Apollo Pipes Ltd Management Discussions

The Economic Review

Global Economy

Challenges & Performance: The global economy displayed considerable resilience reporting a GDP growth of 3.4% (as reported by IMF) despite extreme volatility and uncertainty prevailing worldwide.

The global fight against inflation, Russias war in Ukraine, a resurgence of COVID-19 in China and recessionary headwinds prevailing in the US and Europe in the first half of 2022 weighed on global economic activity. Trade in goods grew 10% over the 2021 level to an estimated $25 trillion, and services were up 15% to a record US$7 trillion, as per the UNCTAD report.

As per UNIDO Statistics, global manufacturing output has maintained a stable year-over-year growth rate of 3-4% since the last quarter of 2021.

2023 possibilities & prospects: The world economy is expected to attain a soft landing considering the decline in inflation and strong growth in goods and services despite the challenging circumstances in the financial sector, the Russia-Ukraine conflict and the three years of the COVID-19 pandemic.

Though the projections by IMF reflect that growth will fall from 3.4% in 2022 to 2.8% in 2023, on careful observation, it is noted that it is a sign of considerable resurgence. Despite the financial turmoil (owing to the collapse of large banks) and escalating geopolitical tensions, the GDP estimates for 2023 are very close to the average annual GDP growth of about 3% (over the last decade).

Though inflation is expected to fall, it is assumed to remain at 5.2% in 2023. Due to the rapid monetary policy tightening to combat inflation, conditions in advanced economies have deteriorated as their growth has been forecast to slow from 2.5% in 2022 to 0.5% in 2023.

Indian Economy

In the financial year 2022-23, in the aftermath of Covid, India stood out as one of the magni cent examples of hope and optimism while the world was tipping towards recession. After a spectacular rebound in FY22 from a lower base, the Indian economy again registered a healthy 7% growth in the GDP. Growth was underpinned by investment activity led by the Governments strong capital expenditure thrust, subsequent capital formation and return in private consumption.

The global turmoil in 2022 triggered broad-based inflation worldwide, and India was no exception. In April 2022, retail inflation, measured by CPI (consumer price index), reached the highest (7.79%). RBI increased interest rates to contain the soaring inflation and by the end of this fiscal, CPI (consumer price index) came down to 5.66%.

The rupees depreciation against the dollar supported the surge of exports growing at 13.84 % during FY 23 over FY 22 to achieve USD 770.18 billion worth of exports.

S&P and Fitch, the global rating agencies, rated India ‘BBB- and ‘Baa3, which indicates a stable outlook but a low investment grade. These ratings consider economic growth, inflation, short and long-term government debt, etc.

Outlook: In FY24, the overall growth scenario is expected to remain robust, although significant challenges persist in the global environment. Slower consumption, income growth, and rising borrowing costs will affect the countrys overall economic growth.

The Governments increased impetus on infrastructure creation, showcased in the largest-ever allocation in the Union Budget is expected to drive economic progress. Expanding public digital platforms and measures such as PM GatiShakti, the National Logistics Policy, and the Production-Linked Incentive schemes will support and aid economic growth.

Indias Agriculture sector

While agricultures share in Indias economy has progressively declined to less than 15%, the sectors importance in Indias economic and social fabric goes well beyond this indicator.

First, nearly three-quarters of Indias families depend on rural incomes.

Second, most of Indias poor (770 million people or about 70%) reside in rural areas.

And third, Indias food security depends on producing cereal crops and increasing its production of fruits, vegetables and milk to meet the demands of a growing population with rising incomes.

For Indias agricultural sector to increase its significance in the economic equation, a productive, competitive, diversified and sustainable agricultural sector will need to emerge at an accelerated pace.

The country has some 195 mn ha of land under cultivation, of which about 63% are rainfed (roughly 125m ha); the irrigated part constitutes only ~37% (estimated at 70 mn ha).

Indian farmers still depend on the monsoon for their growing water demands. Improper patterns of rain showers often result in a poor crop yield. Availability of irrigation facilities, therefore, becomes essential to ensure a good harvest.

