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Last Updated : May 28, 2020 03:33 PM IST | Source: Moneycontrol.com

Agriculture driving demand for plastic pipes industry; this stock can more than double

JM Financial believes the plastic pipes industry may face short-term challenges owing to the economic downturn led by COVID-19.

 
 
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The lockdown, which started on March 25, announced to curb the spread of COVID-19 has hit India Inc hard. The lockdown has since then been extended but with some relaxations in economic activities.

This lockdown will lead to a wash-out first quarter of the fiscal in terms corporate earnings.

Plastic pipes industry is one of the sectors that got some relief to work with lower than normal capacity, so that social distancing norms can be followed properly.

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The sector is also getting help from the opening up of agriculture segment, which accounts for 48 percent of the business, while the no demand from construction activity is the only concern for the pipes sector.

"India's plastic pipes industry is resilient as the nation-wide lockdown eases in various parts of the country, mainly since the agriculture sector is driving demand. A healthy Rabi crop, coupled with payments to farmers from the government, has boosted demand for agri-pipes," JM Financial said.

"However, demand from plumbing remains sluggish due to a drop in construction activities and we do not expect it to pick up until after the monsoons," the brokerage added.

In Q4FY20, Supreme/Astral delivered a volume decline of 7/13 percent (due to the COVID-19 lockdown) in the plastic pipes segment, while EBITDA margins expanded 800bps/350bps, leading to EBITDA growth.

For FY20, Supreme/Astral delivered relatively weaker YoY volume growth of 8/7 percent, largely impacted by the lockdown that began in March 2020.

"However, weak volume growth was offset by significant EBITDA margin expansion of 340bps/220bps for Supreme/Astral, fuelled by a better product mix and price hikes," said JM Financial.

PVC resin prices had fallen by Rs 13 per kg to Rs 60 per kg during the lockdown period. "Large organised players had passed on 50-60 percent of the fall, which will be reflected in Q1FY21 performance," JM Financial said.

However, over the last week, resin prices increased twice by Rs 2 per kg each (total price hike of Rs 4 per kg), which makes organised players believe that PVC resin prices have bottomed out, and they do not expect any price cuts in future, the brokerage added.

All organised players have increased PVC pipe prices by 4-5 percent after the resin price increase. Companies have taken price hikes in CPVC pipes as well, as the cost of CPVC resin has increased due to rupee depreciation.

JM Financial believes the ongoing consolidation in the pipes industry should intensify as unorganised/regional players will find it increasingly difficult to sustain business in the current troublesome COVID-19 scenario.

The market size of India’s plastic pipes industry is Rs 30,000 crore and the industry has posted a CAGR of 10 percent over last 5 years (highest growth rate in the building materials space). The industry's products are made from resins such as PVC, CPVC, PPE and HDPE, with a variety of enduser applications across agriculture, plumbing and infrastructure sectors.

JM Financial believes the plastic pipes industry may face short-term challenges owing to the economic downturn led by COVID-19.

"However, positives such as varied end-user applications, value-added products, shift from metal to plastic pipes, ongoing consolidation and infrastructure demand in the offing keep the long-term growth story intact, it said.

"We continue to believe that India’s plastic pipes industry will capitalise on its various demand drivers and outperform other sub-sectors in the building materials space," the brokerage added.

It has a buy rating on Prince Pipes with a March 2021 target price of Rs 190, implying 147 percent potential upside from current levels.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on May 28, 2020 03:33 pm
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