Outlook Business — December 07, 2017

20

My Best Pick

22 December 2017 / Outlook BUSINESS

The company’s market share in the next three

years is expected to rise to 17 % at the expense of

its competitors and the unorganised market. Again

this performance would not have materialised with-

out establishing perhaps the most extensive nation-

wide network of motivated distributors and retailers

who are richly incentiv ised for superior sales perfor-

mance. Currently, over 80 % of the company’s reve-

nue comes through its own distribution network of

625 distributors and 40 , 000 retailers spread across 300

cities/towns in the country.

In 2013 , the company had embarked on a major

branding exercise to create awareness and visibili-

ty around its products. These initiatives resulted in

higher sales growth in tier II and III cities compared

with tier I cities. The company is now working with

a reputed marketing consultant to launch new prod-

ucts under the “APL Apollo” brand. It is also targeting

30 , 000 signage boards across the country for higher

visibility and has earmarked 0. 5 % of its FY 17 revenue

for this exercise. The eff orts are already paying off.

Improving brand strength has also helped APL Apol-

lo bring down its debtor days from 40 in FY 13 to 24 in

FY 17. Inventory days, too, have fallen from 52 in FY 13

to 38 in FY 17 , through effi ciencies in manufacturing

and by leveraging on the company’s strategic manu-

facturing footprint.

STAYING HUNGRY

Marketing genius apart, Gupta has demonstrated re-

markable fi nancial savvy and discipline. By optimis-

ing capital expenditure, the company has maintained

an attractive return on invested capital of 20 %-plus,

which is set to exceed 30 % by FY 20. He has relied on

internal cash generation to increase capacity and is

averse to debt: the company is expected to be debt-

free in the next three years. But the leverage is not

humongous either. The debt on APL’s books is cur-

rently over # 590 crore and the debt-equity ratio is

just around 0. 83 x. Gupta also understands the impor-

tance of good corporate governance: the company’s

books are audited by a Big 4 auditor; it has a distin-

guished board of industry experts; and is committed

to policies that encourage sustainable development.

It’s close to a decade now, but Gupta’s hunger for

growth remains intact. While the company may

have guided for lower rates, knowing him for the

past nine years, I know he will not be satisfi ed with

a revenue growth rate of less than 25 % CAGR. And

with operating leverage kicking in, operating profi t

should rise at a CAGR of over 30 %. The confi dence

around APL is also on account of the fact that it has

a presence in sectors that are not cyclical. Around

30 % of APL’s retail sales are to the household sector,

30 % to the infrastructure sector and the remaining

20 % comprises agricultural pipes and scaff oldings.

Direct sales to real estate and infrastructure proj-

ects account for the balance 20 %. Against such a

backdrop, a stock that trades at 14 times estimat-

ed FY 19 earnings is cheap. And it is cheap because

the stock is under-researched and under-owned.

APL Apollo operates in a sector which is non-sexy.

It’s when APL delivers results year aft er year, which

surprise and sparkle, will fund managers shed their

bias and buy into the vision of Sanjay Gupta just like

I did grudgingly.

Whatever any one may think; I am a convert. I may

be buying the stock 19 times dearer, but when I wake

up fi ve years later, I am convinced that it would be at

least three times my purchase price. And I can live

with that. Gupta is a man of promise and what we

have seen thus far is just the beginning of his over-

arching ambition. b

The writer holds the stock in his personal capacity

Value-driven

Increase in sales of higher-margin products such as pre-galvanised tubes is expected to boost margin

APL’s product margin profi le (%)

Hollow

Sections

Black Round

Pipes

Pre-Galvanised

Tubes

Galvanised

Tubes

7-8%

4-5%

12-14%

8-9%

Sales volume mix in (%)

Source: Analyst report

Special Value-added products

Galvanised Tubes

Round Pipes

Pre-Galvanised tubes

DFT Technology Products

Hollow Sections

Hollow Sections

FY16 FY20E

25 25

25 25

(^2015)
20 10
10
(^1015)