Anubhav Sahu Moneycontrol Research
Astral Poly Technik overtly looks like a costly stock. It has been a moderate performer at the bourses. So, what excites us about the business? The capacity expansion and re-engineering of value chain demand attention as it provides solid earnings visibility for the medium term and could transform Astral into a multi-year growth opportunity.
Astral Poly holds a 30 percent market share in the CPVC piping business, and caters largely to the housing sector. In recent years, the company has also forayed into adhesives (25 percent of the revenue), after acquiring UK and US based companies, in order to diversify and participate in high margin product portfolio.
In the recently held analyst meet, we took note of the company’s progress in capacity expansion and expect that Astral’s diversification into new segments and end-markets would aid volume growth.
Affordable Housing & Agriculture The plastic pipes sector has been a key beneficiary of the replacement demand (replacement of cast/GI iron pipes) seen in the housing sector.
The government’s push in the affordable housing sector and "Housing for all” by 2022 are expected to be major catalysts.
Astral Poly has strongly gained from its expertise in CPVC pipes, which are more useful in high-rise buildings. It also stands to reap major benefits from agriculture piping business (market size: Rs 7000 crore), in which Astral has begun testing waters only recently.
Capacity Expansion in Pipes business
Enhanced Capacity to Fuel Volume Growth In our conversation with CFO of Astral Poly, Hiranand Savlani, we learnt about the company’s capacity expansion plans. In the piping division, capacity is expected to increase by 27 percent (to 175,000 metric tonnes by end of FY19) for better coverage in north and south Indian markets. (It has plants at Hosur, TN and Ghiloth, Raj). In case of adhesives business, the management pegs its revenue potential at Rs 1,000 crore, given that most of the capacity expansion on this front would be over in the current quarter. Currently, its revenues came in at Rs 454 crore in FY17.
Improving Margin In FY17, the company's EBITDA margin grew by 192 bps in piping division, partially aided by backward integration of CPVC processing. Instead of getting the CPVC compounding done from the only supplier Lubrizol, the company started the compounding operation in-house.
The company is also expanding capacity at its Hosur plant which not only helps in better serving the southern Indian region, but also goes a long way in saving freight costs, thereby aiding margins.
Also, its foray into adhesives, wherein some of its products like silicon tape are expected to have margins three times over existing products, should also boost its margins. In future, these high margin products are expected to be sold in India (besides the US market). However, in our estimates, we have not yet factored the same and await further visibility.
Advertisement/branding costs, however, are expected to remain elevated as the company is consolidating its position in piping business. Expenses will be on the rise, also on account of its major competitor Finolex’s entry into the CPVC business and Astral’s entry into adhesives.
On balance, improvement in margins is expected to be gradual. The management has guided for an EBITDA margin of about 15 percent for FY18-19 which looks feasible.
Financial Snapshot & Projections
Valuation & Recommendation: Based on the ongoing capacity expansion, market share consolidation, Astral is expected to post revenue CAGR (compounded annual growth rate) of 22 percent (2017-19E).
Improvement in margins (FY19e EBITDA margin of 15 percent) on the back of backward integration and lower transportation costs should aid in achieving compounded earnings of 26 percent (2017-19E).
At the current price, the stock trades at a multiple of 32x 2019e earnings. While optically it doesn’t look inexpensive, the same should be seen in the context of near-term volume growth, improving market share in the structurally growing segments and a probable further re-rating of the business as the company cements its position in the high-margin adhesive business in India. The multiple tailwinds make it an ideal candidate for accumulation for the long-term investor.
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