Windfall gains in CPVC pipes to boost earnings
Astral Poly Technik (ASTRA) is on the cusp of witnessing a strong boost to its FY20 earnings aided by
a) imposition of provisional anti-dumping duty (ADD) on Chinese/Korean CPVC resin/compound imports into India – leading to distribution gains and sharp improvement in realisations and margins in CPVC pipes segment in the near term;
b) sustained increase in PVC prices – leading to volume traction and inventory gains in the PVC pipes segment;
c) pick-up in DWC pipe volumes aided by Rex acquisition and government thrust on sanitation and drainage. Growth in adhesive segment, too, is likely to pick-up post Q2FY20 as the on-going shift from a stockist model to a distribution-led model in adhesives is likely to pan out by Sep’19. Maintain our HOLD rating with a revised based target price of Rs1,262 (earlier: Rs1,182).
Expensive valuations likely to sustain:
We tweak our revenue/earnings estimates higher by 1.6%/2.4% and 4.8%/2.8%, respectively for FY20/FY21 and accordingly arrive at SoTP based revised target price of Rs1,262 (valuing pipes and adhesive business at 38x and 40x FY21 earnings, respectively).
Provisional ADD on CPVC pipes: May be a game changer:
Post the recent notification of provisional ADD on CPVC resin/compound imported from China/Korea into India for six months, ASTRA is likely to be on the cusp of gaining a sizeable market share in the CPVC segment in the near term. Also, with the company carrying 3-4 months of inventory of CPVC resin and initiating a price hike of 5% (post 1st Sep), we expect it to report windfall gains in CPVC pipes segment (60-65% of its standalone pipe business) over the next two quarters. Besides sharp improvement in profitability, we believe ASTRA will also witness distribution gains with a number of distributors (sourcing CPVC pipes from players buying resin/compound from China/Korea) likely to shift with them.
Recent surge in PVC prices – to aid volume traction and inventory gains in near term.
With PVC prices rising by Rs4.5/kg or 6% in the past three weeks, they now stand higher by ~5% QoQ. This is likely to aid sustenance of ASTRA’s volume growth momentum in PVC pipes in the near term. Also, with the PVC prices surging since May’19, we expect reversal of past inventory losses over the next couple of quarters. Post the recent corrective actions initiated by Rex (implementation of SAP and merger order), the volumes and margins in DWC pipes are likely to see a substantial improvement post Q1FY20 aided by a) recent and successful integration of Rex with ASTRA, and b) capacity expansion and installing corrugators at ASTRA’s facilities driving competitiveness and logistic savings.
Growth in adhesives is likely to be back-ended in FY20.
ASTRA has recently initiated systemic corrections/modifications in its adhesive segment, namely: a) Shift from a stockiest model to a distribution-led model, which is likely to pan out by Sep’19; b) firmer control on receivables, and c) creating new verticals and heads for each segment/chemistry in adhesives. This is likely to favourably impact volumes in H2FY19 – particularly in Resinova, while growth momentum in the company’s UK and US operations is likely to continue.
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