Ahmedabad-based Astral Poly Technik expects a 20-25 percent topline growth next year driven by two foreign acquisitions which are doing extremely well. CFO Hiranand Savlani told CNBC-TV18 on the sidelines of Antique Conference that there is enormous scope to improve margins from current levels.
The midcap company suffered losses in the quarter gone by due to sharp fall in crude prices which led to a dip in PVC pipe prices. "So because of that we have to take the hit on our inventory which was close to about Rs 12 crore," said Savlani.
Contributing to the discussion, Nehal Shah, Research Analyst, Antique Stock Broking, who tracks Astral Polyclosely, said that though Q3 numbers were below par they were good on volume front. The fall in PVC pipes prices in the first half of the last fiscal has taken a toll on the margins and the profits of the company, he concluded.
Below is verbatim transcript of the discussion:
Q: In Q3 while the volume growth was okay what was disappointing was the contraction in your margins. The EBITDA margins fell from 15 percent to 10 percent. What led to that and can we expect a rebound in your margins in the coming quarter?
Savlani: In the last quarter the crude price collapse and because of that the PVC price dropped in the last quarter alone 23 percent. So because of that we have to take the hit on our inventory which was close to about Rs 12 crore.
If you keep this Rs 12 crore aside we have maintained our regular margin of 13-14 percent which we are consistently delivering since last three years. So we do not see that as any dip in the margin, which is only because of one of the adjustment of the inventory loss that we have accounted in the last quarter.
Q: How is the demand situation panning out now for PVC pipes? In the quarter gone by your volume growth was good. Given that you supply to a whole range of industries where do you see growth coming in from in 2015?
Savlani: So far the major chunk of growth is coming from the replacement market. The new construction activity is still slow in the economy and that will take another couple of quarters to pick up. However, replacement demand is continuously driving the growth for our industry and that will continue forever.
The replacement demand is continuing since long and will continue even in future. Whatever the bigger chunk of the demand is coming from the new construction activity is still going to pick up may be two-three quarters down the line.
Q: What kind of growth do you hope to see in FY16 given that you made a recent acquisition as well as Resinova?
Savlani: Next year we are expecting a topline growth between 20-25 percent because the consolidation of these two new acquisitions which we have taken recently one is Resinova in India and secondly the Bond-it the Seal-It services in UK both companies are doing fantastically well in the current year. Both the companies have grown close to about 17-18 percent topline and have also expanded their EBITDA margins.
We are expecting that this UK company’s product will be operational in India also because we are going to bring the technology to India and want to introduce this product in Indian market through Astral channel and Resinova channel. So that will take place into the next year. Put together all we are expecting minimum 20-25 percent growth into the next year.
Q: Do the new acquisitions also come in at higher margins Seal It services as well as Resinova and therefore, will the consolidated margins be higher in FY16?
Savlani: In the existing business the margins are low compared to Astral but there is enormous scope to expand that margin because the companies where operating at a promoter level. Now, Astral being a part of that and with the synergy of Astral and it being a brand in India we are confident that we will improve the margins of both the companies, which after the acquisition of Astral has already started. That is why in the first nine months of operation in current year both the companies have expanded their EBITDA margins compared to last year.
Q: What is your own recommendation on this stock at this point and given that the Q3 numbers were slightly subpar what is the expectation getting into Q4?
Shah: Despite Q3 numbers below par than our own expectations, the numbers were pretty good as far as volumes are concerned. Margins, there was blip as far as year-on-year (YoY) figures are concerned there was a drop of around 500 basis points. That is well taken care of considering the fact that they have spend nearly Rs 5-6 crore more on the advertising front as well as CPVC also loosening some kind of 2.50 to 3 percent margins share. So apart from that the numbers were well inline. Q4 can be a big game changer as far as Astral is concerned and for that matter even other companies in the PVC space.
The reason why I am telling you this is because PVC prices have increased nearly 3 times in the month of January and February put together and with this happening, the inventory levels which were pretty low at the distributor level will start seeing an uptake that will result in a very good off take for all these pipe companies and Astral in particular.
Q: The likes of Astral Poly, Cera or a Kajaria Ceramics still come under a broad ambit of home building. In that context, Astral seems to have underperformed its peers like Kajaria which have recorded a 200-300 percent jump in the last one year. What is the reason for that and is it possible that Astral can play that catch up?
Shah: If you look at the first half of last fiscal Astral did very well. From September onwards, Astral has been underperforming and there is obvious reason to that because PVC prices have been crashing down. So PVC prices has gone down by 30 percent from those levels and this has definitely affected EBITDA margins as well as revenue growth and you see lot of under leveraging taking place.
So with the uptake now we seeing in the PVC pipes in the market definitely it is a time to buy now as we have reflected in our report as well. The outperformance should kick in sooner than later.
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