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Big getting bigger
We believe top players in the plastic pipe industry are in a sweet spot for the near term as a result of: a) buoyancy in underlying demand, b) market share gains aided by weakening competitive intensity, and c) growth traction in niche products such as double-wall corrugated (DWC) pipes and underground drainage systems (UDS). While we also witness large corporates entering into the pipe business over the past few quarters, we believe the weakening competition and strong underlying demand is likely to more than offset for the threat from the new entrants. Astral Poly (ASTRA) followed by Supreme Industries (SI) are likely to be the big beneficiaries in the near term. Other notable gainers include Prince Pipes and Fittings, and Finolex Industries.
* Underlying demand remains resilient: The current challenging economic environment and liquidity woes in the trade has led to sluggish growth in most building material categories. Nevertheless, demand for plastic pipes has remained resilient through the recent past aided by: a) smooth GST transition leading to shift from unorganised to organised players, b) sustained replacement to traditionally used materials like galvanised iron and cast iron pipes, and c) strong demand from the affordable housing segment. With the government poised to launch the next big mission (Nal se Jal scheme) to provide piped water for all rural homes by 2024 (with likely emphasis on water conservation and supply), we believe the plastic pipe industry is poised to maintain its double-digit growth over the next 3-5 years.
* Market share gains likely for top players aided by weakening competitive intensity: We expect the top plastic pipe companies to witness significant market share gains in the near term, aided by: a) serious liquidity issues confronting the existing large-sized organised players such as Prince SWR, Kisan, Jain Irrigation, etc.; b) semi-organised or regional brands facing working capital challenges and/or management bandwidth woes in scaling up; and c) unorganised players becoming less competitive post GST implementation besides facing working capital issues (due to extreme volatility in PVC pricing) and challenges relating to higher sourcing cost of PVC resin (due to tight supply of PVC from Reliance Industries in the near term). While we also witness some large corporates like HIL, HSIL and Parryware entering the pipe business over the past few quarters, we believe the weakening competition and strong underlying demand would more than offset the threat from the new entrants.
* Underground drainage system – A sizeable opportunity for top branded players. The top players have already introduced underground drainage systems for buildings as well as for civil and infrastructure applications such as inspection chambers, manhole, solid & structured wall pipes. The latest such system is the much talked about DWC pipes. With the emphasis on hygiene and rainwater harvesting only expected to increase, this segment we believe represents a sizeable opportunity for players like ASTRA and SI, who are already actively present in it. ASTRA, with the recent acquisition of Rex Polyextrusion (industry leader in DWC pipes), is expected to be the biggest beneficiary.
* Likely key beneficiaries from weakening competition. We believe ASTRA stands to be the biggest beneficiary due to: a) its expected market share gains in PVC pipes led by weakening competition and the company’s innovation, branding aggression and impressive execution capabilities; b) its nearest competitor in CPVC pipes likely to move gradually to the cash-and-carry model; c) the recent expansion of its geographical footprint (North and South India) and likely setting up of a greenfield plant in East India by FY20-end; and d) market share gains in DWC pipes with recent acquisition of Rex and with one of the existing players facing quality issues. SI too, being a pioneer in plumbing PVC pipes and having the most comprehensive range of pipes and fittings, is expected to be a major gainer going forward. Other notable gainers could be Prince Pipes and Fittings, and Finolex Industries.
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