The Indian power sector is on a bull run! Over the past year, the Nifty Energy Index has zapped up by ~70%. Stocks like Tata Power is up by ~120%, NTPC by ~110% & Power Grid by ~65%.
Any business even slightly associated with the power sector has had a sweet ride, but what’s making the market go gaga?
Let’s find out.
India is the third-largest power consumer in the world, only behind China and the United States. With a booming population and rising per capita energy consumption, the need for power is ever-growing. As of Nov 2023, India’s power demand has reached 243 GW. The projected peak demand as per the 20th Electric Power Survey (EPS) will be 366 GW by FY32.
Recognizing the critical need, the Indian government is committed to making India a major ‘Power’ house. Its focus on attaining ‘Power for all’ has accelerated capacity addition across the nation.
As a result, the budget allocation to power sector Central Public Sector Undertakings (CPSUs) in FY25 saw a 17% jump to Rs 93,200 Cr from Rs ~80,000 Cr in FY24
As of Feb 2024, India’s total installed capacity has gone up to 434 GW, adding ~22 GW of capacity in the last year.
*Source: Central Electricity Authority Website
As in the chart above, renewable energy sources and hydropower are now the two largest contributors to India’s power supply after coal. This looks in line with India’s ambitious target of reducing the carbon intensity of its economy by 45% by the end of this decade, ensuring that 50% of its cumulative electric power capacity comes from renewables by 2030, and achieving net-zero carbon emissions by 2070.
Meanwhile, India has also made significant strides in expanding its power infrastructure, installing approximately 7,000 cKM (circuit kilometers) of transmission lines in FY24 alone.
*Source: Central Electricity Authority Website
To fuel the nation’s growth with a steady power supply, India is setting ambitious targets, planning a massive capacity addition of 517 GW by 2032—a figure that surpasses the current total capacity.
This electrification trend extends into the railway sector as well. Indian Railways is on track to become the third largest railway network globally within the next five years, accounting for 10% of the global market.
With rapid strides towards achieving Mission 100% Electrification, Indian Railways is also gearing up to become the world’s largest green railway network, aligning with its sustainability goals.
As of March 2024, Indian Railways has electrified 62,119 Route Kilometers (RKMs), covering about 94% of its total broad-gauge network of 65,775 RKMs. The electrification efforts have significantly accelerated over the past decade, with a record 40,318 RKMs electrified since 2014, compared to just 5,047 RKMs during 2005-2014. Impressively, over 50% of the current electrified tracks were completed in just the last six years
Amidst the heart of all these electrifying trends, stands APAR Industries Ltd. – capitalizing on the country’s rapidly expanding power infrastructure.
APAR Industries: Riding The Wave Of Electrifying India?
APAR Industries, a 6-decade-old business specializes in manufacturing power conductors, specialty oils, a wide variety of cables, polymers, and lubricants. The company boasts a global presence in over 140 countries across the globe.
Some quick takeaways:
- World’s largest aluminium & alloy conductor manufacturer.
- India’s largest and world’s 3rd largest transformer oil manufacturer.
- Leading exporter and producer of renewables and specialty cables in India.
- Among the top 10 lubricant players in India
- 1st and only Indian company to provide end-to-end telecom solutions in copper and fibre.
Now. let us dive deeper into its various business segments and find out how it has performed in the previous few fiscals.
Conductors Business
Conductors play a key role in the efficient transmission of energy from power generation facilities to end consumers.
Since its inception in 1958, APAR Industries’ conductor business has been at the core of its operations, experiencing substantial growth over the years. Starting with traditional conductors, the company has expanded its range to include innovative solutions like High-Temperature Low Sag (HTLS) conductors.
The top line for the conductor business has grown at ~15% CAGR from FY19 to FY23. Notably, FY23 saw a massive 67% jump in revenues. The same trend has also continues in FY24, with 17% YoY increase in revenues.
*Click on the image to enlarge.
