Apollo APL (APL Apollo Tubes Limited) recently revealed its comprehensive capex and pricing/market share strategy during a press conference. The company's Chief Strategy Officer, Anubhav Gupta, shed light on their plans for capacity expansion, funding initiatives, and projected growth.
Capacity Expansion and Funding Strategy:
Apollo APL is executing a robust expansion plan to increase its capacity by 2.86 lakh tons. The Dadri-2 expansion is on track and expected to commence production by Q4 FY24, adding to the volume this year. Moreover, the company is aggressively pursuing land acquisitions in Maharashtra, East India, and South India to establish new greenfield plants. Each plant is anticipated to mirror the size of Apollo APL's flagship plant, with a significant investment of Rs 135 crore per unit.
To finance this expansion, Apollo APL is leveraging a combination of equity infusion and internal cash flows. An earlier announcement indicated that promoters and non-promoter investors have already infused Rs 2.6 billion into the company, constituting 25 percent of the total capital required. The remaining 75 percent will be sourced as and when the company needs funds. Additionally, Rs 2.4 billion will come from internal cash flows, with an estimated 55-45 ratio of equity infusion to internal funds.
Commitment to ROCE and Pricing Strategy:
Apollo APL maintains a steadfast commitment to achieving 25 percent or more Return on Capital Employed (ROCE). To achieve this goal, the company has implemented a cash-and-carry model in the northern region, where it enjoys a dominant market share. This move has successfully rationalized working capital, propelling ROCE to mid-double-digit levels. The company aims to further improve ROCE and reach targeted levels within the next 2 to 3 years.
Market Share Strategy and Pricing Impact:
The company's current sales strategy focuses on gaining market share from weaker and unorganized players, driven by the ongoing industry shift from unorganized to organized sectors. In pursuit of this objective, Apollo APL is offering additional incentives and discounts to its distributors to secure more wallet share. "While this strategy may have resulted in a slight dip in gross profit per ton on a sequential basis, it has effectively contributed to reducing working capital days", stated Anubhav Gupta.
Moreover, the dip in gross profit per ton is partly attributed to the decline in PVC prices by INR 8 to INR 10 per kilo between April and June 2023. Additionally, non-uPVC raw materials such as HDPE and cPVC experienced a decrease, leading to channel destocking and necessitating aggressive push sales for these product categories.
Outlook and Growth Projections:
Despite the lower gross profit per ton in the short term, Apollo APL remains confident in its growth projections. With the aggressive sales strategy in place, the company anticipates a 35 percent Compound Annual Growth Rate (CAGR) in revenue over the next four years. Furthermore, they aim to achieve a ROCE of 25 to 30 percent, supported by working capital efficiencies despite the significant proposed investments.
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