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Beat on volume front but sharp knock on profitability!

Result Synopsis

Prince Pipes & Fittings Ltd (PRINCPIP) reported a weak set of numbers in Q2FY25. Though volumes increased by 4%YoY to 43,301Te, which was above our estimates, and the same better than the listed peers, but 2-year CAGR stood at 6%, which is meaningfully below industry average. Volumes were impacted due to extended monsoons and sharp fall in PVC prices, which led to dealer destocking. However, growth of 4%YoY was primarily led by plumbing & SWR segment. ASP remained steady at Rs144/Kg despite falling PVC prices on account of better product-mix. Incrementally, margins declined sharply & EBITDA/Kg came in at Rs10.6 (8-quarter low profitability) Vs Rs22.7 (incl inventory gain)/Rs13.8 in Q2FY24/Q1FY25 respectively owing to higher input cost led by inventory build-up, inventory loss of Rs120-150Mn during Q2FY25 and Rs30-40Mn loss for bathware biz. For H1FY25, company’s volumes increased by 9%YoY to 85,481Te with ASP of Rs143/Kg and EBITDA/Kg of Rs12. Working capital expanded to 93-days Vs 80-days in previous quarter largely due to higher inventory days that was 88-days Vs 70-days in Q1FY25.

Management Guidance

Management guided for 8-10%YoY volume growth of FY25 Vs earlier guidance of 15% and for EBITDA margins, company expects to deliver 12% without any inventory losses. For bathware company aims to end FY25 at Rs250Mn. Company expects Bihar plant to commence operations from Q4FY25 with an initial capacity of 55,000Te & this should enable PRINCPIP to grow rapidly in east-India.

Our View

Owing to sluggish growth in H1FY25, we have revised our volume growth estimate for FY25 from 15% to 10%. However major cut in our EPS is driven by lower EBITDA/Kg, which we expect to come in at Rs14/Kg Vs earlier est of 17.5/Kg. Going forward, H2FY25 is expected to be better owing to commencement of restocking at dealer level with improvement in PVC prices coupled with better plumbing and infra demand. We expect pipe volumes to grow by 13%CAGR over FY24-FY27E. However, we reckon, in order to gain volume share company’s profitability could remain undercheck, hence, we expect EBITDA/Kg to come in at Rs15.5/Rs16.5 for FY26E/FY27E respectively. Bathware segment is likely to grow gradually & the same will contribute to profitability post FY27E onwards. Hence, we expect Revenue/EBITDA/PAT to grow by 14%/11%/12% (adjusted for exceptional gain in FY24) respectively over FY24-FY27E.

Given the recent correction in stock price & roll-over to FY27E, PRINCPIP trades at P/E(x) of 22x on FY27E EPS of Rs21. We continue to value the company at P/E(x) of 30x on FY27E EPS, arriving at a target price of Rs623, implying an upside of 34%. Hence, we assign a BUY rating to the stock.

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