Fortune Scrip

Published: Jun 15, 2022
Updated: Jun 15, 2022

Riding huge CPVC pipes demand - ASTRAL LTD

As demand for products of both divisions is on the rise, the company has started growing at a fast clip. During the last 12 years, its sales turnover has expanded from Rs 402 crore in fiscal 2011 to Rs 4,304 crore, with operating profit shooting up from Rs 55 crore to Rs 638 crore and the profit at net level surging from Rs 33 crore to Rs 484 crore during this 12-year period. With this speed, Astral has emerged as the fastest growing company in the pipes and fittings segment. The compounded sales growth during the last 10 years has been at 23 per cent while the compounded profit growth works out to 29 per cent during the same period. The company’s financial position is very strong, with reserves at the end of March 2022 standing at Rs 2,316 crore – more than 115 times its equity capital of Rs 20 crore. The company is a virtually debt-free entity and its borrowings, which were around Rs 229 crore in fiscal 2017 have been reduced to just Rs 84 crore in fiscal 2022. Thus, within the next 2 to 3 years, Astral will be a totally debt-free company.

MARKETING FEAT

No doubt, the company has made rapid strides during its first quarter-century with a huge spurt in revenues and earnings and a robust balance sheet. But we have not picked this company as the Fortune Scrip for its past laurels. We strongly believe that future prospects for the company are all the more promising. Consider:

• The company has grown faster through the inorganic route; i.e., the acquisition route. It has acquired around half-a-dozen companies, but Astral’s speciality in these acquisitions is that it has also acquired the distribution channels of these companies. Now, the company is marketing its own products too through these channels — which has boosted its pace of growth. Astral has thus successfully used a strategy where many companies have miserably failed.
• With these acquisitions, the company has continuously expanded its product range, starting with plumbing and drainage systems and diversifying into adhesives with the takeover of Rasinova Chemie and Seal It Services of the UK. After taking over Prabhu Petrochemicals Pvt Ltd at a cost of Rs 51 crore, Astral entered a new growth engine in plastic storage tanks. Its subsequent acquisition of a 51 per cent stake in Gem Paints Pvt Ltd at a cost of Rs 194 crore will allow Astral to expand its product portfolio into the paints segment. The operating paint business of Gem Paints is proposed to be demerged as a wholly-owned subsidiary of Astral; viz., Esha Paints. The entire acquisition process will be completed by March 2023. An elated Astral MD Sandeep Engineer says, “The acquisition of Gem Paints will be a good addition to the product portfolio in the Astral product basket and I am confident that this will take Astral’s brand value to new heights.”
• Prospects for the CPVC pipes and fittings industry are highly promising and as Astral is the undisputed leader in the industry, its growth outlook has turned all the more robust. The Rs 21,500- crore CPVC pipes and fittings industry is growing at a fast pace. During the last five years, it has recorded the highest demand growth so far of around 20 per cent, and this pace of growth is expected to continue for the next five years. This strong demand growth is attributed to increasing urbanisation, leading to a massive need for drinking water supply and sanitation. The government’s focus on irrigation to increase agricultural productivity is also driving demand of pipes, while PVC/CPVC pipes are also being increasingly used in the real estate sector. It is expected that there will be a shortage of more than 32 million housing units, which should further spur demand for PVC and CPVC pipes.

GROWTH DRIVERS

Of late, the government has announced several new policies which can become excellent growth drivers for the piping industry. For example, the policy of ‘Housing for All’ by 2022, announced by the Prime Minister, has given a big boost to the construction of affordable houses. At the same time, the development of 100 Smart Cities and Swachh Bharat Abhiyan will give a boost to the demand for pipes.

At present, the PVC pipe industry consists of the organised sector which accounts for around 60 per cent, and the unorganised sector which meets the balance 40 per cent. The implementation of GST will support the organised pipe industry, while builders have started to prefer quality pipes, signifying a shift from the unorganised to the organised sector. At the same time, replacement of G1 (metal) pipes with CPVC pipes continues in the country, and can provide significant growth opportunities to CPVC pipes in the coming years. Astral, being the largest manufacturer of CPVC pipes in India, is well placed to capture the significant opportunities from this high-growth industry.

The Union Commerce and Industry Ministry recently imposed anti-dumping duty of 90 per cent on imported CPVC pipes from China and Korea. This step has saved domestic manufacturers like Astral from unhealthy competition and made it possible for our companies to raise their selling prices. As this measure has hit China and Korea, they have in turn increased the prices of CPVC resin which Indian companies have to import to the extent of 40 per cent of their requirements. Astral has a double advantage here, as it imports its resin component requirements from Sakisui (Japan) and will not face Chinese price pressure. At the same time, those who used to import CPVC pipes from China and Korea have turned to domestic companies like Astral. Besides, the demand for the latest products has increased rapidly. At the same time, the company finds itself in a position to raise its prices, which are easily accepted in the market.

• Thanks to Astral’s remarkable deleveraging exercise, its balance sheet is very healthy and lean with a debt/equity raito of 0.01x — steadily improving from 0.4x in 2012. This is owing to proper capital allocation and an effective working capital management, in addition to a focus on improving the margin profile along with the working capital requirement to 38 days from 52 days in fiscal 2017-18

EDGE OVER RIVALS

• The company is increasing its operational efficiency and bringing innovative products in the market, thereby building sustainable competitiveness and an edge over others. What is more, the company is continuously increasing the production of value-added products and exploring new areas for setting up its production facilities to enhance production volume in the market. International alliances with various companies have helped Astral bring new and innovative products to India at competitive prices. New joint venture partner Ramco group of Kenya has been inducted in Astral Pipes Ltd to generate greater market demand for PVC and CPVC products in the East Africa market.

SOUND SCRIP

We see bright prospects for the company going ahead, mainly on account of a large addressable market, a strong balance sheet, remarkable operational efficiency and favourable government policies. Although, during the current bearish environment, the share price has tumbled from the 52- week high of Rs 2,525 to Rs 1,635 — near the 52-week low of Rs 1602 — the stock is fundamentally very strong and discerning investors would do well to accumulate these shares in the current market crash. Investors in this scrip will reap rich rewards going ahead.