Q3 revenue growth at 24% y-o-y (19% y-o-y in 9M) was well rounded with ~27% y-o-y growth in pipes on improvement in realisation/ton (up 22% y-o-y) and consolidation of Rex. Management instituted programmes to bring Resinova into the ASTRA ethos, resulting in transient margin pressure (Q3 margin down 800 bps y-o-y). However, management indicated margin in Q4 would normalise.
Our view: ASTRA has a strong brand name, strong distribution network, wide product suite in pipes business and is headed to become a strong number #2 adhesives player. Hence ASTRA remains a scalable business model in a segment which has weak entry barriers but huge barriers to scale. It has embarked on a journey to sustainably reduce cash-conversion by 10-15 days by (i) introducing channel financing/cash & carry model reducing debtor days to 25 days (40 currently) & (ii) widening its manufacturing footprint, thereby consolidating multiple depots it currently maintains.
We expect revenue growth to sustain (~22% CAGR over FY18-21) as piping capacities come onstream and adhesive gets fully integrated into the ASTRA ethos. We see ~30% earnings growth on ~100 bps margin improvement and financial deleveraging. With lower capex requirements/working capital improvement, ASTRA would see strong cash generation which could be ploughed back for acquisitions or would result in higher payouts. However, at 38x FY21e EPS, positives are priced in; maintain Hold with TP `1,160.
