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Healthy margins offset weak volume in 1QFY27

* Prince Pipes (PRINCPIP) reported a mixed-bag performance in 1QFY27.

* Pipe volume declined 7% YoY, impacted by above-normal channel inventory in April and declining PVC prices. However, May and June experienced a healthy volume recovery.

* Despite muted volume, its consolidated revenue increased 5% YoY, driven by better realization due to price hikes taken to combat RM inflation.

* Despite low volume, its EBITDA margin was high at 12.7% (up 584bp YoY, flat QoQ) due to a superior product mix towards non-agri products and CPVC pipes. The company aims to focus on increasing the non-agri mix.

* The bathware segment reported INR130m revenue and INR50m loss.

Key highlights from the management commentary

* Despite a 7% decline in 1Q and a high base in 4Q, management guided for a 12-15% YoY volume growth in FY27, which we believe is too optimistic.

* PRINCPIP reported no inventory gain in 1Q, and a healthy EBITDA margin was a result of core operating performance.

* April was a blip month with high channel inventory and declining PVC prices. However, volume growth picked up in subsequent months and is still continuing.

* Demand for agri-pipe was severely hit by high and volatile PVC prices. The company is focusing more on increasing the plumbing segment mix.

* With greater emphasis on project sales, the company aims for a 25% revenue mix from this segment in the next few years.

* Gross debt at the end of Jun stood at INR1.2b. Net cash level was almost zero.

* Inventory is likely to be in the 65-75-day range. Debtors are expected to dip below the 30-day level with the use of channel financing aggressively.

Valuation and view

* Following the mixed-bag results in 1Q, we increase our FY27E PAT by 17%, mainly due to better-than-earlier expected margin. We expect a volume growth of only 3% in FY27 as compared to double-digit growth guided by the management (too optimistic, in our view).

* However, we maintain our estimates for FY28 with ~10% pipe volume growth and ~12% EBITDA margin expectations.

* On a low base, we now expect a CAGR of 6%/11%/30%/53% in pipe’s volume/revenue/EBITDA/PAT over FY26-28 (FY19-26: 6%/7%/3%/-1%).

* We also project a low ~10% RoE and ~13% RoCE (pre-tax) in FY28.

* Based on a reasonable valuation of ~17x FY28E P/E, we reiterate our BUY rating with an unchanged TP of INR318, based on 20x FY28E P/E.

* Healthy recoveries in volume growth and return ratios are the key factors for a valuation re-rating

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