Piping business drives performance…
Astral’s Q1FY20 consolidated revenue came in at ~| 607 crore, growth of 27% YoY ahead of our estimate of ~| 566 crore. While the adhesive segment revenue growth remained subdued (at 2% YoY), the piping segment revenue grew 38% YoY led by volume growth of 41% YoY (excluding Rex piping segment volume, value growth at 28%, 26% YoY). Lower EBITDA margin at 15.3% (down ~100 bps YoY in line with our estimate) was largely hit by a change in product mix and higher fixed cost (employee cost up by 41% YoY). PAT increased 27% YoY at | 48 crore. The management guided for strong volume growth in the piping segment (Idirect estimate: volume CAGR of 22%) for FY19-21E led by higher plant utilisation of Rex business and sustained demand of plumbing pipes. With EBITDA margin in the range of 15-16%, we believe Astral will record strong PAT CAGR of ~31% in FY19-21E.
Strong volume traction led by change in product mix
The company reported robust standalone revenue growth of 26% YoY (excluding Rex) led by 28% volume growth in Q1FY20. Volume growth was mainly driven by increase in distribution network, strong demand of CPVC and agriculture pipes. The company’s Rex business recorded revenue of | 40 crore, which was below estimates. The company incurred a loss of one month sales, mainly due rationalisation of distribution network and streamlining of Rex line with Astral (change in GST number, implementation of SAP). On the adhesive front, muted topline growth is attributable to change in distribution strategy (changing from 3-tier to 2-tier distribution strategy). According to the management, Rex, Resinova (adhesive business) business would streamline from H2FY20 onwards with improved utilisation level. Hence, we model consolidated revenue CAGR of ~22% led by piping and adhesive segment revenue CAGR of 23% and ~17%, respectively.
Change in product mix, inventory losses in PVC hit margin
EBITDA margin at 15.3% was down ~100 bps YoY mainly due to a decline in gross margin. Lower gross margin was due to change in product mix and inventory losses in PVC piping segment. We model increase in EBITDA margin by 100 bps in FY19-21E led by price hikes and operating leverage (with increase in plant utilisation in both piping and adhesive segments).
Valuation & Outlook
We model revenue, earning CAGR of ~24%, ~31%, respectively, in FY19- 21E led by volume growth, recovery in EBITDA margin. Though we believe in strong fundamentals of APTL coupled with intact demand outlook (led by government push on housing & infra sectors), current price discounts all near term positives. We maintain HOLD rating on the stock.
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