– A company with a good reputation in the plastic pipes industry with a strong balance sheet
– Focusing on value-added products and increasing market reach
– Strong growth pipeline led by organic and inorganic expansion
– Prudently managing growth capital
– Attractively priced at 12 times FY21 estimated earnings
In a falling market, intelligent investors are picking stocks they believe could be bargains. A well-known investor on Dalal Street, Ashish Kacholia has recently bought 2.33 lakh shares of Apollo Pipes for Rs 375 a share. Apollo Pipes has been on the radar of some prominent investors including the Vallabh Bhansali Family, Malabar India Fund and others like Kotak small-cap fund.
A well-managed company
Apollo Pipes is not just a fast-growing plastic pipes company but is a well-managed company which is now reflecting in its earnings and return ratios. A better product mix, appropriate management and allocation of capital in growing businesses is now yielding good results. These attributes are now being recognised by the market.
Focus on quality of growth
In the last three years, the company’s sales have increased by 20% annually and net profits have risen by 34% due to better margins. Net profit margins have improved by almost 2 percentage points from 4.8% in financial year 2016 to 6.6% in the financial year 2019. This was partly due to better scale economies and partly due to sales of value-added products such as fittings and CPVC pipes increasing from 13.4% of sales in FY18 to 17% of total sales in FY19. These products contribute better realisations and thus better margins and earnings. The company is gradually moving away from traditional commoditised products to premium products like fittings and has launched PVC taps as well as faucets.
Prudent capital allocation
In the past three years, the company has generated close to Rs 171 crore of cash from operations (after working capital). Of this, it has used about Rs 70 crore as capex for expansion. A large part of the cash is being used to keep debt low. The company is net cash positive, that is its cash and equivalents are in excess of its debt.
Close to 50% of the balance sheet in fiscal 2018 and 37% of the balance sheet in fiscal 2019 was cash.
While its latest reported return on capital was 18%, after adjusting for cash its core return on capital was superior.
Apollo’s revenue growth is largely driven by expansion into new markets, developing new products and expanding capacities. It recently acquired a 12000-tonne capacity plant in Bangalore for Rs 30 crore. This will help in increasing its reach in Southern markets and grow its business.
Apollo is expanding its existing capacity at Dadri by 7,000 tonnes and at Ahmedabad by 5,000 tonnes, which will be operational by the end of the current fiscal. The company’s total capacity will increase by 43% to 90,000 tonnes from 63,000 tonnes. On the back of this expansion, the company is expecting revenue growth of 30% in the current fiscal.
Despite a correction in the broader market and in midcap stocks, Apollo Pipes hasn’t fallen much. At the current market price of Rs 400 a share, it is trading 20% below its 52 week high of Rs 508. This is largely because of its superior returns ratios, strong earnings growth and a healthy balance sheet. It is currently trading at 12 times its FY21 estimated earnings, making it look quite attractive.
Slow execution can lead to lower growth and contraction in margins. That apart, government spending on agriculture and water management projects is key. Lower spending could affect growth. It has managed its cash cycle efficiently. Deterioration in the same as a result of higher working capital could pose a risk to its balance sheet and return ratios, thus affecting valuation.