But, what led this growth?
As already said above, considering the growing energy demand in India or even globally, Governments have made substantial investments in the infrastructure of power, railway, and metro projects where APAR has successfully positioned itself as a trusted partner.
As of FY23, they had impressively completed over 150 projects, totaling more than 4,200 Ckms of High-Temperature Low Sag (HTLS) conductors throughout India.
Post Covid, the China +1 trend, saw a steep growth in demand for Optical Ground Wire (OPGW), a combination of optical fibers with overhead power conductors for communication and power transmission purposes. APAR soon achieved expertise in its live line replacement ( installed over 6,500+ km).
Meanwhile, the Indian government’s intensified push for 100% electrification of Indian Railways, led to a notable surge in demand for OHE (Overhead Equipment) conductors. These conductors, crucial for transmitting electricity to the trains running below, are mounted above the railway tracks.
Capitalizing on this increasing demand, APAR successfully introduced the next-gen OHE conductors, leading the company to secure the largest contract in the history of the Central Organisation of Railway Electrification. By FY23, APAR had supplied over 45,000 metric tons of these conductors to the Indian Railways.
All in all, strategically capitalizing on key growth drivers at the right time led APAR’s conductor business revenues to grow substantially.
Now, let us breakdown the first 9 months of FY24.
*Source: APAR’s Q3 FY24 Investor Presentation.
Revenues have climbed by 17%YoY, indicating sustained growth into the next fiscal year. This increase is largely due to a higher export ratio, accounting for 46.7% of the revenues.
Also, premium products comprised 42.3% of the revenues in 9M FY24. EBITDA per MT has remained robust at ~₹40,000, supported by a strong mix of premium products and exports.
The company also witnessed a surge in new order inflows of about ₹6,300 Crore, marking a 17% increase YoY, which brought the total order book to around ₹6,000 Crore.
Higher Mix of Premium Products
APAR’s management in its recent concall explained how AL-59 conductors, a more premium product compared to the traditional ACSR conductors, are now becoming a standard norm in the Industry. The Central Electricity Authority has now made this AL-59 an option to bid against for EPC players.
When considering the weight versus the current carrying capacity, Al-59 conductors are superior to ACSR allowing higher current to be carried for the same amount of aluminium. Going forward they expect all the inter-state lines and the longer intra-state lines to move towards AL-59. Also, the number of competitors for the AL-59 conductors is substantially lower.
Looking ahead, APAR projects an EBITDA per MT of ~₹28,500 plus tailwinds in the next 3 to 5 years. When asked the reason for lower margins than the current levels, management attributed this to resolving supply chain issues in China, which is expected to heighten industry competition and potentially impact profitability.
Speciality Oils & Lubricants Business
APAR expanded into the specialty oils business back in 1969, initially focusing on transformer oils. Over the years, they have expanded their portfolio to include white oils, petroleum jelly, and a variety of industrial and automotive lubricants. They produce and market a wide range of these products under the brand name POWEROIL, with three production facilities (2 in India and 1 in the UAE).
The top line from the Speciality Oils & Lubricant business has grown at ~15% CAGR from FY19-23.
*Click on the image to enlarge
In the transformer oil segment, they stand as India’s largest and the world’s third-largest manufacturer. Their transformer oils cover the complete voltage spectrum, ranging from 0.4kV for pole-mounted transformers to 1200kV for high-voltage direct current (HVDC) transformers. India’s largest engineering company has shown a preference for POWEROIL transformer oil, with APAR successfully formulating a unique blend specifically tailored to meet their requirements. This recognition has helped APAR to hold more than 60% share in high-grade power transformer oil and 40% in distribution transformer oil in India (by FY23).
Furthermore, responding to the steady increase in demand for home and personal care products, APAR expanded its specialty oils segment to include a range of white oils and petroleum jellies. By FY23, this strategic diversification positioned APAR as the world’s third-largest supplier of white oils. Its white oil segment is further divided under two brands i.e., POWEROIL PEARL and POWEROIL TOPAZ.
