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Astral reported Q2FY23 consolidated revenue decline of 2.4% YoY (3-year CAGR of +20%) on a high base with plumbing segment revenue declining 10.6% YoY, while adhesive segment grew 9.8% YoY. Paints segment reported revenue of Rs500mn (- 10% QoQ) in Q2. Plumbing volumes declined 4% YoY (3-year CAGR of +5.6%) on a high base while EBIDTA/kg contracted to Rs27.6/kg (-32.8% YoY) due to inventory losses of ~Rs450mn as PVC prices fell ~23% QoQ. Adjusting for inventory loss, EBITDA/kg was ~Rs38.6/kg (-17% YoY). Adhesive segment margin declined ~260bps YoY to 12.4% in Q2 due to higher raw material prices. Management stated pipe demand was subdued in Q2 due to channel destocking on account of declining PVC prices which has continued in Q3FY23TD (so far) too. However, it expects demand to improve significantly going forward as channel inventory is at minimal levels and raw material prices have corrected significantly and has guided for high double digit volume growth in FY23. For adhesive segment, raw material prices have started declining and the management has guided for margin to return to ~15%. Management remains optimistic on future growth and has maintained its guidance of doubling revenue over the next 5 years. Bathware products have been launched and significant revenue contribution is expected FY24 onwards. We cut our estimates for FY23EFY24E by 9%/6% and maintain ADD with a rolled over Sept’23E target price of Rs2,182 (prior: Rs2,076), set at an unchanged 58x FY24E P/E, in line with 5-year average, 1- year forward P/E.

Consolidated revenue declined due to lower plumbing contribution: Astral’s Q2FY23 consolidated revenue declined 2.4% YoY (-3.4% QoQ) with plumbing segment’s revenue down 10.6% YoY as plumbing volumes fell 4% YoY (3-year CAGR of 5.6%) on a high base. Adhesive business grew 9.8% YoY (3-year CAGR of 24.5%). Management stated demand for pipes during the quarter was adversely affected due to channel destocking on account of declining PVC prices. However, it expects strong demand to come in H2 and has guided for high double digit volume growth in FY23. Adhesive segment growth was modest as its UK adhesive subsidiary saw lower revenues on consolidation as GBP depreciated against INR. The company has guided for 20%-25% growth in adhesive segment for FY23. The ramp-up of bathware division has started and the company plans to have 500 display centres by end-FY23 which will enable high revenues from FY24. Paint business did revenue of Rs500mn (-10% QoQ) in Q2 with ~19% EBIDTA margin.

Operating margin slipped due to inventory loss: Astral’s consolidated operating margin contracted 534bps YoY to 12.3%, primarily due to inventory losses of ~Rs450mn on account of falling PVC prices (gross margin fell 174bps YoY). Piping EBIDTA/kg declined 32.8% YoY to Rs27.6/kg (~Rs38.6/kg after adjusting for inventory loss), whereas adhesive margin declined 260bps YoY to 12.4%. Management stated pipe business will witness some margin pressure in Q3 too as PVC prices continue to fall. It expects margin in pipe business to improve in Q3 and further normalise by Q4, post PVC price stabilisation. Adhesive segment margin is also expected to improve from Q3 as raw material prices have declined significantly. Management has guided for adhesives margin to return to ~15%.

Valuations and view: Astral’s Q2FY23 performance was slightly below estimates due to inventory losses. However, going ahead, we expect pipe volumes to pick up and profitability to normalise as PVC prices stabilise. We continue to like Astral for its comprehensive portfolio, wide distribution reach and strong brand presence, along with net debt free balance sheet and high return ratios. Maintain ADD with a rolled over Sept’23E target price of Rs2,182.

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