IGI Logo

Tepid quarter due to inventory losses; outlook better

Prince Pipes and Fittings (PRINCPIP) reported revenue decline of 16.4% YoY (+5% QoQ; 3-year CAGR of 14%) in Q2FY23 with volumes down 10.2% YoY (3-year CAGR of 3.6%) as dealers de-stocked due to fall in PVC prices. Profitability was severely impacted due to heavy inventory losses of Rs800-850mn (gross margin declined 14.9ppt / 7.7ppt YoY / QoQ), which was due to a steep fall in PVC prices (~23% decline QoQ). This led to an EBIDTA/APAT loss of Rs113mn/Rs242mn (adjusting for inventory losses EBITDA stood at ~Rs687mn). Management stated plumbing demand (~65% of revenue) continues to be healthy, but was not reflected in volume growth due to channel destocking. It expects strong demand rebound from agri segment (~33% of revenue) on increased affordability from declining PVC prices and has guided for sustainable double digit volume growth FY23 onwards driven by strong demand tailwinds from real estate and agri segments. It stated PVC prices continue to decline in Q3 so far, which will result in slight inventory losses in Q3, too. Operating margin is expected to improve in Q3 and further normalise in Q4FY23. We slash our EBIDTA estimates by 38%/10% for FY23/FY24E to factor in lower profitability due to inventory losses. Maintain BUY with a rolled over Sep’23E target price of Rs662 (earlier: Rs713).

* Pipe revenue decline of 16.4% YoY: PRINCPIP posted a revenue decline of 16.4% YoY (+5.4% QoQ) due to pipe volume decline of 10.2% YoY (+23.1% QoQ; 3-year CAGR of 3.6%) and realisation decline of 6.8% YoY (-14.4% QoQ), on a high base of Q2FY22. Demand in Q2FY23 was subdued due to channel destocking as PVC prices were on a continuous declining trend in the quarter. Management stated healthy demand continued from plumbing segment on strong demand tailwinds of real estate sector, which is expected to continue going forward. It is also optimistic of demand rebound from agri segment (due to declining PVC prices) and has guided for a double digit volume growth on a sustainable basis. CPVC volumes grew ~25% YoY in H1FY23 (compared to consolidated volume growth of 13.7% YoY in H1FY23). Going forward, management expects CPVC segment to grow better than PVC, which will aid in realisation growth. Working capital days in Q2FY23 stood at 68 days (vs 88 days in Q1FY23), which was primarily due to lower inventory days (65 days in Q2FY23 vs 78 days in Q1FY23).

* Inventory losses lead to operating losses: PRINCPIP’s reported EBITDA loss of ~Rs113mn (~Rs687mn profit adjusting for inventory losses of Rs800-850mn) primarily due to fall in PVC resin prices (~23% QoQ) as the company had high cost carried over inventory. Adjusted for inventory losses EBITDA/kg would have been ~Rs18/kg. Management stated PVC prices continue to decline in Q3 (~8-9% PVC price correction in Oct-Nov’22) which will lead to slight inventory losses, but has guided for margin to improve from Q3 and normalise in Q4 (as inventory losses will not reoccur). Management has guided for 12-15% sustainable margin in pipe segment going ahead. We model 13.1%/13.3% margin for FY24/FY25E, respectively.

* Valuations and view: PRINCPIP had a tepid quarter due to falling PVC prices in Q2FY23. It is expected to see demand tailwinds from Q4 on lower product prices and also profitability should normalise as PVC prices are now near pre-covid levels. Maintain BUY rating on the stock with a rolled over Sep’23E target price of Rs662 (prior: Rs713), set at an unchanged 30x PER FY24E.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer