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Smart Alpha: Robust volume outlook in pipes for H2FY23E with margin improvement QoQ

In our view, Astral (ASTRA) stock appears well positioned to gain (in absolute term) in the immediate near term as volumes are expected to pick-up in pipe segment (from Q3) and also margins are likely to normalise (in Q4FY23E) as PVC prices have stabilised (post ~34% decline in FY23-TD). Additionally, with correction in adhesive input prices like VAM (down ~49% in FY23-YTD), margin in this business should also normalise (to ~15-16% in Q4FY23E). We have BUY rating on the stock with 12-month target price of Rs2,295.

* We believe pipe volume growth will likely be strong in H2FY23, driven by PVC price stabilisation, pent-up demand and re-stocking by dealers: Pipe demand is expected to be robust in H2FY23E due to re-stocking by dealers as PVC prices have now stabilised (post a continuous decline of ~44% during Apr-Nov’22). Additionally, contribution from pent-up demand is also expected, as there was some deferment earlier by end-users, as per our dealer interaction. We expect ASTRA to report 16.6% YoY volume growth in H2FY23E and believe our estimates/consensus estimates have an upside risk.

* Margin tailwinds from both pipe and adhesive segments in Q4FY23: Pipe margin, which got adversely affected in H1FY23 due to inventory losses, is expected to normalise in Q4FY23E as PVC resin prices have stabilised from Dec’22. Also, higher volumes in a seasonally strong quarter (Q4) should result in operating leverage and thus, margins may surprise on the positive side. Adhesive margin, too, is expected to normalise (to ~15-16%) in Q4FY23E as raw material prices have come down and most of the high cost inventory will be consumed in Q3FY23E

* New segment (bathware) scaling up well: We believe the company is on track to achieve its targeted 500 showrooms/display centres as of end-FY23. Clarity on traction in this business will give visibility to future earnings from this segment for the company.

* We reiterate our BUY rating on ASTRAL as there are 1) strong tailwinds in volumes for pipe segment and 2) margins in both the businesses of pipes and adhesives are expected to normalise from Q4FY23E after being under pressure in H1FY23.

* Key risks to our call: 1) Significant decrease in PVC prices yet again post stabilising, resulting in inventory losses and thus operating profitability, 2) slowdown in housing market may result in lower than expected volume growth.

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