Growth in the adhesive segment is likely to be back-ended in FY20 due to the shift currently happening from a stockist model to a distribution-led model.
We believe Astral Poly Technik (ASTRA) is likely to garner a sizeable market share in the pipe segment considering the weakening of competitive intensity in the near term. This, along with the rising trend of PVC prices (since May’19) and sustained buoyancy in demand for PVC, CPVC as well as DWC pipes, is likely to aid strong volume growth. Standalone margins too are likely to remain firm aided by operating leverage, inventory gains and traction in DWC pipe margins.
Growth in the adhesive segment is likely to be back-ended in FY20 due to the shift currently happening from a stockist model to a distribution-led model. However, the opportunity with respect to cross-leveraging of brand, products and distribution across geographies would lead to strong earnings visibility in the adhesives segment over the next 3-5 years.
Growth optimism to lead to further rerating
Considering the higher than expected volume growth likely in the plastic pipe segment in the near term, we increase our revenue and PAT estimates by 3.1%/11.2% and 2.8%/6.5% for FY20 and FY21 respectively. We now expect ASTRA to deliver revenue and PAT CAGRs of 21.5% and 43.1% over FY19-FY21e, respectively. We assign a multiple of 35x to the standalone pipe business and 40x to the adhesive business due to strong revenue/earnings visibility in an otherwise challenging macro environment. We thus arrive at a revised SoTP target price of Rs 1,214 (earlier: Rs 1,000) and upgrade the stock to Hold from Reduce.
ASTRA likely to be biggest beneficiary of market share gains in pipe segment
The company is likely to gain a sizeable market share in the pipe segment in the near term led by: (i) weakening competition in PVC and CPVC pipes, (ii) growth traction in DWC & UDS, and (iii) increasing trend in PVC prices (May’19 onwards) leading to higher restocking at the distributor’s end and partial reversal of inventory losses incurred in Mar and Apr’19. Also, ASTRA’s widening manufacturing footprint would lead to higher growth traction. We expect ASTRA pipe business to grow at strong revenue and PAT CAGRs of 20.3% and 41.8%, over FY19-FY21e.
Growth in adhesives likely to be back-ended in FY20
ASTRA has recently initiated systemic corrections/modifications in its adhesive segment, namely: (i) shift from a stockist model to a distribution-led model, which is likely to pan out by Sep/Oct’19 there by impacting volumes in H1FY19; (ii) firmer control on receivables; and (iii) creating new verticals and heads for each segment/chemistry in adhesives. We thus expect growth to be back ended—particularly in Resinova, while growth momentum in the company’s UK and US operations is likely to continue. The expected synergies in the adhesive segment is likely to aid scale-up. We expect this segment’s revenue and PAT to grow at 21.3% and 48.5% CAGR, respectively, over FY19-FY21.