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Contraction in PVC prices impacts profitability!

Result Synopsis

Prince Pipes & Fitting Ltd (PP&F), reported topline of Rs6.36Bn, a degrowth of 16.4%YoY & increased by 5.4%QoQ which was in?line with our estimate of Rs6.51Bn. Volumes during the quarter declined by 10.2%YoY & increased by 23.1%QoQ to 35,845Te (better than expected). In Q2FY23, PVC resin prices contracted sharply (April?till?date a decline of Rs62/Kg & July alone Rs20/Kg reduction), this resulted into inventory correction which lead to EBITDA loss of Rs110Mn. Inventory loss for Q2FY23 stood at Rs800?900Mn & for H1FY23 the same came in at Rs1?1.2Bn. Owing to continual fall in PVC prices, channel inventory remained at low?levels which impacted the volume off?take during Q2FY23. Due to this price correction, PP&Fs avg realizations came in at Rs165/Kg Vs Rs178/Rs193 in Q2FY22/Q1FY23 respectively. CPVC resin prices remained stable in Q2FY23 & this segment reported a growth of 25%YoY in H1FY23.

Going ahead, PP&F believes that plumbing (50?55% of biz) demand is likely to remain strong owing to sustained uptick in real?estate segment. Moreover, lower PVC prices should lead to strong demand from agricultural segment (30?33% of biz) which has been fairly muted in past couple of years. Management expects inventory losses to continue in Q3FY23 as well, however the quantum of the same is unlikely to be as steep as Q2FY23. Owing to healthy traction in demand, we reckon company’s volumes to grow by 11%CAGR over FY22?FY24E. However, considering the fall in prices, revenue growth is expected to come in at 7% over similar period. We expect margins to remain under pressure for H2FY23 as PVC prices have dropped by ~Rs9/Kg in Oct?Nov’22 & further fall is expected in coming months. We continue to value the company at P/E(x) of 30x on FY24E EPS of Rs21 (revised downwards by 7%), hence we maintain our ADD rating on the stock.

Result Highlights

* Volumes stood at 38,458 Te (5% above est), reporting a degrowth of 10%YoY & sequential growth of 23%QoQ (2?year CAGR stood at 5%).

* Revenue for the quarter stood at Rs6.36Bn (est Rs6.51Bn), a degrowth of 16.4%YoY & growth of 5.4%QoQ.

* ASP came in at Rs165/Kg during the quarter Vs Rs178/Rs193 in Q2FY22/Q1FY23 respectively.

* Company reported EBITDA loss of Rs110Mn as compared to Rs1.23Bn/Rs440Mn profit in Q2FY22/Q1FY23 respectively. Sharp fall in PVC prices lead to inventory losses which resulted into EBITDA loss.  

* Net loss stood at Rs240Mn Vs profit of Rs760Mn/Rs160Mn in Q2FY22/Q1FY23 respectively.

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