Apollo Pipes/ Amulya Leasing Research Report By Antique And BP Equities

Amulya Leasing & Finance Ltd

A strong brand in NCR & UP markets

Amulya Leasing & Finance Ltd. (AMLF) is primarily into plastic piping and caters mainly to the NCR, Uttarakhand and Uttar Pradesh markets. Its factory being located at Dadri, Uttar Pradesh, with a capacity of 55,000 MT (mainly constituting PVC pipes), AMLF is a North centric Agri PVC pipe maker with access to household CPVC/PVC and infrastructural PVC markets too. Close to 7-8% of its volume comes from CPVC with compound being sourced from KemOne, France.

We recently interacted with the management post demonetization to understand the near term impact on demand and the long term strategies of the company. In mid CY17, AMLF is expected to be renamed as Apollo Pipes and through the reverse merger route, the existing listed entity would be the one representing the plastic piping business. Presently, 75% of its distribution is through the dealer route with rest of it being spread across direct supply to builders, government bodies and irrigation projects.

Apollo Pipes, with the linkage to the well established APL Apollo Tubes Ltd promoters, is in a good position to leverage the established pipe brand (Apollo) along with utilising the distribution network too. Apollo Pipes is operating under the leadership of Mr. Samir Gupta, younger brother of Mr. Sanjay Gupta, the person driving APL Apollo Tubes. Following are the key takeaways:

1. Present capacity of 55,000 MT at Dadri, UP and is expected to ramp it up to 70,000 MT by FY19E in tranches with capex cost of INR60mn for each incremental 10,000 MT.

FY16 production from the Dadri plant was at 30,000 MT and in 1HFY17 production was at 15,000 MT. To cater to the strong Western India markets, AMLF is envisaging a green-field project somewhere in Gujarat or Maharashtra with an initial capacity of 10,000 MT at a cost of INR150mn for the first tranche, which later can be further enhanced to 20,000 MT through incremental capex of INR100mn. Post announcement of the demonetization process, demand at ground level was severely impacted and volume declined by ~30% from normal levels and is expected to remain weak at least till mid-4QFY17. Though demand from government projects and irrigation projects is expected to resume soon, B2C demand got impacted led by lack of cash availability in the system.

Thus company is expecting FY17E volume to be lower than FY16 volume (1H volume growth was flat). Also led by forthcoming elections in UP, demand is expected to remain weak in the near term.

Strategically management is aiming to increase the mix of B2C business to 50% by FY19E by focusing more on household pipes and fittings down the line (fittings mix stands at ~12% currently), especially with the Western India operations start. Seasonally government orders and demand from irrigation projects tends to be higher in 4Q and thus management is hoping for some solace as rest of the household led demand is set to remain weak in 4Q. Apollo Pipes does not have any exclusive sales outlet and it operates through multi brand retail only. It has 250 dealers and in general one dealer deals with 20 end retailers. Thus ~500 touch points are presently catering to the markets of NCR, UP, MP, Haryana and Rajasthan.

2. Employee count is close to 300 now and is set to get ramped up with rise in capacity and distribution. With rising focus on household B2C segment, investment on brand building would also increase ahead. Being a follower brand behind the leaders like Supreme, Finolex, Astral, Ashirwad etc, Apollo sells its plastic pipes at ~5-10% lower rates along with providing much higher dealer incentives as compared to the leaders. Over the past couple of months, with PVC prices increasing by ~10% amid weak demand on back of demonetization, it had been pretty tough to pass on the prices as compared to the leaders. Thus going ahead with higher scale and better brand presence and recall, Apollo Pipes would be aspiring to have a better pricing power to take care of all commodity related volatilities. AMLF is presently operating at robust ~11-12% EBITDA margin levels and is confident of improving it further with scale and mix enhancement.

3. Confident of generating cash from internal accruals to fund the needs for Dadri expansion and fresh green field facility fund needs. Temporary hiccups in credit lending period getting extended led by demonetization to get resolved with demand situation normalizing.

Do not see any need for equity dilution or major debt increase to fund the capex plans and grow in size as strong margin profile and visibility of strong demand for agri pipes and improved distribution for Apollo pipes would generate the necessary cash flows.

Apollo Pipes, with the linkage to the well established APL Apollo Tubes Ltd promoters, is in a good position to leverage the established pipe brand (Apollo) along with utilising the distribution network too