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Plumbing segment drives recovery; PVC firming up again

Our recent channel checks for plastic pipes suggest that a) demand recovery for non-south region started from mid-June’21 while in south region it started from mid-July’21, b)dealers are experiencing healthy MoM improvement and have come closer to normal levels in Sept’21 (in volume terms) driven by strong demand from plumbing segment, c) agri season in 2022 is expected to be significantly better than 2021 as pipe replacements/installations cannot be delayed more than one season , d) high PVC prices are less likely to impact the plumbing segment due to high time sensitivity of projects and inelastic demand and e) dealers in non-metro cities are more optimistic on demand outlook versus metro cities dealers. As PVC resin prices have started firming up again, we believe that it is likely to remain at elevated levels as PVC imports continue to be a challenge due to container availability issue and high ocean freight and thus, expect modest gains in 2QFY22 for plastic pipe companies.

Most of the smaller/regional players are under severe stress over recent quarters due to highly volatile PVC prices/ demand coupled with high PVC resin prices and sourcing challenges and regulations on BIS and lead usgae will make it more difficult for unorganised players (c.40-50% of PVC pipe industry). This augurs well for the large pipes players as it will result into stronger and sustained consolidation. We have a BUY rating on Prince Pipes.

* Plumbing segment drives recovery: Overall demand scenario for pipes sector started improving from mid-June'21, while for southern region it started improving from midJuly'21 as the second covid-19 wave came with a delay in South India. Industry players across metro and non-metro cities highlighted that they are witnessing healthy MoM improvement in demand scenario mainly driven by the Plumbing and SWR segment. Dealers have almost reached to normal levels of business (in volume terms) in Sept'21 driven by strong demand recovery in plumbing segment. Though, agri season in 2021 was impacted mainly due to high PVC prices, dealers believe that agri season in 2022 is expected to be significantly better than 2021 as pipe replacements/installations cannot be delayed more than one season.

* PVC resins prices scale back to record high levels; expect prices to remain firm: Post the INR 7/kg rise by Reliance Industries on 9th Sept’21, PVC resin prices stand at record high levels of INR 138/kg (INR 20/kg rise from 15th July’21). Post this increase, PVC prices are now up 16% CYTD, up 61% YoY and back to the previous high seen in May’21.Global PVC prices have bounced back (+14% since 30th July’21) after a drop of c.20% as demand expansion has been at a faster pace than supply resumption. Domestic PVC resin prices have started firming up again due to a) higher global prices, b) strong pick up in Plumbing and SWR segment and c) opening up of major markets post lockdown. We believe that PVC resin prices are likely to remain firm as PVC imports continue to be a challenge due to container availability issue and high ocean freight and thus, expect modest gains in 2QFY22 for plastic pipe companies.

* Regulations on BIS and Lead usage to boost consolidation: Government of India, in Official Gazette on 30th Mar’21, has mandated that all pipe manufacturers should get Bureau of Indian Standards (BIS) licence by 30th Sep’21 and also laid down rules for phased abatement of use of lead stabilizers in PVC pipe manufacturing. While the organised players (c.50-60%) have the BIS licence and make minimal use of lead stabilizers, we believe most of the unorganised PVC pipe players (c.40-50% of industry) will see an impact of this notification as they will have to incur significant capex to meet guidelines resulting into erosion of price differential. Most of the smaller/regional players are under severe stress over past 5-6 quarters due to highly volatile PVC prices/ demand coupled with high PVC resin prices and sourcing challenges. Ban on lead usage for PVC pipe manufacturing and mandatory requirement of BIS licence for manufacture of PVC pipes will make it more difficult for unorganised players (c.40-50% of PVC pipe industry). Stricter implementation of these regulations by Government would augur well for the large organised PVC pipes players as it will result into higher consolidation.

* Growing focus on storage tanks segments: Players like Prince, Astral and Supreme (Finolex Industries is evaluating the tanks segment) have become aggressive on the storage tanks segment as they plan to increase the manufacturing locations and capacity, in order to have a competitive advantage of lower freight cost (freight is a crucial cost element for tanks). All leading players are seeing encouraging response to its offering from the channel partners/customers. This can potentially be a modest growth driver over longer term for companies (read our note on Storage Tanks).

* Companies focussing on increasing TAM: Plastic pipe companies are aggressively focussing on innovation and adding products beyond plastic pipes/fittings, namely, plastic storage tanks, composite and industrial pipes etc. which is helping in increasing the TAM (Total addressable market) and ensuring sustainable long term growth.

* Ongoing consolidation to intensify: Leading players believe that the Covid-19 second wave led slowdown and volatility in PVC prices is further strengthening the ongoing consolidation as smaller/regional players are facing significant raw material procurement and working capital constraints. Moreover, distributors also prefer to move from smaller players to larger players in order to ensure supply continuity. We believe large organised players with pan-India facilities continue to reap benefit of consolidation for another 1-2 years.

* Healthy recovery in demand scenario reflects resilience of plastic pipes sector: The market size of India’s plastic pipes industry is c.INR 330bn and the industry has posted a CAGR of c.10% over last 5 years (highest growth rate in the building materials space). The industry’s products are made from resins such as PVC, CPVC, PPE and HDPE, with a variety of end-user applications across agriculture, plumbing and infrastructure sectors. This has helped it achieve superior growth vs. other building material sub-sectors, notwithstanding the fact that the real estate sector has been struggling in recent years. We believe that large plastic pipe players will recover in 2QFY22 from the second wave led slowdown due to sharp improvement in demand scenario and the positives in the likes of varied end-user applications, value-added products, shift from metal to plastic pipes, ongoing consolidation and infrastructure demand in the offing keep the long-term growth story intact.

* We have a BUY rating on Prince Pipes with a Sept’22 TP of INR 750 (30x Sept’23E EPS).

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