*Source: APAR’s Website. Click on the image to enlarge.
*Source: APAR’s Website. Click on the image to enlarge.
FY23 also marked another significant achievement, with APAR’s Rabale plant in Mumbai recording its highest-ever output of petroleum jelly, totaling 5,900+ metric tons.
*Source: APAR’s Website. Click on the image to enlarge.
APAR’s White Oils Pearl Series has been approved by one of Europe’s leading cosmetic companies. The company stated that this approval would result in a remarkable 400% increase in the sales of their white oil in the European region.
Coming to its lubricants business, APAR ranks among the top 10 lubricant players in India. The company manufactures and markets three distinguished lubricant brands: POWEROIL, Eni, and ARKOS. The Eni brand is produced under a licensed agreement with the globally recognized Italian lubricant company ‘Eni’, and ARKOS is developed in partnership with PSPL, based in Singapore.
Below is a snapshot of APAR’s speciality oils & lubricants business performance in 9M FY24.
*Source: APAR’s Q3 FY24 Investor Presentation.
Its revenues have grown by 5% YoY, on the back of 13% YoY volume growth. Exports contributed 46.4% of the total revenues.
Additionally, EBITDA per KL experienced a 13% YoY increase, largely due to a ~300% YoY surge in Q3 FY24. But, why?
There was a delay in shipments of base oil, which led to a lower weighted average cost of inventory. It is expected to increase in Q4.
Looking ahead, management anticipates transformer oil to be the strongest product for growth in the oil vertical. They project an overall volume growth of 5% and target for an EBITDA per KL in the range of Rs 5000 to Rs 6000.
Cables Business
The cables business is a relatively recent addition to APAR Industries’ diverse business portfolio. APAR ventured into the cable industry in 2008 through an acquisition, and by FY23, it had grown to become India’s largest exporter and producer of renewable and specialty cables. Increasing demand for energy, growing industrialization, the transition towards renewable energy, and the advent of 5G are the multiple tailwinds driving their cable business.
The cables segment has shown a topline growth of 18% CAGR from FY19 to FY23, with a remarkable 64% YoY growth in FY23 alone.
*Click on the image to enlarge.
APAR also became India’s first and only company to offer a comprehensive end-to-end telecom solution, providing both copper and fiber cables. Within its telecom segment, APAR provides an array of cable products including fiber optic cables, hybrid cables, specialty cables, LAN cables, and OPGW.
In FY23, APAR’s light-duty cables showed a significant growth of 68% in the domestic market as it grew its retail presence to 13 states, from 2 states in FY22. One of their flagship brands in the light-duty cables segment is APAR Anushakti, a house wire brand that they aim to develop into a Rs 500 Cr brand by FY30.
Additionally, APAR offers a selection of solar cables, windmill cables, and utility cables, all designed to support India’s transition towards renewable energy. These products boast a lifespan of over 25 years and feature zero transmission loss and fire-retardant properties.
Also Riding the EV and Defence Wave
Automotive wires and wiring harnesses are APAR’s newest additions in its cables business making it India’s first cable manufacturer to venture into the EV space supporting the ‘Make in India’ initiative.
They provided OEMs with custom-made cables and harness solutions tailored to meet their specific needs.
APAR has also established itself as a trusted partner to major naval and private shipyards in India. The company supplies a range of specialized cables, including optical fiber cables (OFC), tactical cables, submarine cables, torpedo cables, and more, all tailored to fulfill the operational demands of the Indian Army and Navy.
*Source: APAR’s Q3 FY24 Investor Presentation.
In the first 9 months of FY24, cable business revenues grew by 20%YoY, accompanied by an expansion in EBITDA margins by 1.4%, leading to a significant 36% YoY increase in EBITDA.
