March 13, 2023
analysis123 analysis123
ASTRAL LTD, Demand and margin trends remain favourable
Call & Research Report by ICICI Securities
Sector: Plastics – Tubes/Pipes/Hoses & Fittings
CMP Rs. 1922, Target Rs. 2373 (24% upside potential)
Target Period: 12 Months
We interacted with the management of Astral Ltd (Astral) and following are the key takeaways: a) the demand trend in pipe market remains healthy in Q4FY23-TD with double-digit volume growth YoY driven by the plumbing segment; b) operating margins are expected to improve QoQ in Q4FY23 for both pipes (as inventory losses are not likely to recur in Q4 given that PVC resin prices have stabilised) and adhesives (fall in raw material prices to result in normalised margins); c) ramp-up in bathware segment (sanitaryware & faucetware) is progressing well and the company has opened ~320 showrooms/display centres as of Feb’23. According to management Astral is on track to achieve pipe volume growth and adhesive revenue growth in high double-digits YoY in FY23. We maintain our estimates and BUY rating on the stock with an unchanged Mar’24E target price of Rs2,373.
● Pipe volume demand remains healthy: Management indicated demand for PVC pipes has remained steady with YoY double-digit volume growth in Q4FY23-TD driven by the plumbing segment. However, March is a crucial month to determine overall growth in seasonally the best quarter and the management is hopeful of it being healthy. Channel inventory is now near normal levels as PVC prices have stabilised. East plant (Odisha) has started PVC pipe production, which should enable the company to have deeper penetration in the region and thus overall better volume growth. CPVC production from the East plant is expected to commence in Q1FY24 post the requisite approvals. Management indicated it is on track to achieve its guidance of high double-digit pipe volume growth in FY23. Demand for adhesives remains healthy and the company expects segmental revenue growth in high double-digits in FY23. Management stated FY24 pipe volume outlook remains buoyant with lower PVC prices and continued uptick in the housing market. We have factored-in pipe volume CAGR of 17% over FY22-FY25E.
● Margins in both pipe and adhesive segments to normalise from Q4FY23: Pipe margins are expected to normalise from Q4FY23 (post the high inventory losses in 9MFY23) as PVC resin prices have stabilised. Management believes 15-17% is a sustainable margin in pipe segment. Adhesive margins are expected to normalise to ~15% from Q4FY23 and remain steady in FY24 too as raw material prices have declined and most of the high-cost inventory was consumed in Q3FY23.
● Bathware segment scaling up: The newly-entered segment of bathware (sanitaryware and faucetware) is ramping up well and Astral has already opened ~320 showroom/display centres (another 80 are WIP) as of Feb’23. Company expects to open at least 500 showrooms/display centres by Q1FY24 (vs earlier guidance of end-FY23). We have factored-in revenue of ~Rs1,250mn in FY24E from the bathware business.
● Maintain BUY: We continue to like Astral for its strong brand, comprehensive product portfolio, wide distribution reach and robust balance sheet. We believe Astral has near- term margin and demand tailwinds in both its major businesses (pipes and adhesives). Maintain BUY with an unchanged Mar’24E target price of Rs2,373.
To study next Research Analysis.. Click
To Study our Small Cap Calls… Click
For Mutual Fund Guidance, Click chanakyaMFguidance.com