IGI Logo

Worst is behind; inventory normalisation underway

Prince Pipes’ (Prince) performance was a miss on EBITDA / PAT on account of higher-thanexpected inventory loss of INR 800-900mn (vs. JMFe of INR 750mn) due to fall in PVC resin prices (-27% QoQ on average). Adjusting for inventory losses, Gross/EBITDA margin contracted 470bps/590bps YoY (180bps/210bps QoQ) respectively. The company expects prices to stabilise soon, which will lead to volume and margin recovery in 2HFY23, although it did not rule out inventory losses in Q3FY23 again given a further fall in PVC prices (though it will be significantly smaller than in 2QFY23). Revenue declined 16% YoY (+14% 3-year CAGR) as volume/ realisation fell 10%/7% YoY (6%/7% above JMFe respectively). We cut our FY23 estimates by 36% for the inventory loss while broadly maintaining our FY24-25 estimates. Notwithstanding near-term weakness, we continue to maintain a positive view on the stock as it is well placed to ride on real estate recovery, product diversification, brand building efforts improving the enterprise business (tie-up with Lubrizol) and distribution reach. We maintain BUY with a Sep’23 TP of INR 660, basis 30x Sep’24EPS (earlier INR 670).

* 2QFY23 summary: 2QFY23 revenue came in at INR 6.3bn, -17% YoY (+14% 3-year CAGR; 13% below JMFe) as realisation declined by 7% YoY (-14% QoQ, 10% 3-year CAGR; 7% above JMFe) and volume fell 10% YoY (+4% 3-year CAGR, 6% above JMFe). CPVC pipes continued to perform well, as volume grew 25% YoY in 1HFY23. As per the company, despite the sharp fall in PVC prices, improved product mix (CPVC now contributes 22-24% of sales) has led to lower decline in realisation. During the quarter, the company continued on a) distribution network expansion, b) brand building, and c) product portfolio expansion in order to gain market share. The management continues to be optimistic on the future and is confident of Prince outpacing industry growth; it believes volume will be better in 2HFY23 on revival in agri demand and restocking of the channel as PVC prices stabilise. Prince’s volume growth on 3-year CAGR lagged the other leading players, Supreme (+5%, 3-year CAGR), Finolex (+7%, 3-year CAGR) for the first time and we believe it has potential to reverse the same in 2HFY23.

* Inventory loss owing to falling PVC prices hurt margin…: Prince reported gross margin of INR 22/kg, down 57% YoY/46% QoQ (-18% 3-year CAGR, 20% below JMFe). PVC prices fell sharply; they have corrected 52% from the peak (INR 160/kg) in Nov’21 to INR 78/kg (-52% YoY, -42% FYTD). As per the management, inventory loss is estimated to be around c. INR 800mn-900mn in 2QFY23 (vs. INR 300-350mn in Q1FY23). As a result, EBITDA/kg declined 110% YoY at INR -3/kg, (JMFe: INR 2.7/kg). EBITDA margin was - 1.8% (vs. 16.1% in Q2FY22). The management continues to be optimistic on its sustainable margin guidance of c. 13-15%.

* …losses to continue in Q3FY23, albeit quantum will be much smaller: During OctNov’22, prices have corrected by INR 10/kg (-11%), which may further lead to inventory losses in Q3FY22. As per the management, PVC prices are falling mainly due to a) lower housing demand in USA, China, b) significant rise in prices of caustic soda, a by-product in production of PVC resin, is leading to higher production of PVC. The management believes further correction in Oct-Nov’22 in PVC prices may also lead to some inventory loss in Q3FY23, though it believes the extent of inventory loss could be lower than in 2QFY23.

* Revise FY23 estimates; maintain BUY: We cut our FY23 estimates by 36% to reflect the PVC resin price correction led inventory losses. We continue to maintain our positive view on Prince given its a) relatively superior performance vs. most peers in almost all quarters in the past, b) tailwinds on the industry (improving growth trajectory and market consolidation), c) focus on premiumisation and distribution expansion, d) improvement in balance sheet, and e) constant improvement in corporate governance. We maintain BUY with a Sep’23 TP of INR 660 basis 30xSep’24EPS (earlier INR 670). Key risk to our call: Delayed recovery in macro growth trajectory.

* Other highlights.

* Prince’s 40% consumption in PVC is from the domestic market, while the rest is imported, which is in line with industry players.

* During the quarter, the company has spent INR 140mn (2.2% of revenue) towards advertising and brand building.

* The newly announced Bathware division is progressing well and the company is in the process of shortlisting vendors for outsourcing and finalising designs. It is looking forward to build a lean and credible team to spearhead the division.

* Net working capital days decreased to 68 in Sept’22 (88 in Jun’22). Inventory days decreased significantly to 65 (78 in Jun’22 and 85 in Mar’22), debtor days decreased to 48 (48 in Jun’22 and 60 in Mar’22) and creditor days was 44 significantly to 38 (38 in Jun’22 and 77 in Mar’22).

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

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