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Strong volume growth; weak margins…

About the stock: Astral is the leader in the CPVC piping segment and expanding into the adhesive business.

* Astral is the third largest piping company with a value market share of 9%. Piping, adhesive contribute 76%, 24%, respectively, to topline

* Healthy balance sheet reflected in strong return ratios (RoE: ~21.5%, RoCE: ~27.5%)

Q2FY22 Results: Better-than-expected performance from both piping and adhesive business. High raw material costs weigh on margins.

* Consolidated revenue growth of 55% YoY to | 1154 crore; piping segment reported strong volume, value growth of 20%, 62% respectively

* Gross margin declined 510 bps YoY. Cost savings measures restricted EBITDA margin fall to 90 bps YoY at 18.3%

* PAT jumped 63% YoY to | 143 crore tracking strong topline growth

What should investors do? Astral’s share price has grown by ~7.5x over the past five years (from ~| 965 in November 2016 to ~| 2270 levels in November 2021).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We introduce FY24E estimates and roll over our valuation on FY24E. We value Astral at | 2375 i.e. 65x P/E on FY24E EPS.

Key triggers for future price performance:

* Pick-up in housing sales and construction activities will augment growth in both pipes and adhesives

* Capacity addition (at 7% CAGR by FY24), launch of new products (water tank, valve) will help drive revenue of piping business

* Launch of new products and dealer addition in the adhesive business will drive segment revenue at CAGR of 30% in FY21-24

Alternate Stock Idea: We also like Supreme Industries in our coverage universe.

* Supreme is market leader in plastic piping segment with ~14% market share. Robust b/s with average RoE, RoCE of 24%, 27%, respectively

* BUY with a target price of | 2740

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