Indian agriculture was lucky to have a good run of monsoons for the last four years. This helped ensure that agriculture was not only largely unaffected by the pandemic but also provided refuge to many who lost their livelihoods during the crisis.

Realising the lacunae of Indias monsoon-dependent farming, the Government extended the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) (launched in 2015 to improve farm productivity) by four years till 2025-26 to complete ongoing projects. The program entails additional spending of RS. 93,068 Crore.

The Government also approved the Accelerated Irrigation Benefit Programme (AIBP), Har Khet ko Pani (HKKP), and watershed development components of the PMKSY for four years to 2025-26.

Under the AIBP, which offers financial support to irrigation projects, the Government aims to extend irrigation to 1.39 million hectares by 2025-26.

Under the HKKP, which aims to expand the cultivable area under assured irrigation, the Government plans to bring 450,000 hectares under irrigation through minor projects and to rejuvenate water bodies.

Through the watershed development component, the Government envisages the completion of sanctioned projects covering 4.95 million hectares of degraded land and bringing an additional 250,000 hectares under protective irrigation through 2025-26.

The heightened efforts towards increasing the cultivable land under irrigation are expected to create promising opportunities for the PVC pipes segment.

Sources https://www.worldbank.org/en/news/feature/2012/05/17/india-agriculture-issues-priorities https://www.livemint.com/opinion/online-views/indian-agriculture-faces-double-whammy-of-deficient-monsoon-and-inflation-challenges-for-policy-to-ensure-food-security-and-farmer-interests-11684432221750.html https://www.livemint.com/news/india/cabinet-approves-implementation-of-pmksy-scheme-for-202126-11639562477698.html

Indian Real Estate

In India, the real estate industry ranks second in terms of the ‘highest employment generator after agriculture. This sector is expected to continue on its journey of long-term growth as the GDP per capita increases, leaving larger disposable incomes with people and growing urbanisation which will propel the economy.

The Indian real estate sector has seen remarkable growth in recent years, and Non-Resident Indians (NRIs) have played an instrumental role in this expansion. Rising demand for the luxury home sector, rent inflation, and the rupee depreciation are some of the most prominent factors fuelling the demand for Indian real estate.

According to a report by the National Real Estate Development Council (NAREDCO) and KPMG India, the Indian real estate industry is showing strong growth, even as the global real estate industry continues to recover from stagnation. The report states that the market size of the Indian real estate industry in FY21 was indexed at US$200 billion and is expected to reach US$1 trillion by FY25. This growth is expected to contribute 13% of the countrys GDP.

Residential real estate: Indias residential real estate market had remarkable growth in 2022 and this momentum is expected to continue even as the global market remains muted. The new development will mushroom across the Indian landscape and be more pronounced in Tier 2 and 3 towns.

Affordable housing: The growing awareness of home ownership and the Governments favourable affordable housing schemes have led to significant growth in the affordable housing segment. As we advance, the demand for affordable housing will continue over the coming years. In the Union Budget 2023-24, the Finance Ministry has allocated RS. 79,000 Crore (US$ 9.64 billion) for the PM Awas Yojana- an initiative addressing urban housing shortage among EWS/ LIG and MIG categories, ensuring a pucca house to all eligible families.

Commercial real estate: Commercial real estate, meanwhile, has rebounded strongly post Covid now that the workforce is returning to office. This industry is one of the fastest expanding real estate categories as many MNCs and large businesses have recently reopened their offices or adopted a back-to-office plan. The most recent analysis from Knight Frank India predicts that the commercial real estate market will grow steadily and sustainably. The co-working sector in India should cross 50 million sq. ft by the end of 2023, which would be a YOY 15% increase.

In addition to office space, there is tremendous growth in other sub-segments of the commercial segment, namely, hospitality, hospitals, retail and data centers among others.

* According to JLLs Data Centre Update: H2 2022 report, the expansion in data center capacity between 2023-2025 will necessitate a demand for 9.1 million sq. ft of realty space.

* Developers plan to add nearly 25 million sq. ft. of new mall space across the top 7 cities over the next 4-5 years, according to a joint report by ANAROCK and Retailers Association of India (RAI).