The proportion of revenues from exports has dipped to ~44%, down from ~51% in the 9M FY23. This reduction is largely attributed to de-inventorization activities by U.S. customers, who represent a major market for APAR’s business.
Despite the decrease in U.S. sales, global sales of APAR’s cable business, excluding the USA, surged by ~43% YoY.
Looking ahead, management has indicated a positive shift in market dynamics, with increased levels of inquiries from both the U.S. and EU, signaling a potential revival in these key markets.
Premiumization of the Cables Business
APAR management strategically focuses its cable business on end-user sectors such as wind, solar, railways, defense, and mining, with a particular emphasis on elastomeric cables. These are more complex products that not only carry higher margins but also show robust demand projections.
As of Q3 FY24, elastomeric cables contributed between 25%-30% of total sales from the cables business, with optical fiber cables (OFCs) accounting for 10-15%, and the remainder coming from power cables.
Also, there is a strong revival in the wind sector with the government’s new scheme of upgrading old wind farms. According to APAR, windmills with a smaller capacity of 50-500 kilowatts, can now be replaced by 3.5 megawatts where they see themselves as a major contributor.
Going forward, APAR projects a robust growth rate of 25% for its cable business capitalizing on the above-mentioned opportunities in the next few years.
Other Businesses
In addition to its three primary businesses, APAR also operates in niche markets with its APAR Speciality Automotives and APAR Polymers divisions.
In 2018, APAR launched ARKOS (its specialty automotive brand), introducing products like 2-Wheeler batteries, tyres for electric vehicles, and a range of lubricants for various vehicles and equipment.
This brand also achieved a milestone by becoming the first Indian company to receive VDA approval for AdBlue, a product now essential for all new diesel vehicles in India due to latest emission regulations.
APAR ventured into the polymers business in 2014 to support its cable manufacturing operations through backward integration, ensuring better control over quality, costs, and material availability.
Over time, the polymers division has expanded its product offerings to serve diverse sectors including automotive, electrical, toys, food, and medical equipment.
However, these segments still represent a small fraction of APAR’s total revenue, contributing just 0.6% in FY23.
*Source: APAR’s FY23 Annual Report.
APAR’s CAPEX Plans
As of Q3 FY24, APAR’s conductor business boasts a total capacity of 2,05,000 Mt. Anticipating a 15% growth in volume in the coming years, the management is prepared to expand capacity as necessary.
In recent quarters, APAR has strategically acquired properties and facilities from cable manufacturers in Silvassa who have shut down their operations, with plans to install new equipment and scale up the business.
For FY24, APAR has allocated a total of Rs 300 Cr towards CAPEX, with Rs 225 crore already spent by the end of Q3. Looking ahead, the management intends to continue investing Rs 300 crore annually with a large portion to be spent on greenfield expansion and de-bottlenecking in Conductors and Cables segments.
APAR also raised Rs 1,000 Cr from a QIP placement in Q3 FY24, out of which Rs 300 Cr was already spent by Q3, with plans to spend the remaining bulk by Q4.
Red Sea Crisis
The ongoing Red Sea crisis has affected the overall global trade dynamics, but how has it affected the likes of APAR being present in more than 140 countries?
Management notes that the disruption varies by region; the U.S. shipments are delayed for ~15 days and even greater impact in West Africa and Europe, where the detours are significantly longer.
Additilonally, the U.S. and other international markets are not without their challenges, particularly with the issue of de-inventorization.
The shifting dynamics of customer preferences have seen a notable increase in requests for ‘DDP’ (Delivery Duty Paid) dates. Under the DDP Incoterm, the seller, like APAR Industries, is responsible for delivering goods to the buyer’s specified location (factory or warehouse). This includes handling all logistics, like unloading goods, covering transport costs, managing customs procedures and paying any associated tariffs.
Responding to these requirements, APAR has adjusted its operations to maintain a significantly higher inventory level—around 9 to 10 months, compared to the usual 2 to 3 months. Additionally, to meet these DDP obligations and ensure timely delivery, APAR is now dispatching its exports 15-20 days earlier than usual.
