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Volume moderates; PVC prices key monitorable 

Leading plastic pipe companies reported modest volume growth in 4QFY22 (c. 4% growth, 3-year CAGR). Pipes realisation grew in high single digits (c. 15-18% growth, 3-year CAGR) on the back of a) price hikes due to rising PVC prices ,and b) favourable product mix, and healthy mix from Plumbing and SWR segments. However, on the profitability front, delay in price hikes offset the operating leverage benefit for pipe companies. Companies are optimistic on future growth and have guided for c. 15% volume growth in FY23 on the back of a) healthy demand from Plumbing and SWR segment, b) distribution expansion and c) raw material supply security. Given the correction in PVC prices of c. INR 20/kg since Apr’22 to INR 123/kg following easing of the global supply situation, we expect primary sales in 1QFY23 to be slightly impacted as the channel works with lower inventories during a declining price regime. We maintain BUY on Prince Pipes as steady plumbing demand growth coupled with recovery in agri segment would help it tide over near-term weakness.

* Plumbing segment drives volume growth in 4QFY22; delay in price hikes shrinks margins: Prince/Astral/Supreme/Finolex pipe volumes were subdued, growing by 5%/7%/5%/-1% (3-year CAGR) respectively as healthy demand from Plumbing and SWR segments was offset by weak demand from the agriculture segment, though companies continue to remain optimistic on agri demand. On the profitability front, EBITDA margin of Prince/Astral/Supreme/Finolex contracted by 370bps/610bps/1100bps/1620bps YoY and 110bps/230bps/310bps/750bps QoQ respectively due to delay of 2-3 weeks in hiking price in order to maintain volumes, which negated the benefit of the operating leverage

* Correction in PVC resin prices (c. INR 20/kg since Apr’22), higher inventories a concern: Domestic PVC resin prices have dipped by INR 20/kg since Apr’22 to INR 123/kg currently due to the decline in global PVC prices (easing supply chain issues). Global prices fell 10% from Apr’22 to $1,320/t (-29% from the Nov’21 peak of $1,850). Companies such as Prince and Supreme are currently having higher than usual inventories (Prince: 85 days vs. 40 days as of Mar’21; Supreme: 59 days vs. 44 days as of Mar’21), which will lead to inventory loss in 1QFY23. Having said that, the management has guided for normalisation of inventories in 1QFY23. Reduction in PVC prices can lead to improvement in volume off-take in the agri segment due to price elasticity of rural demand, though it will be visible only in the next season (Feb-Jun’23).

* Companies focussing on increasing TAM; Astral enters into Paints and Bathware segment: 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 such as Prince, Astral, and Supreme have already added storage tanks to their product portfolio and have started clocking revenue. All leading players are seeing encouraging response to their offerings from channel partners/customers given the channel overlap and favourable competitive scenario. This can potentially be a modest growth driver over the longer term for companies. Besides this, Astral has further diversified its product offerings and has entered into the paints and bathware segments, thus increasing its addressable market size (Paints estimated market size is c. INR 550bn).

* On-going consolidation strengthening leading players: The Covid-19 second wave-led slowdown and volatility in PVC prices is further strengthening the on-going 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 will continue to reap the benefits of consolidation for another 1-2 years.

* Demand recovery in FY22 reiterates resilience of plastic pipes sector: Leading plastic pipes companies reported strong revenue growth of c. 14-29% (3-year CAGR) in FY22 led by higher realisations (14-18%, 3-year CAGR). Despite several disruptions, Covid-19 and volatility in PVC prices, leading plastic pipes manufacturers have shown resilience. We believe that large plastic pipe players will deliver strong performance in the medium term due to improvement in demand and positives such as varied end-user applications, valueadded products, shift from metal to plastic pipes, on-going consolidation, and infrastructure demand.

* We have a BUY rating on Prince Pipes with a Mar’23 TP of INR 770 (30x Mar’24E EPS).

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