Adhesive business regains growth momentum
While ASTRA Q1FY21 numbers were largely in line with our expectations, the silver linings from this operationally truncated quarter were: a) impressive EBIDTA margin at 18-19% in the standalone pipe business (adjusted for operating deleverage in Apr’20 and inventory losses of Rs90mn-100mn in PVC pipe segment); and b) strong growth momentum in adhesive business post Q1 (with Jul’20 delivering 26% YoY growth). With the company showing faster growth recovery (>90%) in both the pipe and adhesive businesses (from May to Jul’20), we believe ASTRA is on course to meet our current year expectation of 10% decline in pipe volumes and 10% growth in adhesive revenues. Upgrade to ADD.
* Valuation and outlook: Considering the strong recovery witnessed in both the pipe and adhesive businesses, we maintain our estimates for FY21E/FY22E. We expect ASTRA to report overall revenue/PAT CAGRs of 8.5%/23.7% respectively over FY20-FY22E. We upgrade the stock to ADD with a revised SoTP-based target price of Rs1,007 (earlier Rs956), implying a P/E multiple of 40x FY22E earnings (38x earlier) – considering the improved earnings visibility and likely balance sheet strengthening in such testing times.
* Pipe business reports healthy margins despite significant loss of volumes and inventory losses in Apr’20: ASTRA reported sharp decline in its standalone revenues at Rs3.2bn, down 33% YoY, led by 31% YoY decline in its volumes. Despite operating deleverage in Apr’20 and adverse product mix, standalone EBITDA margin remained firm at 14.8%. However, adjusting for higher operational overheads in Apr’20 and inventory loss of Rs90mn-100mn in PVC pipe segment, ASTRA reported EBIDTA margins in the 18-19% range. With gradually improving visibility (expectation of metros opening up post-Aug’20 and sustained market consolidation) plus expected improvement in margins ahead (driven by cost cutting initiatives and increasing trend in PVC prices), we estimate ASTRA’s standalone revenues/PBT to grow at 4.7%/17.5% CAGRs respectively, over FY20-FY22E.
* Adhesive business regains growth momentum: The adhesive business reported lower than anticipated decline in revenue (down 37% YoY) with sharp recovery in volumes seen in Jun’20 and Jul’20. In fact, ASTRA managed to report impressive growth of 26% YoY in Jul’20 driven by recent systemic corrections initiated by the company and lower base of last year. With this sharp recovery, the management remains hopeful of achieving double-digit growth in adhesives in FY21. EBITDA margins too are likely to witness a sharp rebound post Q1 driven by operating leverage and benign input costs. We thus expect ASTRA’s adhesive business to exhibit revenue/PBT CAGRs of 17%/43.2% respectively, over FY20-FY22E.
* Strong working capital discipline drives debt-free status for the first time. With stricter working capital management across both the product segments (receivables below 30 days and sharp reduction in finished goods inventory in Q1FY21), ASTRA has now proclaimed debt-free status for the first time since inception.
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