Steering The Course: APAR’s Leadership
APAR Industries was originally established as Power Cables Pvt. Ltd in 1958 by the late Shri Dharamsinh D. Desai. It began its journey manufacturing power transmission conductors but over the years, the company has significantly diversified its business portfolio as discussed already.
The leadership baton is currently held by Mr. Kushal Desai, serving as Chairman & Managing Director, and Mr. Chaitanya Desai, Managing Director. Both are also the promoters of the business, collectively holding ~46% of the company’s shares. As of Q3 FY24, the total promoter holding stood at ~58%.
Mr. Kushal Desai joined the company in 1999, and Mr. Chaitanya Desai has been part of the business since 1993, each bringing nearly three decades of industry experience to their roles. For FY23, their combined remuneration was ~ ₹20.75 crore, constituting 3.25% of the net profit for the year, which seems fair considering the company’s growth trajectory.
Overall, the strategic leadership and effective succession planning have been crucial in guiding APAR Industries through phases of growth and innovation.
Let us now dive deeper into how APAR has performed overall as a business:
Financial Overview
*Click on the image to enlarge.
APAR has demonstrated consistent revenue growth, achieving a 16% CAGR from FY19 to FY23. This growth trajectory has continued into the 9M FY24, where revenues have increased by 14% year-on-year.
Despite facing challenges such as de-inventorisation and disruptions from the Red Sea crisis, APAR managed to sustain its growth majorly through its well-diversified business portfolio and extensive global presence.
*Click on the image to enlarge.
Its EBITDA has grown at an even better rate, ~29% CAGR from FY19 to FY23. The 9M FY24 EBITDA has already reached 87% of the FY23 numbers, showing a YoY growth of ~39%.
During the same time, its EBITDA margins have improved from ~6% in FY19 to ~10% in 9M FY24. This robust growth is majorly attributable to its growing mix of premium products across different businesses and also higher exports (30% of revenues in FY19 vs 48% in FY23).
*Click on the image to enlarge.
APAR’s consistent growth and improving margins can be notably seen in its significant PAT growth as well, which has grown at ~47% CAGR from FY19-FY23. The same trend is also seen in 9M FY24, with PAT growth of 49% year-on-year.
Furthermore, its PAT margins have improved to reach ~5% level as of 9M FY24.
Its cash profits (Net Profit + Depreciation), have also shown robust growth at ~38% CAGR from FY19 to FY23.
*Click on the image to enlarge.
APAR, even though operating in a capital-intensive business, maintains a balanced capital structure with a Debt-to-Equity ratio consistently around 0.14.
It carries relatively low debt, with borrowings totaling ~Rs 300 crore as of FY23.
However, the company manages significant supplier credit, Rs 4,100 crore in acceptances as of Q3 FY24, primarily using Letter of Credit (LC) Acceptances.
This form of financing allows APAR to extend its payment terms with suppliers, effectively managing its working capital needs. The cost of interest on these acceptances is influenced by various factors, including SOFR Rates, prices of raw materials, and the volumes of procurement.
What Do We Like In APAR?
One of the largest players across segments:
APAR is one of the largest players in all three of its major segments.
- Conductors: World’s largest aluminium & alloy conductor manufacturer.
- Transformer Oils: India’s largest and world’s 3rd largest transformer oil manufacturer.
- Cables Business: Leading exporter and producer of renewables and specialty cables in India.
- Lubricants: Among the top 10 players in India.
Additionally, the company has a substantial international footprint, exporting to key regions including Australia, Southeast Asia, the Middle East, Latin America, North America, and Africa, with a presence in over 140 countries worldwide.
Diversified Revenue Profile:
In FY23, 46.7 % of APAR’s revenues came from its conductors business, 31% from its speciality oils and lubricants business, and 21.7% from its cables business.
