Input cost volatility to keep plastic pipe maker Astral's margins in check

Market share gain continues, company seeks to double consolidated revenues in five years

The country’s largest plastic pipe maker by market capitalisation, Astral, did better than Street expectations during the April-June (Q1 of FY23) quarter.

Strong volume growth on a low base and higher realisations in its core plumbing segment as well as incremental gains from adhesives and newer segments led to the revenue growth.

Consolidated revenues were up 73 per cent over the year-ago quarter to Rs 1,212 crore.

The plumbing business, which accounts for over 72 per cent of revenues, grew by 74 per cent year-on-year (YoY).

It was on the back of higher PVC pipe realisations and a 49 per cent growth in volumes, which was aided by a capacity ramp up. On a sequential basis, however, plumbing volumes were 23 per cent lower as volatile prices led to channel destocking of PVC pipes.

This segment was earlier known as plastics and has been renamed as plumbing. It now includes pipes, water tanks, faucets and sanitary ware.  

While its peers, too, posted strong volume growth in the April-June quarter, the company outperformed them on a three-year annual volume growth basis, registering 3.8 per cent growth at the end of Q1.

Its peers Finolex Pipes, market leader Supreme Industries and Prince Pipes posted a fall of 7.2 per cent, 2.3 per cent and 3 per cent, respectively, in volume over this period. This reflects the market share gains for Astral.

The company highlighted that volumes for the sector have been impacted due to PVC price volatility with prices falling 44 per cent from October 2021 levels.

The company expects PVC prices to stabilise. This, coupled with increase in construction activity, is expected to aid volumes, said Ruchitaa Maheshwari of BOBCAPS Research.

Annual value growth over the three-year period for the pipe business is at 27 per cent. This comes owing to the company’s focus on chlorinated PVC or CPVC, which fetches better margins.

The company has stuck to its guidance of 15 per cent average annual growth for plastic products over the next five years.

To maintain its growth trajectory, it will continue to expand in the eastern region. It would also enhance its network in new areas and improve its distributor and dealer network. The company seeks to double its consolidated revenues over the next five years. In addition to plumbing, a lot will depend on the traction it gets in the adhesive and paints business. Revenues in the latter segment grew 72 per cent in the quarter YoY and 9 per cent sequentially.

While the adhesive segment has grown at 23 per cent annually over the last three years, ICICI Securities expects it to grow at a healthy 20 per cent annually over FY22-24 period. This is on the back of expansion into new geographies through dealer additions and new product launches.

Paints is a new business for the company (post acquisition of Gem Paints). It reported revenues of Rs 55 crore during the quarter and contributed an additional 5 per cent to the revenues and operating profit. How the business scales up as the company rolls it out in multiple states will be key for incremental revenue growth.

HDFC Securities believes that with the company’s foray into paints and bathware, Astral’s capital expenditure will peak out in FY23. This will drive asset sweating from FY24 onwards.

In addition to revenue growth, the Street will also track the margin trajectory of the consolidated entity. The dip in input costs led to price cuts during the quarter. It led to a Rs 25 crore inventory loss. Gross margins fell 717-basis points (bps) YoY during the quarter. 

This coupled with rise in employee costs — given the hiring in new businesses — and bathware product launch costs resulted in a 430 bps drop in operating profit margins to 14.2 per cent.

There could be some impact of falling input costs in the current quarter. Price hikes and improved product mix (pick-up of higher margin valve business) could aid margin recovery.

Brokerages are positive on Astral, given its strong retail franchise, debt-free balance sheet and healthy return ratios

The 27 per cent rally from June lows captures some of the upside in the stock, which trades at 57 times its FY24 earnings estimates. Investors should wait for better entry points in the stock.