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Embedded optionality offers valuation comfort

While we downgrade Astral Ltd (ASTRA) to ADD from Buy on the recent surge in stock price, we remain highly optimistic on the growth prospects of the company over the next 3-5 years. Besides the inherent growth prospects of both its pipes and adhesive divisions (capable of delivering 15-20% revenue CAGR over next 5 years), the business model has embedded optionality which provides healthy comfort to otherwise seeming expensive valuations. These include - 1) huge cash on books (to exceed Rs10bn by FY23) which would likely open up substantial organic/inorganic growth opportunities, 2) low market share in pipes (7.5%) and adhesives (3%) to drive substantial scalability over the next 5 years, 3) recently launched DWC pipes and tanks to drive sound revenue visibility, 4) East India plant (to come on stream by Oct’21) to open up massive opportunity in the region where the leading player Supreme Industries (SI) was almost 10x the size of ASTRA in FY21, and 5) new product launches in pipes & adhesives to contribute meaningfully over the next 3-5 years. Q4FY21 earnings key highlights: A) Industry leading volume growth of ~26% YoY in pipes, b) adhesive revenue growth at 73% YoY, and c) all-time high EBITDA margins in both business segments despite cost inflation.

Valuation and outlook:

Considering the robust growth outlook and the expected improvement in margins in both pipe and adhesive businesses, we increase our revenue and PAT estimates by 3.3%/3.1% and 8.4%/7.3%, respectively, for FY22E/FY23E. We expect ASTRA to report overall revenue/PAT CAGRs of 24.9%/33.2%, respectively, over FY21-FY23E. With the recent surge in stock price, we downgrade it to ADD (from Buy) with a revised target price of Rs1,964 (earlier: Rs1,665), implying a P/E multiple of 55x FY23E earnings. Key risks: 1) Sharp decline in PVC prices and 2) lower than expected pick-up in adhesive business.

Pipe business reports industry leading 25.8% volume growth:

ASTRA reported 25.8% YoY industry leading volume growth in its piping segment led by robust growth in CPVC piping segment and market share gains. Standalone EBITDA margin at 23.5% (I-Sec: 20.5%), up 60bps QoQ, was led by inventory gains of Rs300mn, operating leverage and superior product mix. With robust growth outlook (Apr’21 witnessing 154% YoY revenue growth) amid likely industry consolidation, possible new product launches and expected improvement in margins led by better mix and decentralisation, we estimate ASTRA’s standalone revenue/PBT to grow at 22%/27.2% CAGRs, respectively, over FY21-FY23E.

Adhesive business revenue grew 73% YoY; robust outlook ahead:

Adhesive business reported an impressive 73% YoY growth in revenues on the back of new product launches, sharp demand recovery and considerable pick-up in construction activity pan-India. EBIDTA margin surprised at 17.7%, up 140bps QoQ (despite input cost cost inflation), largely driven by operating leverage and price hikes. With growth recovery expected to sustain, we expect adhesive business to register revenue and PBT CAGRs of 30.5% and 44.3%, respectively, over FY21-FY23E.

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