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Beat on all counts

Prince Pipes and Fittings (PPF) reported an impressive 25.7% YoY volume growth driven by strong growth in its plumbing portfolio. Higher inventory gains (Rs300mn-350mn), operating leverage and superior pricing power led to a sharp beat in its Q4FY21 EBITDA margin at 19.3% (I-Sec: 17.4%), up 590bps YoY and 50bps QoQ. This was achieved despite marked increase in its brand spend, which was higher at 4.5% of sales vs 2-2.5% normal quarter.

PPF has guided for 13-14% EBITDA margin with an upward bias on the back of likely operating leverage, superior product mix and logistics cost savings with Telangana facility likely to ramp up production in the near to medium term. Key risks to our estimates: a) sharp cut in PVC prices may impact volumes and margins in the near term, and b) sustained intermittent lockdowns. Maintain BUY.

* Valuation and outlook:

Factoring-in the Q4FY21 outperformance, we increase our revenue and PAT estimates by 7%/7.4% and 22.2%/20.8% for FY22E/FY23E respectively. We now expect the company to report volume/revenue and PAT CAGRs of 18.6%/10.2% and 10% respectively, over FY21-FY23E. We maintain BUY on the stock with a revised target price of Rs660 (earlier: Rs505), valuing it at 27x (vs 25x earlier) FY23E earnings due to sustained improvement in the balance sheet and growing visibility in the CPVC pipe segment.

* Higher PVC prices and growth traction in CPVC pipes drive an impressive 25.7% YoY volume growth:

PPF posted a strong Q4FY21 volume growth of 25.7% YoY led by higher sales of plumbing (PVC as well as CPVC pipes) and SWR pipes. Higher PVC prices and recent price hikes in CPVC led to a sharp increase in revenues by 76.7% to Rs7.6bn (I-Sec: Rs6.3bn). With the company expected to witness strong growth traction in CPVC pipes led by cross-selling opportunities and focus on increasing the project business along with ramp-up in Telangana capacity, we expect PPF to report 18.6%/10.2% volume/revenue CAGRs over FY21-FY23E.

* EBIDTA margin surprises positively at 19.3% (I-Sec: 17.4%):

PPF reported a sharp beat in EBITDA margin at 19.3%, up 590bps/50bps YoY/QoQ. The beat was driven by inventory gains in the PVC pipe segment to the tune of Rs300mn-350mn, sustained brand monetisation in PVC pipes, operating leverage and superior product mix. Going forward, we expect EBITDA margin (adjusted for current inventory gains in PVC pipe segment) to further improve driven by superior product mix, likely price hikes in CPVC pipes and manufacturing footprint expansion over the next two years.

* Sound balance sheet to lead to further rerating:

With the company repaying its long-term debt fully, its gross debt is now down to Rs850mn vs Rs2.6bn in Mar’20. Going forward, despite Telangana plant capex, we expect the company to generate strong FCF and deliver >25% RoCEs starting FY23E.

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