* India will require an additional 1.3 billion square feet of healthcare space by 2030 to reach the global hospital beds-to-population average, according to CBRE.

Furthermore, policy initiatives like Smart Cities Mission and AMRUT (Atal Mission for Rejuvenation and Urban Transformation) could further amp up demand for commercial real estate.

Every real estate creation will open opportunities for the PVC pipe sector and bolster the demand.

The PVC Pipes Sector

PVC (Polyvinyl Chloride) is a chlorinated hydrocarbon polymer that is coarse and sti in its original state but eventually becomes flexible when combined with plasticisers. These are mainly used as water conduits since they do not rust, rot or wear out over time. Owing to its high durability, flexibility, recyclability, resistance to heat, long-lasting nature, lightweight and minimal chemical reaction, it is one of the most utilised plastics in the world.

Considering their high degree of malleability and other aforementioned characteristics, PVC pipes are used in both commercial and residential sectors. Further, their usage is prevalent in plumbing, sewage and drainage systems, drinking water distribution, irrigation systems, chemical handling, fume, exhaust and ventilation ducts, and recreation.

PVC pipes are mainly categorised as CPVC (Chlorinated Polyvinyl Chloride) and UPVC (Unplasticised Polyvinyl Chloride), their distinguishing factor being that CPVCs are composed of plasticisers while UPVCs do not contain plasticisers.

The future of the Indian PVC pipes market is expected to ourish with prospects in potable water supply, wastewater supply, electrical and telecommunication cable protection, agriculture, chemicals, and oil and gas. Prominent growth drivers of this market include the expansion of government infrastructure investment, rising home and business building, industrial production and the irrigation sector.

To facilitate supply of potable drinking water through individual household tap connections, the Government launched the "Jal Jeevan Mission" in August 2019, which will require an extensive system of in-village piped water supply infrastructure to facilitate the flow of water to each household, thus accelerating the requirement of PVC pipes. This scheme has been allocated RS. 70,000 Crore for FY 24, 27% more than the revised estimates for 2022-23.

As India ampli es its mission of ‘Atmanirbhar Bharat, several direct and indirect policies have been implemented to encourage this sectors growth. Import restrictions placed on CPVC resins and their compounds enable domestic firms to acquire a significant market share. Further, assets have been monetised so that they can be allocated for the execution of the schemes under the "National Infrastructure Pipeline (NIP)," which opens up an exciting array of opportunities for the Pipes industry.

AMRUT Scheme: It prioritises the supply of water and increased coverage for sewage and septage management to households, along with developing amenities, particularly for the poor and the disadvantaged. As per the Operation Guidelines issued

Strengths

• Large and mature market with an entrenched presence • Complete basket of products for every application • Abundant availability of inputs

Opportunities

• Significant opportunities emerge from the real estate sector as it comes under the global spotlight

• Government thrust on irrigation, infrastructure creation and development of Tier 2, 3 and 4 cities and towns

• Significant investment by the private sector for this scheme, it has an outlay of RS. 2,77,000 Crore, including a central share of RS. 76,760 Crore for five years from FY22 to FY26.

Amrit Bharat Station Scheme: This program has been undertaken to modernise the infrastructure of 1275 railway stations as identified under this scheme. This renovation will fuel the demand for piping solutions.

Potential for PVC pipes: The plastic pipe market in India is estimated to be worth $400 billion (FY22). The pandemic throughout the previous five years has scripted a 10% CAGR from FY2016 to FY2021. By FY2025, the sector is anticipated to develop at a slightly faster rate of 11% and reach between RS. 550 and RS. 600 billion.

Weaknesses

Competitive intensity is considerably high owing to the significant presence of the unorganised sector

Threats

• Volatility in input prices adversely impacts business profitability and sustainability • Considerable increases in interest rates could slow down new investment in projects leading to diminishing opportunities

About Apollo Pipes

Apollo Pipes (BSE: 531761, NSE: APOLLOPIPE) is a significant player in piping & fittings and water management solutions in India with multi-decadal experience in serving diverse clients.

Headquartered in Delhi, the Company enjoys a strong brand presence in the domestic market.

