Jefferies is betting on Indian pipes industry citing a gradual shift to organised players. It expects players such as Astral Poly, Supreme Industries and Finolex Industries to benefit the most from this transition.
Along with it, companies are also diversifying their products to enhance profitability, the global research firm observed. Based on these reasons, it has initiated coverage on these stocks with a buy call.
Moreover, the recent market crash is a good opportunity for entering such quality names.
“While mid and smallcap indices corrected by 15-20% month-on-month, Astral, Finolex and Supreme Industries declined 25%, 13% and 16%, respectively. This has left them within 5-10% of their five-year average and 30-40% lower than YTD peaks.
The key trigger is diversification into value-added sales streams (adhesives, packaging, consumer products, CPVC pipes etc.) which command premium valuations over pure-play PVC pipes, analysts at the firm wrote in their report.
Additionally, superior growth prospects with financial discipline (high return ratios, and robust free cash flow, among others) should support multiples, they further wrote.
In case of Astral Poly, Jefferies has a target price of Rs 1,090. It highlighted how the firm has fortified its pipes mix through consistent product launches and inorganic growth (Rex Polyextrusion acquired in Jul’18).
“In adhesives, while Astral has turned around Resinova's financials, improvement in SEAL IT is in the offing. Further, with majority capex outlay behind us, higher utilisation levels (68% now) should result in superior operating leverage, boosting margins,” the report stated.
Meanwhile, for Finolex Industries, it said that the company has enhanced focus on plumbing and fittings.
The key near-term trigger is ramp-up in the higher-margin CPVC products to 20,000 MT from 5,800 MT (6% of pipes mix now).
Also, Finolex is backward integrated into manufacturing of PVC resin, a lion's share of which is used for captive consumption — this is important as India is 50% deficient in PVC supply, the research firm further wrote.
Lastly, Jefferies believes that Supreme Industries is well-placed for long-term growth trajectory aided by a diversified portfolio, formidable market share, array of value-added products and expansive footprint.
It is also betting on existing capacity to rise to 700k MT by FY21 (565k MT now), which will equip it to cater to incremental demand. Also, its financial metrics seem to be the best in the industry, it added.
Among key catalysts for the sector are:
1) Government's thrust on agriculture and irrigation
2) Push for housing and infrastructure
3) New value-added launches
4) Demand shift to organised sector
Risks
1) Slowdown in construction/industrial/farming activity
2) Inability to pass-on escalation in raw materials
3) Slowdown in economy and spends
4) Pricing pressure
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