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Plumbing segment shines; PVC prices face moderate correction

Leading plastic pipe companies reported steady volumes in 2QFY22 (3-11% growth on 2yr CAGR basis; YoY not comparable on low base) on the back of a) healthy demand from Plumbing and SWR segment, b) distribution and network expansions, c) raw material supply security and d) industry consolidation. Managements highlighted that though currently the volume growth is led by Plumbing and SWR segment, they remain optimistic on the upcoming agri season (Jan-May) on the back of healthy monsoons and positive sentiments across rural India. On profitability front, delay in price hikes offset the operating leverage benefit for pipe companies. Adjusted for the modest inventory losses and delay in price hikes, we believe underlying margins of pipe companies have improved on QoQ basis which indicates towards better product mix and pricing power. Our channel interaction suggest modest weakness in volumes in last few weeks, especially on agri front and to some extent in plumbing segment as well. Having said that, we expect a) Plumbing and SWR segment to see strong growth given healthy construction activity across India and b) the pace of consolidation to accelerate further as smaller players continue to struggle with raw material procurement, PVC resin volatility and demand volatility. We maintain BUY on Prince Pipes.

* Plumbing segment drives volume growth in 2QFY22: Prince/Astral/Supreme/Finolex pipe volumes delivered healthy performance as it grew by 11%/11%/3%/7% on 2yr CAGR basis on the back of a) healthy demand from Plumbing and SWR segment, b) distribution and network expansions, c) raw material supply security and d) industry consolidation. Management highlighted that though currently the volume growth is led by Plumbing and SWR segment, they remain optimistic on the upcoming agri season on the back of healthy monsoons and positive sentiments across rural India. Demand in Plumbing and SWR segment (c.60% of revenue) continue to improve given healthy construction activity in urban, semi-urban as well as rural areas. Industry consolidation has further intensified as smaller/unorganised players who were already facing demand volatility, PVC resin volatility and working capital crunch are further burdened with raw material supply issues.

* Delay in price hikes offset the operating leverage benefit for pipe companies: In 2Q22, EBITDA margin of Prince/Finolex expanded by 360bps/110bps QoQ respectively, while margins of Astral/Supreme contracted by 100bps/300bps QoQ respectively. EBITDA margins were under pressure in 2QFY22 due to a) modest inventory losses and b) delay of 2-3 weeks in taking price hikes in order to maintain volumes, which offset the operating leverage benefit for Plastic pipe companies. Adjusting for price hikes, we believe underlying margins of leading pipe companies have improved which indicates towards better product mix (higher mix for value added products) and better pricing power (aided by consolidation).

* PVC resin prices drops by INR 20/kg to INR 140/kg in past 1 month on global cues: Domestic PVC resin prices have dropped sharply by INR 20/kg in the past 1 month to INR 140/kg currently due to a) easing supply chain issues and b) decline in global PVC prices. Global prices have started falling from 5th Nov’21 onwards (-16% over last month) as it stands at $1,550 currently (increased by 22% over July-Dec’21; earlier it had fallen from $1,600 in May'21 to $1,270 by last week of July'21 before recovering fully). We believe global prices have started falling on the back of easing supply chain issues. While the easing of supply issues will lead to normalisation of PVC prices, reduction in PVC prices will lead to improvement in volume off-take for agri segment due to price elasticity of the rural demand (main agri season is from Jan-June). As Plumbing and SWR segment was already witnessing reasonably strong demand, we believe that healthy momentum will continue in terms of volumes (very less elastic to PVC prices).

* Companies focussing on increasing TAM, starting with storage tanks: Plastic pipe companies are aggressively focussing on innovation and adding products beyond plastic pipes/fittings, namely, plastic storage tanks, composite and industrial pipes etc. which is helping in increasing the TAM (Total addressable market) and ensuring sustainable long term growth. Players like Prince, Astral and Supreme (Finolex Industries is evaluating the tanks segment) have become very aggressive on the storage tanks segment as they plan to increase the manufacturing locations and capacity, in order to have a competitive advantage of lower freight cost (freight is a crucial cost element for tanks). All leading players are seeing encouraging response to its offering from the channel partners/customers. This can potentially be a modest growth driver over longer term for companies,

* Ongoing consolidation to intensify: Leading players believe that the Covid-19 second wave led slowdown and volatility in PVC prices is further strengthening the ongoing consolidation as smaller/regional players are facing significant raw material procurement and working capital constraints. Moreover, distributors also prefer to move from smaller players to larger players in order to ensure supply continuity. We believe large organised players with pan-India facilities continue to reap benefit of consolidation for another 1-2 years.

* Healthy recovery in demand scenario reiterates resilience of plastic pipes sector: The market size of India’s plastic pipes industry is c.INR 330bn and the industry has posted a CAGR of c.10% over last 5 years (highest growth rate in the building materials space). The industry’s products are made from resins such as PVC, CPVC, PPE and HDPE, with a variety of end-user applications across agriculture, plumbing and infrastructure sectors. This has helped it achieve superior growth vs. other building material sub-sectors, notwithstanding the fact that the real estate sector has been struggling in recent years. We believe that large plastic pipe players will deliver strong performance due to sharp improvement in demand scenario and the positives in the likes of varied end-user applications, value-added products, shift from metal to plastic pipes, ongoing consolidation and infrastructure demand in the offing keep the long-term growth story intact.

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