Religare Investment Call

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1 BUY CMP (Rs) Target Price (Rs) Potential Upside Sensex Nifty Key Stock data BSE Code NSE Code Bloomberg Shares o/s, Cr (FV 10) Market Cap (Rs Cr) 3M Avg Volume 52 week H/L Shareholding Pattern (%) Promoter FII DII Others Dec Year relative price performance Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 1,596 2, % 31,747 9, APLAPOLLO APAT:IN 2.4 3,770 15, /811 Mar17 Jun17 Feb Mar17 Apr17 May Jun17 Jul17 A strong play on capacity expansion and innovation... is amongst India's leading branded steel products manufacturers. The Company operates seven manufacturing facilities with a total capacity of 1.3 Million MTPA. It has pan India presence with units strategically located in Sikandarabad (3 units), Bangalore, Hosur, Murbad and Raipur. APL Apollo's multiproduct offerings include over 400 varieties of MS Black pipes, Galvanized Tubes, PreGalvanized Tubes, etc. Investment rationale caters to different sectors of the economy, which includes infrastructure, construction, automobile, energy and agriculture. Factors like continuous government reforms, increasing infrastructure spending, better monsoon, rising income level, introduction of latest products, etc. will ensure steady demand for APL Apollo's products from all the sectors. The company is one of the leading steel tube manufacturers in India. Its products are used in diverse applications like structures of new commercial buildings and bridges, liquid petroleum gas cylinders, wind energy structures, water pipes, lowfloor buses, metro railway bogies, airports, mobile telecom towers, etc. It has been expanding its capacity across India to cater to the increasing demand. Recently it started a new facility in Eastern region at Raipur with an installed capacity of 0.32 mn tonnes, of which it has commissioned one line out of six lines and expects to start all the lines in the current fiscal. APL Apollo is the first company to bring Direct Forming Technology (DFT) in India for making hollow sections, both square and rectangle. It is also focusing on inlinegalvanizing technology in which tube manufacturing and zinc plating are done at the same time. Thus, technically advanced and upgraded products have enabled the company to differentiate itself from its peers, which we believe will continue to increase its customer base in the future. With healthy revenue growth in the coming years and improvement in operational efficiency, we expect the working capital cycle of the company to improve with reducing inventory and receivables days. Also debt reduction will reduce the overall interest cost, which will add up to its bottom line. Outlook & Valuation is the market leader in the Indian ERW (Electric Resistance Welded) pipe industry with a market share of ~15%. With upcoming capacity expansion, entry into new markets (east India), branding, innovation and technology capability (DFT and inline galvanizing), it is well placed to benefit from strong demand outlook for its various products. We expect Revenue and PAT CAGR of 18.2% and 30.8% over FY1720E. At CMP 1,596, the stock is available at 11.6x of earnings, which is fairly attractive considering robust demand outlook, improving balance sheet and rising profitability. We recommend a Buy on the stock with a target of Rs. 2,352 with an 18 months perspective. Apl Apollo Tubes Ni y Financial Summary Particulars, Rs cr Net revenue FY17 FY18E FY19E 4,545 5,457 6,439 7,501 Research Analyst Ajay Pasari, CFA ajay.pasari@religare.com EBITDA OPM (%) Adj PAT PATM (%) EPS, Rs RoE (%) P/E (x) July 12, 2017

