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On a strong footing; top pick in pipes

We upgrade ASTRA to BUY with the stock correcting ~27% in the last one month. Besides expecting the company to continue with its strong earnings traction post Covid, we expect its premium valuations to sustain driven by a) sustained market share gain opportunity in piping segment with likely accelerated consolidation in PVC/CPVC pipes segment in the post Covid environment; b) strong option value in its adhesive business (capable of growing at 20-25% CAGR over the next 3-5 years); c) strong growth opportunity in tanks (likely to achieve Rs1.5bn revenue by FY23) and DWC pipe (expected to post 25-30% CAGR over next 2-3 years) segments; c) expansion of manufacturing footprint (Odisha plant to commence by Oct’21) which opens up huge opportunity in East India (where its scale is currently at ~1/10th of Supreme’s revenue in East India); d) option value in the form of likely acquisition/(s) (with ASTRA likely to close FY23 with cash on books in excess of Rs10bn) and e) pre-tax RoCEs (ex-cash) likely to touch 50% by FY23.

* Valuation and outlook: Considering the robust growth outlook amid the ongoing second Covid wave, we increase our revenue and PAT estimates by 4.4%/8.3%/8.1% and 6.7%/7.2%/7.9% for FY21E/FY22E/FY23E, respectively. We expect ASTRA to report overall revenue/PAT CAGR of 23.1%/39.1%, respectively, over FY20-FY23E. We upgrade ASTRA to BUY (from HOLD) with a revised target price of Rs1,663 (earlier: Rs1,387), implying a P/E multiple of 50x (earlier - 45x) FY23E earnings. Key risks: 1) Sharp decline in PVC prices and 2) lower than expected pick-up in adhesive business.

* Prefer ASTRA (post recent correction) over Prince Pipes (PPF) and Supreme Industries (SI): We expect ASTRA’s earnings to outpace its key peers in FY22 driven by 1) likely least impact of the recent strict restrictions imposed by few states amid the ongoing second Covid wave with Q1 revenue being much leaner at 17- 18% of overall sales for ASTRA vs 24-25% for SI and 21-22% for PPF; 2) likely least impact on its realisations and margins on account of expected steep price fall in PVC pipes segment post Q1FY22 with expected uptick in CPVC pipes prices (by ~15- 20%) in FY22E (ASTRA’s share in CPVC pipes segment being significantly higher than peers; Q1FY22 has already seen a price hike of 6-8% in CPVC pipes) and 3) its least impact of muted growth in agricultural pipes segment (due to elevated prices of agricultural PVC pipes in Q1FY22 – being a key season) where ASTRA’s share is least at 4-5% vs SI at ~30-35% and PPF at ~30%.

* RoCEs (adjusted for cash) likely to touch 50% by FY23E. Strong earnings momentum, stricter working capital management and impressive free cash generation (due to muted capex) are expected to drive significant cash on books (Rs10bn+) by FY23E. We thus assign a 50 PE multiple to ASTRA’s FY23 earnings compared to 35x for SI and 25x for PPF considering a) its high RoCE (adj. for cash) profile (50.6% for ASTRA vs 28.3% for SI and 27.1% for PPF) and b) option value in the form of likely acquisitions and its scaling up of its niche segments (adhesives, tanks and DWC pipes).

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