Apollo Pipes makes products that cater primarily to the plumbing, sanitation, water supply, infrastructure and agriculture sector.

The Company operates five state-of-the-art manufacturing plants with a cumulative capacity of 1,36,000 MTPA. The Company has a diversified portfolio of over 1,500+ high-quality products in CPVC, UPVC and HDPE pipes & fittings, bathroom products, water tanks and solvents.

Apollo Pipes maintains a strong distribution network of 700+ channel partners and 10,000+ customer touchpoints.

Operational Performance

Apollo Pipes continued to push the efficiency of its business operations a few notches higher. This drive was critical owing to the prevailing headwinds in the business space.

In addition to increasing productivity, the team successfully implemented debottlenecking initiatives at its existing facilities to increase the label capacity. It also focused on enhancing the utilisation of its Raipur facility commissioned towards the close of FY22. These efforts helped in 24% increase in production.

The Company launched the PPR-C plumbing range of products which were well received by its channel partners and end consumers.

On the cost front, the team endeavoured to reduce energy costs and reduce wastage. While the financial impact of these efforts was overshadowed owing to external factors, these initiatives have only strengthened the Companys competitive edge.

Into FY24, the Company will pivot its energy on creating new capacity across all regions. This investment will strengthen its ability to cater to consumer markets better and faster.

Financial Performance

FY23 was a particularly challenging year owing to the volatility in PVC prices which peaked towards the end of FY22 and started scaling down month-on-month. This resulted in the channels destocking in the fiscals initial half, which impacted business volumes.

Notwithstanding the muted external environment, business volumes increased by 24% over the previous year, showcasing the brands strength in attracting discerning consumers. Revenue from operations also increased by 17% to RS. 915 Crore against RS. 784 Crore in FY22.

The continued drop in raw material prices significantly impacted business profitability. EBITDA dropped by 27% to RS. 68 Crore from RS. 93 Crore in the previous year. Also, Profit after Tax declined by more than 50% to RS. 24 Crore in FY23 against RS. 50 Crore in FY22.

FY23 had its share of positives as well. Operating Cash flow improved from RS. 36 Crore in FY22 to RS. 69 Crore in FY23. The improvement in the working capital cycle from 68 days in FY22 to 56 days in FY23 partially helped in this uptick.

The Company utilised part of the internal accruals to part-finance its RS. 71 Crore capex project towards enhancement of capacities, debottlenecking and adding balancing equipment majorly into cPVC, HDPE pipes and fittings to strengthen its presence in the building products segment, which is offering better growth opportunities.

Net debt increased to RS. 9 Crore as on March 31, 2023, against RS. 3 Crore as on March 31, 2022. Despite the increase, the debt-equity ratio remained low at 0.02.

Networth stood at RS. 457 Crore as on March 31, 2023, against RS. 405 Crore as on March 31, 2022 the increase was owing to the ploughing of operational surplus into the business.

Significant changes, i.e. a change of 25% or more in the key financial ratios

In accordance with the amendments notified by SEBI in Regulation 17 of the SEBI (Listing Obligation and Disclosure Requirement) Regulation, 2015 on 9th May 2018, the details of significant changes i.e. change of 25% or more in the key financial ratios as compared to the immediately previous financial year along with detailed explanations are reported hereunder:

Particulars	2022-23	2021-22	Change (%)	Reasons for change
Debtors Turnover Ratio	13.4	11.8	14	Improved for the better by 7 days
Current Ratio	1.67	2.25	(26)	Increase in Creditors
Debt-Equity Ratio	0.02	(0.01)	N/A
Interest Coverage Ratio	4.7	16.7	(72)	Lower due to fall in EBIT
EBITDA Margin (%)	7.4	11.9	(38)	Declined due to decrease in Margins.
Net Profit Margin (%)	2.6	6.3	(59)	EBITDA decline led to lower net profit
Return on Net Worth (%)	5.5	13.2	(58)	Lower profitability

Internal Control & Adequacy

At Apollo Pipes, the Internal Control Mechanism is designed to protect its assets and authorise, record, and correctly report all transactions on time. It conforms to the local statutory requirements and meets the highest global standards and practices to remain competitive in evolving business dynamics.