While the conductors and specialty oils segments are expected to continue their sustainable growth, the cables business is anticipated to experience significant expansion, despite currently being the smallest revenue contributor.
Additionally, APAR has ventured into the polymers and specialty automotive businesses as well. Although these new business areas are in their nascent stages and do not yet make a significant contribution to the company’s revenue, they represent strategic diversification efforts that could provide additional growth avenues in the future.
Higher Exports and Move Towards Premiumization:
APAR is strategically shifting towards more premium product offerings within its conductors and cable business segments. The company is keen on the adoption of Al-59 conductors, which are increasingly becoming the industry standard due to their superior performance characteristics. Additionally, the elastomeric cables market, which currently accounts for 25-30% of the total sales from the cables business, is witnessing growing demand.
Increasing exports is yet another critical factor contributing to APAR’s improving margins. The company has successfully increased its export mix from 30% in FY19 to 48% in FY23, illustrating a broader international reach and a stronger global presence.
Views & Valuation
APAR in its recent quarter has done decent amidst headwinds like de-inventorisation in the US Markets and the Red Sea Crisis.
- Revenues grew by a mere 2% YoY as US Sales had dropped V/S Q3 FY23.
- Export mix at 39% vs 50% in Q3 FY23.
- Global sales excluding the US markets grew 17.2% YoY.
- EBITDA was up 25% YoY due to higher margins across business segments as discussed above.
- Translating into PAT growth of 28% YoY, while PAT margins also improved to 5.4%.
Going forward, APAR’s management expects the cable business to be a key growth driver in the coming years, anticipated to expand at a CAGR of 20-25%.
This growth is expected to be fueled by multiple tailwinds, including increased investments in electric infrastructure, emerging opportunities in defense and electric vehicle (EV) sectors, and significant potential in wind energy and telecommunications.
Meanwhile, the conductors business is shifting its focus towards premium products, although it faces prospective challenges from rising competition, particularly from Chinese manufacturers.
The specialty oils segment is projected to grow at a modest rate of ~5%, with the transformer oil segment identified as the primary contributor to this growth.
Additionally, the current headwinds are considered to be transitionary as management states rising levels of inquiry from US and European markets.
*Click on the image to enlarge.
Currently, APAR is trading at a Market Cap of ~Rs 31,300 Cr. Based on management’s guidance on growth and realization for each segment, our one-year forward SOTP valuation stands at ~Rs 19,565 Cr.
The stock seems to be a direct bet on the growing power infrastructure in India and across the globe, effectively serving as a proxy play business for the power sector.
However, from a valuation perspective, there appears to be limited upside. The stock is already trading at a significant premium, which seems to have factored in the growth drivers previously discussed.
What Are The Risks?
High Working Capital Requirements:
APAR operates in a business environment that is inherently working capital intensive, primarily due to industry-specific challenges such as delays in order execution and obtaining necessary clearances, as well as delays in funding arrangements by EPC players.
To manage its operations, APAR utilizes LC (Letter of Credit) acceptances as a form of supplier credit, which is directly proportional to the scale of its operations.
Volatile Raw Material Prices:
APAR’s margins are susceptible to changes in raw material prices like aluminum and copper for conductors, as well as base oil for its speciality oils business which is dependent on the highly volatile crude oil.
Also, due to the intense competition, it cannot always pass on the raw material price rise to its customers. Even when price adjustments can be made, there is typically a time lag before these changes can be implemented, during which the company must absorb the increased costs.
Intense Competition:
Even though, we see APAR as a beneficiary of the China + 1 story. They face intense competition from the like of China, where manufacturers often benefit from scale and cost advantages.
Additionally, given its significant export activities, APAR is exposed to currency exchange fluctuations as well.
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Disclosure: APAR Industries Ltd. is not a part of our Capitalmind Premium Portfolios. This article is for information only and should not be considered as a buy or sell recommendation for any stocks.
