MANAGEMENT DISCUSSION ANALYSIS The following discussion and analysis should be read in conjunction with the Company's financial statements included herein and the notes thereto. The financial statements have been brpared in compliance with the requirements of the Companies Act, 2013 and Generally Accepted Accounting Principles (GAAP) in India. The Company's management accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably brsent the Company's state of affairs and profits for the year. Investors are cautioned that this discussion contains forward looking statements that involve risks and uncertainties. When used in this discussion, words like 'will', 'shall', 'anticipate', 'believe', 'estimate', 'intend', 'expect' and other similar exbrssions as they relate to the Company or its business are intended to identify such forward-looking statements. The Company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results, performances or achievements could differ materially from those exbrssed or implied in such statements. Factors that could cause or contribute to such differences include those described under the heading "Risk factors" in the Company's prospectus filed with the Securities and Exchange Board of India (SEBI) as well as factors discussed elsewhere in this report. Readers are cautioned not to place undue reliance on the forward-looking statements as they speak only as on their date of statement. Information provided in this Management Discussion and Analysis (MD&A) pertains to APL Apollo Tubes Limited (the Company) and its subsidiaries on a consolidated basis, unless otherwise stated. Economic Overview Global growth in 2014 was a modest 3.4 percent, reflecting a pickup in growth in advanced economies relative to the brvious year and a slowdown in emerging market and developing economies. Despite the slowdown, emerging market and developing economies still accounted for three-fourths of global growth in 2014. Complex forces that affected global activity in 2014 are still shaping the outlook. These include medium- and long-term trends, such as population aging and declining potential growth; global shocks, such as lower oil prices; and many country- or region-specific factors, such as crisis legacies and exchange rate swings triggered by actual and expected changes in monetary policies. Overall, global growth is projected to reach 3.5 percent and 3.8 percent in 2015 and 2016, respectively, in line with the projections in the January 2015 World Economic Outlook (WEO) Update. Growth is projected to be stronger in 2015 relative to 2014 in advanced economies, but weaker in emerging markets, reflecting more subdued prospects for some large emerging market economies and oil exporters. As far as India is concerned, India's macro-economic prospects have strengthened and the country is best positioned among emerging market economies, gaining global investor's attention, says a report by ICICI Bank. The improvement in India's economic fundamentals has accelerated in FY2015, with the combined impact of a strong Government mandate, RBI's inflation focus supported by benign global commodity prices. India is set to become the world's fastest-growing major economy by 2016 ahead of China. India is expected to grow at 6.3 per cent in 2015, and 6.5 per cent in 2016 by when it is likely to cross China's projected growth rate, the IMF said in the latest update of its World Economic Outlook. India's consumer confidence continues to remain the highest globally and showed improvement in the fourth quarter of calendar year 2014 (Q4), riding on positive economic environment and lower inflation. Nielsen's findings reveal that the consumer confidence of urban India increased by three points in Q4 from the brceding quarter. With a score of 129 in Q4, urban India's consumer confidence is up by 14 points from the corresponding period of the brvious year (Q4 of 2013) when it stood at 115. India's foreign exchange reserves touched a record US$ 322 billion, surpassing the brvious high of almost US$ 321 billion in September 2011. India has become a promising investment destination for foreign companies looking to do business here. Mr Narendra Modi, Prime Minister of India, has launched the 'Make in India' initiative with the aim to give the Indian economy global recognition. This initiative is expected to increase the purchasing power of the common man, which would further boost demand, and hence spur development, in addition to benefitting investors. The International Monetary Fund (IMF) and the World Bank, in a joint report, have forecasted that India will register a growth of 6.4 per cent in 2015, due to renewed confidence in the market brought about by a series of economic reforms pursued by the government. Furthermore, the new 'Make in India' initiative is expected to be a vital component in India's quest for achieving wholesome economic development. Steel Sector Update As per the World Steel Association (WSA), global apparent steel use reported a growth of 0.6% only in CY2014, as against a growth of 3.6% in CY2013, while aggregate capacity utilisation too dropped to 76.7% in CY2014, from 78.4% in CY2013. Weak demand in China, owing to the real estate sector slowdown, resulted in a de-growth of 3.4% in CY2014 in the country, and was one of the major reasons behind the decline in the growth rate of global steel consumption. Muted demand conditions prompted steel producers in China to turn to export markets in CY2014, and the same resulted in a 50% growth in China's steel exports, which in turn led to a sharp decline in steel prices in the rest of the world, especially during the second half of FY15, from about $485/MT in October 2014 to $370/MT in March 2015. Domestic steel consumption growth improved to 3.1% in FY15 from 0.6% in FY14, but remained low at an absolute level. However, the growth rate improved from 0.5% level during Apr-Oct 