The Internal Control framework monitors and assesses all risks associated with current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks.

While ensuring flawless competition of accounting and financial processes, the internal control mechanism reviews the manual and automated processes for transaction approval.

The Audit Committee reviews the internal audit plan, verifies the adequacy of the control system, marks its audit observations, and monitors the sustainability of the remedial measures.

Human resource

Apollo Pipes recognises its workforce as an essential resource that makes an invaluable contribution to the Companys growth. The Company has a dedicated HR team focusing on developing and motivating our 600+ workforce. The team keeps its people inspired, engaged, and focused on outcomes. Having emerged successfully from the crisis of FY 22, the HR team focused on the teams growth and well-being in FY 23.

About the team

Apollo Pipes has an employee strength of 644 talented and enthusiastic professionals striving to drive excellence. Of this, around 57% have been with the Company for more than five years. This reflects the organisations healthy work environment, work conditions and progressive culture.

Talent Acquisition

Apollo Pipes continued its search for fresh talent in the industry from multiple platforms such as campus interviews, job portals, references, agencies and social media. The Company recruited 196 new hires in FY 23. Under its "Fresh Talent Scheme," it hired GETs (Graduate Engineer Trainees) to strengthen the technical knowledge of its talent pool.

Learning and Development

Apollo Pipes invested in Paathshala, a state-of-the-art dedicated training center at Dadri which provided technical and nontechnical training to the Company employees. Tailored training modules were developed in-house with the help of subject matter experts. Internal Faculty appointed by the management imparted training programs.

The HR team is also investing in the horizontal deployment of these programs in other locations. Additionally, continuous training programs were rolled out for the skill-upgradation of operators and supervisors through classroom training programs and on-the-job training.

The Company has a defined promotion policy and a "succession planning scheme." Under these policies, employees are elevated and identified to take up higher roles in the future and bridge the talent gap. The HR team conducts development programs through structured training programs.

Safety Policy and Practice

Apollo Pipes is committed to employee health and safety. Our health and safety policies ensure a safe and secure work environment. It has a record of zero fatalities and zero major injuries for the last five years.

Employee Engagement

Apollo Pipes has invested adequately to enhance employee engagement and productivity. It has a Reward and Recognition policy that provides rewards such as Kaizen Awards and ‘Worker of the Month etc. All winners are acknowledged and appreciated in a public forum.

These initiatives have increased the staffs sense of belonging and commitment to the organisation.

Policy Changes

We have implemented the following policy changes in FY 23: -

• Emphasis on training programs by internal trainers for tailor-made internal training modules.

• Fresh Talent Scheme.

• Succession Planning Scheme.

• Policies and SOPs related to the employee life cycle.

Priorities

Our priorities for FY 24 include the following: -

• Developing a Performance-Driven Organisational Culture.

• Creating a Talent Pool to meet the future requirements of the organisation.

• HR Digitisation as planned.

• Emphasis on People Development Programs.

Information technology

In todays environment, information technology is the backbone of business operations for every enterprise, especially for an organisation with a multi-geography presence. The same holds true for Apollo Pipes. The Companys IT infrastructure and Networks have created a cohesive and agile organisation that keeps pace with the sectoral dynamism.

Across the Company: In 2022-23, the Company upgraded its SAP version from 1709 to 2022. Along with the SAP/HANA upgrade, it also installed Fiori based dashboard that allows it to have a user-friendly visualisation of its business data. This dashboard facilitates knowledge-backed and faster decision-making, combining all required information. It also facilitates trend analysis which helps in tweaking business strategies accordingly.

Customer management: In our Customer Management System (CMS), the Company implemented order management and product tracking, including the sales route and the best delivery plan. The system also features a product campaigning process and details about distributors, retailers and influencers meet programs. The Company also implemented a customer complaint management system. It makes the process of handling, managing, responding to and reporting customer grievances easier. To support customer management, Apollo Pipes established a 24x7 call center. Coupled with the customer management system, this addition delivers a superior customer service experience. Further, it has developed a uni ed platform for its sales team, making the customer interaction process seamless.

