximately 20% of our business. However, we are more concerned about the recovery of housing, because about 50% of our sales come from housing space, while 20% is commercial, which is also part of real estate, and the remaining 5% comes from industry. However, our cash cow is mainly in the real estate sector, where we have a very strong brand influence. Our products have many applications in this field. Given that mortgage interest rates are also very low, the housing market should improve in the next 2-3 years.
Question: Please take us to understand the future expansion and investment plan of APL Apollo Tubes
A. Our focus in the next 2-3 years is to increase existing production capacity and adhere to the value-added aspect. Therefore, 2.6 MnT production capacity will continue to grow year-on-year. However, no matter what incremental capacity appears, it will only appear in value-added products. We are building our 11th factory in Raipur, Chhattisgarh. The current finance is one of consolidation, we have retained cash and no debt. Next year, if the situation continues to improve, then we will execute our expansion plan. Generally, for a 100,000-ton factory, the required investment is about 1 billion Indian rupees. We have not yet decided on the total capacity etc. We will finalize our plan in the next 3-4 months. We will wait for the end of the fourth quarter. Then focus on the new capital expenditure cycle. The products of the new factory will be an improvement of our value-added basket. We are very optimistic about larger diameter and higher thickness pipes.
Q: Tell us about your export situation
A. About 5% of our products are exported for export. But this is not a very important focus area, because, firstly, for us, domestic demand is strong, and secondly, we can also sell at high prices. We get brand premiums. At the same time, we will focus on value-added products in the export market.
Q: Considering your expansion plan, what is your annual steel consumption? How much do you want to increase? Do you import?
A. All our steel products come from top domestic producers. We do not import because we have signed long-term contracts with Indian producers and hope to strengthen this relationship. India produces about 100 MnT steel. In the third quarter, our output was 485,000 tons. At an annualized level, it is about 2 MnT, which is almost 2% of this 100 MnT. This should increase in the future because we will expand production capacity faster than the steel industry.
Q: The prices of iron ore and steel have risen sharply. How do these two factors affect APL Apollo Tubes?
A: Let's look at our value chain... We buy HRC at a price of INR 50,000 per ton. After processing, we sell the products to distributors at a price of INR 60,000/ton, and the distributors will maintain a profit of approximately INR 1,000/ton when selling to retailers. At the retailer level, plus 1,000 Indian rupees per ton of freight, the price will reach 62,000 Indian rupees per ton. The retailer will retain its 2,000 Indian rupees deposit plus shipping costs and sell it to the manufacturer at 65,000 Indian rupees per ton. The manufacturer who welds and cuts the pipes to convert these pipes into finished products (such as handrails, choukhats, doors, etc.) will charge his customers a labor fee of 35,000 Indian rupees per ton, and finally sell them at a price of 100,000 Indian rupees per ton. Finally-the customer. Now, if the price of steel rises to INR 60,000 per ton, the price of hot rolled coil will rise by 20%. Therefore, the final customer will pay 110,000 Indian rupees because everything else will remain the same, which is actually a 10% rate hike. For the end customer, a 10% increase will not affect his purchase decision when building a house. Therefore, the rise in steel prices must be judged based on the last mile jump.
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