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Last Updated : May 25, 2018 03:18 PM IST | Source: Moneycontrol.com

Astral Poly Q4: Premium play on the CPVC volume growth and high margin adhesive business

While medium term tailwinds with regard to demand for CPVC pipes backed by capacity expansion and cost savings from backward integration remains, elevated valuation (53x 2019e earnings) and the intensified competition in the piping industry keeps on the sidelines at current price levels.

 
 
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Astral Poly Technik reported yet another robust quarterly performance, driven by volume growth in pipes business and improved margins across divisions. Operational improvement in the adhesives business and the steady progress in capacity addition projects were the key positives.

The company’s foray into new categories and the project execution capabilities are commendable, but the stock price is factoring in the medium term growth prospects, in our view.

Volume-led growth
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Astral Poly’s standalone March quarter net sales rose 7 percent year-on-year, mainly due to a 10 percent YoY increase in volume sales. EBITDA margins improved 142 bps to 17.7 percent, compared to the management guidance of 14-15 percent.

Lower raw material costs helped, and the margin would have been even better, but for the increase in other expenses. Quarter-on-quarter as well, raw material as percentage of net sales have fallen to 58 percent from 67 percent.

In the adhesives business, overall margin is improving. Quarterly EBITDA margin stood at 20.5 percent (vs. 15.2 percent in Q4 FY17) helped by mainly aided by Resinova operations and economies of scale at its new facilities at Kanpur (UP) and Santej (Gujarat)

International operations (SEAL IT) reported a 15 percent sales growth YoY with the induction of new machinery at its US plants. The US operations are expected to export high margin adhesives products to both UK and India in the current year. While EBITDA margins are still in the high single digits, export of high margin adhesives products are expected to push EBITDA margins towards company’s guidance of double digit margins in FY19.

Capacity expansion projects are on track

In the current quarter, the company has started trial production at Ghiloth Plant (Rajasthan) which has an installed capacity of 22,700 tons. Here, commercial production will start in July.

Further, construction work for expansion at Hosur facility (15,000 tons) is nearing completion and should start production in September. Together, these projects should help increase company’s installed capacity to about 1,75,000 tons. That is a 27 percent increase compared to the installed capacity in FY17.

Additionally, company’s adhesive business, Resinova Chemie has launched new products, one of them being Cyanoacrylate under the brand name “Resiquick”.

Current fiscal year to witness volume and margin expansion

FY19 is expected to witness a volume growth of about 15 percent backed by both capacity expansion and better capacity utilization. Further, higher contribution from both Resonova and SEAL IT divisions is expected to aid margins. Along with this company benefits from backward integration in the pipes business.

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Source: Moneycontrol Research

On the positive sides, Astral will gain from tailwinds like demand for CPVC pipes backed by capacity expansion and cost savings from backward integration. But the stock is expensive at 53 times 2019 estimated earnings, and the industry suffers from stiff competition. Long term investors can consider accumulating this stock on declines.

For more research articles, visit our Moneycontrol Research page

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First Published on May 25, 2018 03:18 pm
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