Astral's high growth prospects reflect well in its high valuation

After gaining 40% already in FY24, the stock is trading at a PE of over 100x

PVC pipes, paints and adhesives manufacturer Astral had a strong performance and confident guidance thus far in the 2023-24 financial year (FY24). A good agricultural season, coupled with rebound in housing, means strong demand for pipes. Moreover, PVC prices are down so there could be volume growth and margin expansion.

In the January-March quarter (Q4), pipes saw a volume expansion of 19 per cent quarter-on-quarter (QoQ) while the adhesives division revenue saw 14 per cent QoQ growth.

 

Earnings before interest, tax, depreciation and amortisation (Ebitda) margins improved across all segments. Sales grew to Rs 1,506 crore, which was up 8 per cent year-on-year (YoY) and 19 per cent QoQ. Profit after tax (PAT) was at Rs 199 crore, up 39 per cent YoY. The company expects 16-18 per cent Ebitda margin in FY24.

The guidance is that the pipe industry will grow at 9-10 per cent in volumes and revenue compound annual growth rate (CAGR) should be at 15 per cent for the next 5 years, with capacity expansion, new product launches, diversified geographical manufacturing and strong branding. In FY24, guidance is for 15-20 per cent YoY volume growth. Astral has also launched specialised valves (a high margin product).

In the adhesives segment, Astral is clustering products under the Bondtite brand. It markets adhesives for maintenance, wood, construction, and industrial chemicals. It expects double-digit volume growth and has guided for adhesives segment revenue to grow 20 per cent YoY in FY24. The company’s UK operations saw revenues of Rs 330 crore in FY23 (28 per cent of adhesive revenue) and management expects low double-digit revenue growth in FY24 from the UK. Guidance is for 15-16 per cent Ebitda margin for this segment in FY24.

A new foray in bathware is based on completely outsourced sanitaryware sales and 60 per cent of faucets are also outsourced. But Astral targets 100 per cent in-house faucet manufacturing. It is also expanding distribution reach and has 383 showrooms with another 177 under development. It expects bathware to hit Ebitda breakeven in FY24.

Astral plans to rebrand and relaunch its paints segment in 6-12 months. It has products in industrial and decorative segments and guided for revenue to grow at 20 per cent YoY with operating margin of 15 per cent in FY24. The management indicated current paints capacity has revenue potential of Rs 800-900 crore (reported revenue of Rs 220 crore in FY23), and no new capex is envisaged in paints.

Astral does plan greenfield expansion of pipes capacity to 70,000 MTPA (metric tonnes per annum) in Hyderabad for a capex of Rs 130 crore (Rs 30 crore already spent). The expansion is planned in two phases, with phase-1 expansion of 30,000 MTPA to be commissioned in the second half (H2) of FY25 and phase-2 capacity of 40,000 MTPA to be commissioned in H2FY26. It has also planned a pipe expansion of 12,000-15,000 MTPA in Guwahati, and plans to commission production from this facility in H1FY24. This expands the north-east footprint.

Astral has celebrity brand ambassadors in actors Ranveer Singh and Allu Arjun. It also has Indian Premier League (IPL) branding where it sponsors three IPL teams to promote its pipes segment and a fourth IPL team for the adhesives segment. It also targets consumers on social media platforms through ad films.

The high-profile stock is, however, very highly valued with a current PE ratio of over 100x. Although growth prospects are strong, and analysts’ consensus is ‘buy’, some analysts advise ‘reduce’, purely on valuations. The stock is up 45 per cent YoY and up over 40 per cent since early April (adjusted for 1:3 share bonus in March).