2 has application of its various products in all the major sectors of the economy namely; construction, automobile, agriculture, solar energy, etc. Investment rationale Application of APL Apollo s products in major sectors of the economy caters to different sectors of the economy, which includes infrastructure (metro, airport, ports, smart cities, etc.), construction (railings, cranes, fencing, etc.), automobile (bus/truck bodies and heavy vehicle axles), energy (power, solar plants, water transportation, etc.) and agriculture (drip irrigation, pump conveyance, etc.). India being amongst the fastest growing economies in the world would see huge demand and consumption in the coming years. Also factors like continuous government reforms, increasing infrastructure spending, better monsoon, rising income level, introduction of technically advanced products, etc. will boost the demand for APL Apollo's products from all the sectors. Application in areas like airport, automobile, solar, construction, etc. Source : Company The company has over 400 product range used in different applications like water pipes, mobile telecom towers, bus bodies, structure of buildings, etc. APL Apollo has a diversified product basket The company is one of the leading steel tube manufacturers in India. Its products are used in diverse applications like structures of new commercial buildings and bridges (urban infrastructure), liquid petroleum gas cylinders (housing), wind energy structures (renewable energy), water pipes (irrigation), lowfloor buses, metro railway bogies, airports, mobile telecom towers, etc. The company has created a portfolio of innovative products like hot dipped galvanized pipes, pregalvanized pipes, electric resistance welded tubes, black and hollow sections across dimensions. For FY17, the revenue mix for the company was Hollow sections (48%), Pregalvanized tubes (23%), Black round pipes (15%) and Galvanized pipes (14%). The total volumes growth for FY17 was restricted at 4% hit by demonetization partly and volatile steel prices during the year. Black round pipes saw volume degrowth of 22%, whereas volume growth

3 for Hollow sections, Pregalvanized pipes and Galvanized pipes was 12%, 18% and 2% respectively on YoY basis. The company has been ahead of its competitors in launching new and innovative products like door frames, coastal pipes, etc. We believe the company will continue to invest in technology and launch new products to cater to its diverse customer base. Product wise Revenue breakup FY16 4% Product wise Revenue breakup FY17 3% 19% 14% Major product categories include black round pipes, galvanized pipes, pregalvanized pipes and hollow sections 14% 43% 14% 46% 20% 23% Hollow sec ons Pregalvanized tubes Hollow sec ons Pregalvanized tubes Black round pipes Trading and scrap Black round pipes Trading and scrap Galvanized tubes Galvanized tubes The company has pan India presence with over 600 distributors and 26 warehouses across India Revenue growth to come from launch of branded products, capacity expansion and entry into new markets APL Apollo has been expanding its capacity across India to cater to the increasing demand. It has increased its capacity from 0.49 million tonnes per annum in FY11 to 1.3 million tonnes in FY17. Recently it started a new facility in Eastern region at Raipur with an installed capacity of 0.32 mn tonnes, of which it has commissioned one line out of six lines and expects to start all the lines in the current fiscal. It has a pan India presence with units strategically located in all regions of the country Sikandarabad (North3 units), Bangalore (South), Hosur (South), Murbad (West) and Raipur (East). The company has guided to increase its capacity to 2.5 mn tonnes by through brownfield and greenfield expansion. Production in MTPA Capacity in MTPA 1,600,000 1,400,000 1,200,000 1,000, , , , , , , ,000 1,070,650 1,252,661 1,503,193 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 1,050,000 1,300,000 1,300,000 1,650,000 2,000,000 2,500,000 Produc on MTPA Capacity MTPA APL Apollo is in process to expand its capacity from 1.3 mn tonnes to 2.5 mn tonnes by, which would largely be funded through internal accruals Capacity expansion along with launch of latest products will improve demand for company's products. APL Apollo has been aggressively pitching to create itself as a brand for its basket of product portfolio. Recently, it has launched Apollo Coastguard branded product to tap the growing consumption and demand of galvanized steel tubes in the coastal regions. This particular product is made from special galvanized steel, which will help them make 100% rust proof pipes.