2014 to 3.1% in the whole of FY15, indicating a sharper improvement in the second half of FY15 on the back of improved automobile sales. Given that the construction and capital goods sectors, which together account for about 70-75% of the total steel demand in India, are yet to witness much on-the-ground recovery, automobile sector is expected to support domestic steel demand in the near term. On supply side, India's steel production growth rate continued to exceed the consumption growth rate in FY15, and stood at 3.3%, with secondary steel producers reporting a higher growth of 3.9% during FY15 compared to 2.9% reported by integrated steel producers. International price of iron ore is currently trading at near ten year lows. On April 02, 2015, spot price of iron ore with 62% Fe content was trading at USD 47.08 per dry metric tonne (dmt), cfr China, down 19% from a month ago. On a year on year (y-o-y) basis, average spot iron ore prices in April 2015 have corrected by a steep 55%. Though there has been some recovery in ore prices towards the fourth week of April 2015, touching USD 59.88 per dmt on April 28, 2015, the possibility of a sustained recovery looks unlikely at the moment, given that Chinese steel production is not expected to witness any apbrciable growth in CY2015, and the global sea-borne iron ore market is passing through a phase of supply glut, because of significant upcoming low cost capacities from Australia and Brazil. The operating margins of the domestic steel industry (sample: seven large Indian companies in the steel sector, together accounting for over 40% of the total domestic capacity) witnessed a decline in this year due to low capacity utilisation levels and a fall in sales realizations. However, recent softening of interest rates is likely to provide some relief to the debt-laden steel players in the near term. As per the report of the Working Group on Steel for the 12th Five Year Plan, there exist many factors which carry the potential of raising the per capita steel consumption in the country. These include among others, an estimated infrastructure investment of nearly a trillion dollars, a projected growth of manufacturing from current 8% to 1112%, increase in urban population to 600 million by 2030 from the current level of 400 million, emergence of the rural market for steel currently consuming around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana among others. At the time of its release, the National Steel Policy 2005 had envisaged steel production to reach 110 million tonnes (mt) by 2019-20. However, based on the assessment of the current ongoing projects, both in greenfield and brownfield, the Working Group on Steel for the 12th Five Year Plan has projected that domestic crude steel capacity in the county is likely to be 140 mt by 2016-17 and has the potential to reach 149 mt if all requirements are adequately met. Company Overview APL Apollo Tubes Limited (APL) operates in the steel tubes and pipes market specifically in the Welded Segment. The Welded segment has three sub-segments namely SAW Pipes, ERW Precision pipes and ERW Structural and Commercial pipes. We operate in the ERW Structural and Commercial segment. The pipes are made from Mild Carbon Steel and are used in transportation of water and other fluids as well as structural support system in fabrication and construction. Structural segment has a wider brsence as far as APL Apollo is concerned and contributes to almost 55% of our turnover. The current capacity of APL Apollo is about 1.05 million tonnes, sbrad across six manufacturing plants three in Sikandrabad, UP, and one each in Murbad (Maharashtra), Hosur (Tamil Nadu), Bangalore (Karnataka) thus making APL Apollo, the market leader in the ERW pipes with a share of over 10% of the organized market. Efforts are underway to set up a plant in the Eastern region of India and also in the Middle East thus making APL Apollo the only player in the country with a pan-india manufacturing capability. The key products in the portfolio include MS-Black, Galvanized Tubes, Pre-galvanized Tubes and Hollow Sections. Hollow sections form 35% of the revenue mix while MS-Black and Pre-galvanized contribute 25% each and the rest comes from Galvanized tubes. From a margin perspective, br-galvanized tubes have the highest margin of about 13-15% while MS-Black have more modest margins in the region of 4-6%. The company has built a pan-India distribution network with over 400 direct dealers which is almost twice the size of the nearest competitor's distribution channels. Multi-locational plants also help reduce transportation and logistic costs and this is a key attribute of APL's strategy. Plans are afoot to double the dealer network in the next two years. Operational Highlights - FY 15 The company's efforts this year have centered around increasing the production capacity as well as having operational efficiencies built in to the system to grow profitably. The prices of our key raw material HR coil have been very volatile this year and we have been operating in a period of falling raw material prices. This has in turn put brssure on margins of all the players in the steel industry and our fortunes have not been much different. The company carries an inventory of almost 30-40 days to service the demands of the customers and this inventory loss has hit the EBITDA and hence the net profitability. From a capacity perspective, the company has increased its capacity to almost 1.05 million tonnes this year and this rebrsents a 31% rise in capacity over the last year. This positions us well in the industry to meet the rising demand from our customers and particularly in the area of structural where APL has carved a niche for itself. Despite the strain in the industry, the Company has managed to maintain its volume growth. The volume registered for the year was 709,600 tonnes, which is a 22% jump