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Pipes to sustain outperformance despite falling PVC prices
On the back of muted real estate demand (which got derailed further in Q3FY20 led by CAA protests across the nation and construction ban in NCR region), coupled with deferment in renovation demand and liquidity constraints, we expect Q3FY20 building material sector (ex-plumbing pipes) volumes to remain under pressure. However, benign input costs and lower tax rates are expected to drive double-digit growth in PAT. We estimate our building material coverage universe to report an aggregate revenue/EBITDA/PAT growth of 4.2%/13.8%/25% YoY, respectively (ex- PIDI: 3.9%/9.1%/11.7% YoY), in Q3FY20 with plumbing pipes likely to sustain their outperformance over peers. While ASTRA and PIDI are likely to outperform in Q3FY20, VSKI and CRS are expected to be the laggards.
* Plumbing pipe sector: Top CPVC pipe players (ASTRA in particular) are likely to gain impressive market share in Q3FY20 aided by recent imposition of anti-dumping duty on CPVC resin/compound imported from China/Korea. PVC pipe volumes are, however, likely to witness some softness QoQ driven by falling PVC prices. Margins for top pipe players are expected to improve YoY on the back of firm CPVC pipe margins and operating leverage despite likely inventory losses in PVC pipes segment.
1) Trend in polymer prices, and
2) competitive intensity.
* Ceramic tile sector: Branded tile players are likely to witness low to mid-single digit volume growth (aided by market share gains) and muted margins amid sluggish demand environment and pricing pressure. While EBITDA margins for KJC are likely to decline, SOMC is expected to report higher margins YoY due to lower base in particular.
1) Trend in gas prices,
2) GVT pricing, and
3) volume growth.
* Sanitaryware sector: We expect growth in sanitaryware sector to be in negative terrain due to subdued real estate demand. Margins, too, are likely to see a decline YoY due to operating deleverage and pricing pressures.
1) Trend in gas prices, and
2) competitive intensity amongst organised players.
* Wood panel sector: Demand in wood panel space is likely to remain muted due to restrained growth in occupation of premises and likely deferment of renovation demand. However, wood panel players are likely to report an improvement in EBITDA margin led by benign input (resin and commercial veneer) costs.
1) Trend in timber and CV prices, and
2) MDF demand-supply trend and prices.
* Adhesives and construction chemicals sector: On the back of challenging macro environment, adhesives space is expected to grow in mid-single digit aided by increasing awareness and improving replacement demand. Margins, though, are likely to improve YoY due to softness in input costs.
Key monitorable: Trend in input costs.
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