Inventory & shop-floor management: Apollo Pipes also introduced a contemporary QR code-based inventory tracking process (in and out) at its facilities. These QR code labels meet BIS standards with advanced Image-based product identification. It has also implemented a Ta eta silk QR label for its bundle pipe products. Additionally, the Company has customised the weighing process for all its extruder machines and integrated it with the SAP QR label process (in and out).

Supply chain management: The Company installed Superprocure, a software with a built-in multi-enterprise solution that facilitates it to automate and optimise its end-to-end logistics. It is scalable and easy to use. It equips the Company with logistics mobility, robust integration with its existing tech stack, real-time analytics and visibility, enabling freight reduction, operational efficiency, seamless collaboration, data-driven decisions and optimised service labels.

The IT team added a unique truckload calculation algorithm in our supply-chain system to identify the number of trucks during dispatch. It also automated the entire dispatch system, which traditionally involved pen, paper or spreadsheet, ensuring an excellent delivery experience for the customer.

Finance management: Upgradation to SAP/HANA has facilitated the finance team seamlessly manage the treasury & risk portfolio. This software automates corporate treasury activities, including cash, investment, debt and trade finance. It also scans the Companys risk positions, commodity price changes, and currency conversion rates to develop compliant hedge accounting strategies with a complete audit trail and limit exposure.

Moreover, it directly connects with Banks and Financial Institutions using a multibank digital channel with embedded SWIFT technology. It enables us to connect to our bank accounts and send/receive payments from within SAP, thus automating the banking process. It provides a single platform for managing the creation, delivery, and tracking of customer communications, including account statements, notices, and other documents.

Cyber Security: With the new version of SAP and full ash SD-WAN (a virtual network that allows companies to connect users to applications securely) features, the IT team has implemented SAP security and enhanced the overall cybersecurity of the organisation to protect its networks, devices, applications, systems and other cyber threats.

The Company installed Data Loss Prevention (DLP) software, also known as data leak prevention software, to secure control while ensuring compliance with sensitive business information. A vital component of this software is distribution control, which ensures that users do not send private information outside of corporate business networks.

The Company also implemented ‘Single Sign On or SSO software, an authentication tool that allows users to sign in to multiple applications and databases with a single set of credentials. It simplifies the identification process when accessing applications, portals and servers.

Denial-of-service (DoS) and distributed denial-of-service (DDoS) attacks are malicious attempts to disrupt the normal operations of a targeted server, service, or network by overwhelming it with a flood of Internet tra c. These days, protection against these attacks is a necessity for every enterprise.

Apollo Pipes implemented this software in FY23, which prevents malicious tra c from reaching our network. Additionally, it has implemented the Mobile device management (MDM) software used by businesses to optimise the functionality and security of the mobile devices used in the organisation, including smartphones and tablets.

Risk Management

Apollo Pipes knows that its business is subject to risks and uncertainties that could have both short-term and long-term implications for the Company. Business risks are constantly evolving in a rapidly changing business environment with dynamic customer requirements. As a result, there is significant variation in the risks landscape across businesses.

Apollo Pipes constantly monitors the external environment to identify potential emerging risks and their impact on our business. The Company evaluates risks impacting its strategic, operational, compliance and reporting objectives.

The Companys robust and resilient risk management framework is guided by the Risk Management Committee of the Board, involving Independent Directors and Senior Management. The Risk Management Committee monitors risk management efforts and provides insights for effective risk management across our operations.

Under guidance from the Risk Management Committee, the Companys risk management process is further supported by responsibilities involving the formulation of policies, identification of risks and monitoring risk mitigation measures. The Functional Heads are responsible for implementing risk mitigation measures on an ongoing basis.

Risk Management process

Oversight of the process by the Risk Management Committee

Identification Adopt an inside- out and outside- in identification process.

Assessment Identified risks are analysed and assessed to determine triggers and impact.

Recording Key risks are established, prioritised and documented.

Mitigation Mitigation plans are prepared and implemented across businesses.

Monitoring Development of key risks and mitigation actions are monitored by the Senior management.