4 The company is targeting to grow at ~20% higher than industry growth of 810%, which shall help it to improve its market share in the coming years APL Apollo has announced strategic tipup with NEXTracker to manufacture a key component of its solar tracking system in India. This will enable NEXTracker to source high quality steel products from APL Apollo for solar parks and power plants in India and also help it to penetrate in the fast growing renewable energy market in India. With government's focus on developing solar energy projects in India with a capacity of 100 GW by 2020, the demand for premium pregalvanized hollow section tubes is expected to be around 1 million tonnes. Exports contribute to ~5% of the total revenue. The company is planning to increase exports mainly to US and Europe with latest technology (DFT). It is planning to start a new facility in Dubai in FY1920E. The implementation of GST is likely to benefit the company in terms of better market share (current share ~15%) in the coming years as organized players will benefit the most and are growing at a faster pace than the industry. Revenue to grow at CAGR of 18.2% over FY1720E leading to economies of scale and higher margins 8,000 7, % 4% 35.0% 6,000 3% 5,000 4, % 20.1% 18.0% 16.5% 25.0% 2% 3, % 15.0% 2,000 1% 1,000 3,138 4,214 4,545 5,457 6,439 7, % % Revenue Rs. Cr (LHS) Growth % (YoY) (RHS) Direct forming technology and inline galvanizing technique to boost its product portfolio, improve working capital cycle and reduce production time Direct Forming Technology, Inline galvanizing and value added products to improve margins APL Apollo is the first company to bring Direct Forming Technology (DFT) in India for making hollow sections, both square and rectangle. Currently, it is the latest global technology for making hollow sections. Presently in the conventional technology, round pipe is formed and then the round pipe is converted to square and rectangular shape. However, in Direct Forming technology, square and rectangular sections are formed directly through welding with high production speed. This could be a potential trigger for the company, as the customers can order customized sizes in small or large quantities, which would expand its addressable market size. DFT will help to produce hollow sections within a certain range of dimensions and thickness without changing rolls, which could save setup time, save rolls management time and reduce to zero the space required to store rolls series. It has successfully established its first DFT line at its Hosur facility and is expected to start more lines at its other existing facilities in the current fiscal. The full benefit of DFT will only be realized from FY19E and thus we expect the company to report healthy margins in the coming years. Apart from DFT, it is also focusing on inlinegalvanizing technology in which tube manufacturing and zinc plating are done at the same time. The tube exterior is uniformly galvanized and an anticorrosion coating is applied over it. The tube interior is uniformly finished with baked coating simultaneously done in manufacturing, giving the tube interior its strong anticorrosion property. Thus, technically advanced and latest products have enabled APL Apollo to differentiate itself from its peers, which we believe will continue to increase its customer base in the future.

5 DFT to aid improve operational margins Higher realizations and reducing debt to support PAT % 8.1% 7.6% 7.1% 6.7% 6.1% % 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% % 4.0% 3.6% 3.2% 2.4% 2.0% % 4.4% 3.9% 3.4% 2.9% 2.4% 1.9% 1.4% EBITDA Rs. Cr (LHS) EBITDA % (RHS) PAT Rs. Cr (LHS) PAT % (RHS) APL Apollo is focusing on debt reduction, improvement in working capital cycle, higher profitability through increase in volumes and realizations, which would further increase its return ratios Improving working capital cycle, reducing debt and robust return ratios With healthy revenue growth in the coming years and improvement in operational efficiency, we expect the working capital cycle of the company to improve with reducing inventory and receivables days. The management is aiming to become net debt free company in the next 34 years, which will reduce the overall interest cost in the coming years. The entire capex requirement to increase the capacity from 1.3 million tonnes to 2.5 million tonnes is being done through internal accruals. Thus, we expect the company to report healthy margins in the coming years along with robust return ratios. RoE to increase with rising PAT and reducing debt RoC to improve and remain robust in the coming years 29.0% 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% 13.0% 26.8% 27.4% 25.0% 22.7% 18.9% 13.9% 32.0% 3% 28.0% 26.0% 24.0% 22.0% 2% 18.0% 16.0% 30.7% 28.1% 24.8% 22.9% 21.0% 17.8% ROE % ROC %

6 Company background is amongst India's leading branded steel products manufacturers. The Company operates seven manufacturing facilities with a total capacity of 1.3 Million MTPA. It has pan India presence with units strategically located in Sikandarabad (3 units), Bangalore, Hosur, Murbad and Raipur. APL Apollo's multiproduct offerings include over 400 varieties of MS Black pipes, Galvanized Tubes, PreGalvanized Tubes, Structural ERW Steel tubes and Hollow Sections. With stateoftheartmanufacturing facilities, APL Apollo serves as a 'onestop shop' for a wide spectrum of steel products, catering to an array of industry applications such as urban infrastructures, housing, irrigation, solar plants, greenhouses and engineering. The Company's vast 3tier distribution network of over 600 dealers is spread all across India, with warehouses cum branch offices in over 20 cities. Risks The company's realizations are highly impacted by volatility in steel prices. Its key raw material is HR coils, which are used to make pipes and tubes. Thus, huge volatility in steel prices can impact its revenue and earnings. APL Apollo caters to different sectors of the Indian economy, which includes infrastructure, construction, automobile, energy, etc. Any slowdown in these sectors could have negative impact on the company's revenue growth.

