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An ‘astr‘onomical growth story

We initiate coverage on Astral Poly Technik Ltd (ASTRA) with an ADD rating and a target price of INR 2,210/sh. We like ASTRA for its leadership presence in the CPVC segment and continued traction in adhesive business. Aided by strong demand outlook in both businesses and ASTRA’s new product launches (tanks and valves in plastic pipes, newer chemistries in adhesives), distribution strengthening in adhesives, and focus on asset sweating, ASTRA’s revenue/EBITDA/APAT should grow at robust 24/29/35% during FY20-23E (ahead of 24/27/24% CAGR during FY10-20)!

* Focus on niche - CPVC pipes: ASTRA is India’s fastest-growing (10-year revenue/EBITDA CAGR 22/24%) plastic pipes producer (in the listed space). While the company has grown to become the fourth largest overall, it is among the two largest players in the high-margin (and faster growing) CPVC pipes and fitting segments. Over the next three years, its growth visibility looks equally strong, driven by robust demand in piping segment and the company’s expansion in plastic tanks and valves businesses (both high-growth opportunities). These should drive its plastic

* Adhesive business – another high growth segment: ASTRA diversified into this business in 2010, and has mainly grown through inorganic acquisitions (during 2014-17), in India, the UK, and the US. Aided by ASTRA’s continued new product launches, distribution rationalisation, and strong demand, we expect segmental revenue/EBITDA to grow at accelerated pace of 27/35% CAGR respectively.

* Focus on asset sweating to accelerate FCF and bolster return ratios: : Over the past 10 years, ASTRA’s capacity has grown at a strong pace – organically in the pipes business (23% CAGR) and inorganically in adhesives. The company has now trained focus on asset sweating, as it is operating below 60% utilisation across both business segments. Increased utilisation and slower pace of Capex at ~INR 1bn annually (vs INR 2bn in the preceding five years) should bolster return ratios to 20%+ and accelerate FCF generation from FY21-23E.

* Initiate coverage with an ADD rating: ASTRA’s superior capital allocation has resulted in strong revenue and earnings growth, as well as high return ratios. While earnings growth outlook remains buoyant, ASTRA’s stepping up asset sweating led FCF/return ratio acceleration should further bolster its valuations. We initiate coverage on ASTRA with an ADD rating and a TP of INR 2,210/share (34x its consolidated Mar’23E EBITDA). Despite valuing it at a 15% premium to its 3-year mean multiple, the upside is limited, owing to sharp rise in its share price over the past six months.

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