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Inventory loss, one-off expenses drag margin…

About the stock: Astral is the leader in the CPVC piping segment and expanding into the other building material business such as adhesive, paints and sanitary ware.

* Astral is the third largest piping company with a value market share of 9%. In FY22, Piping, adhesive contributed 77%, 23%, respectively, to its topline

* Healthy b/s reflected in strong return ratios (RoE: 21%, RoCE: ~27%)

Q1FY23 Results: Strong revenue growth; Inventory loss dragged EBITDA margins.

* Consolidated revenue up 73% YoY to | 1213 crore on a favourable base and consolidation of paint business. Piping and adhesive & paints segments growth came in at 74% & 72% YoY to | 876 core & | 337 crore, respectively

* EBITDA margin declined 433 bps YoY to 14.2%, mainly due to inventory losses amid volatile PVC prices

* PAT up 25% YoY to | 94 crore tracking sales growth in Q1

What should investors do? Astral’s share price has grown by ~5x over the past five years (from ~| 392 in August 2017 to ~| 1986 levels in August 2022)

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value Astral at | 2100 i.e. 58x 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, launch of new products (water tank, valve) and diversification in the sanitary ware and paint business to drive overall revenue CAGR of 22% in FY22-24E

* Price hike, improved product mix (launch of high margin valve business) will help in recovery in EBITDA margin from FY24E onwards

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

* Supreme is market leader in plastic piping segment with ~15% market share. Robust b/s with average RoE, RoCE of 24%, 27%, respectively

* BUY with a target price of | 2175

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