Margin trajectory on rise
Despite a substantial volume loss witnessed in Mar’20 due to nationwide lockdown, Astral Poly Technik (ASTRA) is possibly witnessing a phase of meteoric rise in its margin trajectory. The all-time high Q4FY20 EBIDTA margin, which the management clarified was without any one-offs, is largely attributed to strong gross margin expansion in both the product segments – which were led by the company’s backward integration drive, decentralisation efforts and increasing share of VAPs. Besides the rising margin trajectory, the sustained focus on strengthening the balance sheet and likelihood of the company being one of the biggest beneficiaries of market share gains in the plumbing pipe segment, ASTRA’s recovery in earnings could be much earlier than anticipated. Upgrade to BUY.
* Valuation and outlook:
Factoring-in the Q4FY20 numbers, we cut our revenue and PAT estimates by 18.1%/16.4% and 14%/7.4% respectively, for FY20E/FY21E. We expect the company to report consolidated revenue and PAT CAGRs of 8.5% and 23.2% respectively over FY20-FY22E. We upgrade the stock to BUY (from Add) with a revised target price of Rs950 (earlier: Rs1,096), valuing its pipe/adhesive business at 38x FY21E earnings (40x earlier).
* Pipes report all-time high margins despite significant loss of volumes due to lockdown:
ASTRA reported sharp decline in its standalone revenues at Rs5.1bn, down 16.5% YoY, due to 13% YoY decline in volumes. Orders in hand amounting to Rs1.75bn, which could not get executed post nationwide lockdown, led to the sharp decline. Standalone EBITDA margin however remained at all-time high levels of 19.1%, up 340bps YoY, despite massive operating deleverage in Mar’20. With May’20 showing significant improvement in despatches, the management remains hopeful of achieving normalcy (we however assume 10% volume decline – refer table 2) in FY21E itself. We estimate ASTRA’s standalone revenues and PBT to grow at 4.7% and 17.6% CAGRs respectively over FY20-FY22E.
* Adhesives business poised for promising start post Covid-19:
The adhesive business reported a sharp decline in revenues by 26.7% YoY in Q4FY20 leading to FY20 revenue decline of 8.1% YoY. With the systemic corrections (change in distribution model and team verticalisation) initiated in the previous fiscal and the lower base of last year likely to come into play, the management remains hopeful of achieving double-digit growth in adhesives in the current fiscal. Despite significant improvement in gross margins YoY, EBITDA margin was down 130bps YoY to 13.1%. We expect ASTRA’s overall adhesives business to exhibit revenue and PBT CAGRs of 17% and 43% respectively over FY20-FY22E.
* Higher forex loss impacts overall PBT:
Despite reporting better than expected EBIDTA margin, ASTRA’s consolidated PBT was down 30.5% YoY to Rs657mn. This was largely attributed to loss of sales in Mar’20, lower other income and higher forex losses incurred in Q4FY20.
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