over the brvious year number of 572,000 tonnes. The spurt in volume was primarily driven by demand in black and square pipes. This was also complemented by a strong performance from the export markets, where demand from Europe and more recently Australia have given us good visibility in the world markets. We hope to continue our focus on exports with a view to sbrad the brand equity as well as increase the margins of the company. Distribution Reach The company's vast distribution network is sbrad across India, with warehouse cum branch offices in 20 cities. The company's network of over 400 direct dealers, who in turn may be servicing more than 30,000 retailers, gives an enviable brsence of the company's network in over 200 cities and towns of the country. The wide geographical reach offers a competitive advantage to the company in terms of quicker delivery and service. We have strengthened our brsence in markets like Kerala, Maharashtra, Karnataka and UP while making deep inroads into virgin territories like Himachal Pradesh, Uttarakhand and other smaller states. Financial Review For the year under review, we had sales of Rs. 3,014 cr compared to \ 2,497 cr of last fiscal. These figures are net of excise duties. This corresponds to a growth of almost 21% year on year. Absolute EBITDA increased from Rs. 166.6 cr to about Rs. 186.2 cr which corresponds to a 6.2% EBITDA margin. This margin percentage is slightly lesser than last year but as mentioned the key reason for the drop in the margin was the inventory carrying loss. The inventory carrying loss was about Rs. 45 crore for this fiscal and it had an impact on the margin. If the losses due to the inventory were added back to the margins, we would have been at a much healthy level of profitability this year itself. We believe that the prices of the HR coil are bottoming out and we do not see this trend repeating for this year for sure. The net profit of the company was at Rs. 63.8 crore which was 8% higher than the Rs. 59.0 crore last year after accounting for the inventory loss. This translated to an EPS of Rs. 27.2, an increase of 8.1% over last year. Net worth for the company as at the end of March 31, 2015 stood at Rs. 472.1 crore an increase compared to the Rs. 425.2 crore of last year. The Board has recommend a dividend of Rs. 6 on a face value of Rs. 10 which translates to a dividend percentage of 60%. The Debt-equity ratio stands at 0.92 for the year. This is with our stated objectives of maintaining the debt-equity ratio to a level as close to 1 as possible. As far as future expansion goes, we do not foresee any new long term debt being added to the balance sheet. The internal accruals would be able to sufficiently manage the funding requirements. There could be an increase in short term working capital in relation to the increase in the production levels. The Capex envisaged for the current fiscal is about Rs. 80 - 100 crore to add capacity by interchanging existing mills. Branding initiatives To strengthen the APL Apollo brand, the company has undertaken several brand building initiatives. The company has directly engaged with over 15000 fabricators through 100 fabricator meets all over India. The company has installed over 5000 brand signages across its network of dealers, retailers and fabricators. Direct engagement with GI customers through branded van operations with consumer contest have been started in the rural markets of Karnataka and Andhra Pradesh. Bus branding, wall painting, in-shop branding, branded channel partner schemes, new look catalogs and POS items and a more engaging company website were some other initiatives. New Initiatives As part of the strategy to stay ahead of the curve, the company initiated many new product innovations in this fiscal. The company laid the foundation for introducing Colour Coated Pipes as a product in India for the first ever time. The line has been put up in our Murbad facility and we are already seeing acceptance of the product in India as well as a good demand for exports. We believe that colour coated pipes will find wide acceptance in India in the foreseeable future given the twin benefits of looking aesthetically pleasing as well performing the important function of brvention of rusting in pipes. The other key innovation that has been patented is the door frame - both single and double door frames. This product replaces wood which has been the traditional material of use in normal door frames. The advantages that the steel door frame provides are manifold; it is far cheaper than wood, it does not wear out like wood and it has a good resale value. The Government of India's initiative to promote low cost housing is a big driver for this product as the cost differential with a wooden door frame ensures that the economically weaker sections of the society can profit from this innovation. The company believes that innovations such as these will help differentiate the brand APL Apollo and etch it firmly in the minds of consumers. The R&D team at APL is constantly engaged in identifying and designing new products that can make a perceptible impact not only for the consumers but also for the company as a means of diversifying our risk. Outlook The industry has been passing through many cycles of troughs and peaks, but APL has been relatively insulated and has been growing at a steady pace. The key reasons for this growth has been our single minded focus on our products, strong distribution network, innovation and tight financial discipline. Going forward, we expect the momentum in demand to continue and we hope to continue to grow our topline by 25% while also focussing on the margins. This should also help our return ratios to come back to healthy standards and hence benefit the shareholders. Our stated goal of reaching the US$ 1 bn in revenues continues and we hope to achieve the same in the next 3-4 years. |