7 P&L Account consolidated Particulars, Rs cr FY17 FY18E FY19E Net revenue Expenditure Raw material consumed Employee cost Other expenses Total expenditure EBITDA OPM (%) Other income Depreciation PBIT Interest expenses PBT Exceptional items Tax Tax rate % PAT Less: Share of minority interest Add: Profit/Loss of associates Adjusted Net Profit PATM (%) EPS 4, , , , , , , , , , , , Balance sheet consolidated Particulars, Rs cr FY17P FY18E FY19E Share Capital Reserves & Surplus Total Shareholder's Fund NonCurrent Liabilities Long term borrowing Deferred tax liability Other long term liabilities Long term provision Current Liabilities Short term borrowing Trade payables Short term provisions Other current liabilities Total liabilities Fixed Assets Goodwill on Consolidation Non Current investment Long Term loans & advances Other noncurrent assets , , , , , , Current Assets , , ,532.6 Inventories Trade receivables Cash & Cash equivalents Short term loans and advances Other current assets Total assets 1,85 2, , ,507.3

8 Cash Flow statement consolidated Particulars, Rs cr FY17P FY18E FY19E Profit Before Tax Add: Depreciation Add: Interest cost Op profit before working capital changes Changes In working Capital Direct taxes Cash Flow From Operating Activities Cash Flow from Investing Activities Purchase of Fixed assets Others Cash Flow from Investing Activities Cash from Financing Activities Net proceeds from borrowing Dividend (incl dividend tax) Interest cost Cash Flow from Financing Activities Net Cash Inflow / Outflow Opening Cash & Cash Equivalents Closing Cash & Cash Equivalent Key Financial ratios consolidated Particulars, Rs cr FY17P FY18E FY19E Dividend per share Rs Dividend Yield (%) Payout % EPS Rs Book Value per share Rs Profitability Ratios EBITDA / Total income (%) PBT/Total income (%) NPM / Total income (%) ROCE (%) ROE (%) Liquidity ratios DebtEquity Ratio Current Ratio Interest Cover Ratio Turnover ratios Total Asset Ratio Fixed Assets Ratio Debtors Velocity Overall (Days) Inventory (Days) Creditors Velocity (Days) Cash Conversion cycle GROWTH YOY% Sales Growth % Operating Profit % Net Profit Growth % VALUATION P / E Ratio P / BV Ratio EV / EBITDA

9 Before you use this research report, please ensure to go through thedisclosure interalia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 and Research Disclaimer at the following link : Specific analyst(s) specific disclosure(s) interalia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 is/are as under: Statements on ownership and material conflicts of interest, compensation Research Analyst (RA) [Please note that only in case of multiple RAs, if in the event answers differ interse between the RAs, then RA specific answer with respect to questions under F (a) to F(j) below, are given separately] S. No. Statement Answer Tick appropriate YES I/we or any of my/our relative has any financial interest in the subject company? [If answer is yes, nature of Interestis given below this table] I/we or any of my/our relatives, have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance? I / we or any of my/our relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance? I/we have received any compensation from the subject company in the past twelve months? I/we have managed or comanaged public offering of securities for the subject company in the past twelve months? I/we have received any compensation for brokerage services from the subject company in the past twelve months? I/we have received any compensation for products or services other than brokerage services from the subject company in the past twelve months? I/we have received any compensation or other benefits from the subject company or third party in connection with the research report? I/we have served as an officer, director or employee of the subject company? I/we have been engaged in market making activity for the subject company? Nature of Interest ( if answer to F (a) aboveis Yes :... Name(s)with Signature(s)of RA(s). [Please note that only in case of multiple RAs andif the answers differ interse between the RAs, then RA specific answer with respect to questions under F (a) to F(j) above, are given below] SS.No Name(s) of RA Signatures of RA Serial Question of question which the signing RA needs to make separate declaration / answer YES Copyright in this document vests exclusively with RSL. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose, without prior written permission from RSL. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Disclaimer: