EQUITY RESEARCH: ASTRAL LIMITED

Astral Limited, previously Astral Poly Technik Limited, is an India-based pipe organisation. The Company is engaged in manufacturing plumbing and drainage structures. The Company and its subsidiaries are engaged within the enterprise of producing and trading of pipes, fittings and adhesive solutions. Its product variety consists of plumbing pipe & fittings, insulation tube, industrial pipes & fittings, sewerage drainage pipes & fittings, fire sprinklers pipes & fittings, ancillary products, agriculture pipes & fittings, cable safety, urban infrastructure and surface drainage gadget. The Company gives numerous products below its product variety, inclusive of Astral chlorinated polyvinyl chloride (CPVC) PRO, Astral Pex-a PRO, Astral Aquarius unplasticized polyvinyl chloride (uPVC), Astral INSUPro, Astral Chem PRO, Astral Aquarius Plus, Astral Fire Pro, Astral clamps and hangers, Astral Borewell, Astral Casewell, Geo Rex, Astral Aqua Rex, Astral WireGuard, Astral MultiRex and Telerex.

ABOUT: 

• Astral Ltd., established in 1996, operates in the dynamic sphere of manufacturing and trading, specializing in pipes, fittings, adhesive solutions, and infrastructure products. The company also oversees a group of subsidiaries, which include ABPL (100% ownership), Resinova Chemie Ltd. (97.45% ownership), APL Kenya (50% ownership), Seal IT USA (100% ownership), Seal IT UK (95% ownership), and Gem Paints (51% ownership). Astral Ltd. has strategically expanded its footprint to over 25 countries, making its presence felt on the global stage.
• Astral Ltd. is renowned for its position as one of the fastest-growing and leading companies in the realm of building materials. The company boasts a diverse product portfolio encompassing seven key categories, namely pipes and fittings, water tanks, adhesives and sealants, infrastructure products, faucets and sanitary ware, paints, and specialized valves.
• Within the domestic market, the Astral group has established itself as a market leader in the niche segment of CPVC pipes and fittings. It derives its competitive edge from pioneering the introduction of such innovative products in the Indian market.
• The company's operational prowess is underpinned by a robust infrastructure comprising 22 manufacturing units, categorized as follows: pipes (9 units), adhesives and sealants (5 units), water tanks (5 units), and paints (3 units). The cumulative production capacity of these units amounts to 4,27,611 metric tons per annum (mtpa), with pipes and water tanks accounting for 2,90,176 mtpa, adhesives and sealants contributing 1,01,435 mtpa, and paints constituting 36,000 mtpa. Astral Ltd. has effectively harnessed its vast production capacity to meet market demands.
• In addition, the company has cultivated a formidable distribution network comprising over 1,93,000 dealers and more than 2,778 distributors, reinforcing its strong market presence and accessibility.

SHAREHOLDING PATTERN:

MANAGEMENT:

• Sandeep P Engineer, the Chairman and Managing Director, stands as the visionary founder and a pivotal figure within the company's leadership.
• Jagruti S Engineer is another significant presence within the promoter group, contributing to the company's strategic direction.
• In a notable move, Mr. Kairav Engineer, a member of the promoter group, has been appointed as the Whole Time Key Managerial Personnel of the company for a substantial period of 5 years, commencing from July 1, 2023.
• Furthermore, Mr. Hiranand Savlani has undergone a re-designation, taking on the additional role of Whole Time Director, while concurrently serving as the Chief Financial Officer of the company, effective from July 1, 2023.
• The management's unwavering commitment is directed towards fostering a culture of continuous innovation, thus expanding their already diverse product portfolio. This pursuit is closely accompanied by a concerted effort to enhance the reach of their distribution network.
• The management's primary focus remains on driving product innovation, exploring opportunities in adjacent market segments, embracing emerging technologies, and bolstering the dealer and distribution network. Furthermore, a dedicated emphasis is placed on optimizing working capital to ensure financial efficiency and sustainability.

SECTOR:

• Pipe Industry: The significant growth drivers for the pipe industry encompass a range of factors, including the government's substantial investment in infrastructure, the burgeoning construction sector, increased industrial production, advancements in the irrigation industry, and the imperative need for replacing aging pipelines, among others.
• Government initiatives such as the Pradhan Mantri Awas Yojana, Smart Cities Mission, Pradhan Mantri Krishi Sinchayee Yojana, and Housing for All, Nal se Jal have indeed been instrumental in propelling the Indian plastic pipe industry towards greater heights.
• The unorganized sector still retains a substantial market share in the plastic pipe industry, accounting for approximately 35%-40%. Nevertheless, unorganized players continue to grapple with challenges, which is expected to foster market share expansion for organized players. Hence, industry consolidation is likely to persist in the near to medium term.
• The sector is inherently susceptible to fluctuations in raw material prices, as major raw materials, such as PVC and CPVC resins, are intricately linked to global crude oil prices.
• Adhesives & Sealants Industry: The adhesives and sealants industry is poised for significant growth, underpinned by an expanding population base, rising per capita income, the ever-increasing wave of urbanization and industrialization, and the unwavering commitment of the Government of India to initiatives such as 'Housing for All,' the 'Smart Cities Mission,' and robust support for infrastructural development.
• A paramount emphasis is being placed on enhancing the performance of protective coatings, ushering in multipurpose and hybrid coatings, and promoting eco-friendly advanced products like nano-coatings and green coatings.
• Unorganized regional players are expected to continue ceding market share, as industry consolidation trends remain steadfast over the coming years.

FINANCIALS:

• In fiscal year 2023, Astral witnessed a robust growth in net sales, reaching ₹5,158 crore, marking a substantial 17% year-on-year increase. This remarkable revenue growth extended across both of the company's core segments, with the plumbing segment recording a commendable 12% year-on-year growth and the paints & adhesives segment exhibiting an impressive 35% year-on-year increase.
• In the first quarter of fiscal year 2024, net sales amounted to ₹1,283 crore, marking a steady 6% year-on-year growth. Similar to the previous fiscal year, revenue growth was evident in both the plumbing segment, which saw a 7% year-on-year rise, and the paints & adhesives segment, which posted a 2% year-on-year increase. Notably, the plumbing segment reported a remarkable 31% year-on-year growth in volumes. The adhesive segment also experienced robust volume growth.
• During the quarter, the growth in value was somewhat subdued, primarily due to a significant decline in polymer and chemical prices, which were subsequently passed on to the market.
• Looking ahead, the company anticipates that its revenue growth will be bolstered by geographical expansion, new product launches, the optimization of its distribution networks, market share gains (particularly in the pipe segment), and sustained demand in both segments.
• In fiscal year 2023, Astral's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) reached ₹810 crore, marking a respectable 7% year-on-year growth. This EBITDA growth was primarily driven by economies of scale and a high contribution from CPVC sales, which is a typical trend for the fourth quarter.
• In the first quarter of fiscal year 2024, EBITDA reached ₹202 crore, demonstrating a robust 17% year-on-year growth. The growth in EBITDA was facilitated by a gradual decline in CPVC and PVC prices, although the sustainability of this trend requires close monitoring. However, the growth was partly offset by increased employee expenses (up by 36% year-on-year) and other expenses (up by 30% year-on-year).
• In fiscal year 2023, Profit After Tax (PAT) amounted to ₹461 crore, reflecting a modest decline of 6% year-on-year. The PAT was influenced by higher depreciation and elevated interest costs, along with incurring exceptional expenses of ₹1.8 crore.
• In the first quarter of fiscal year 2024, PAT reached ₹119 crore, exhibiting a noteworthy 27% year-on-year growth.
• The EBITDA margin for fiscal year 2023 stood at 15.70%, reflecting a marginal contraction of 149 basis points year-on-year. In the first quarter of fiscal year 2024, the EBITDA margin was 15.71%, representing a slight expansion of 155 basis points year-on-year. Margin expansion was partly offset by inventory losses in both the PVC and CPVC segments, amounting to approximately ₹15 crore to ₹17 crore, as well as lower margins reported by the UK adhesive business. Additionally, the faucet and sanitaryware segment reported an EBITDA loss of ₹3.4 crore.
• The PAT margin in fiscal year 2023 was 8.94%, experiencing a marginal contraction of 226 basis points year-on-year. In the first quarter of fiscal year 2024, the PAT margin reached 9.30%, reflecting a notable expansion of 157 basis points year-on-year.
• For the fiscal year 2023, the company's Cash from Operations (CFO) witnessed an inflow of ₹557 crore, primarily attributed to improved operating profit. Cash Flow from Investing (CFI) saw an outflow of ₹480 crore due to investments in Property, Plant, and Equipment (PP&E) and an increase in bank deposits. Cash Flow from Financing (CFF) experienced an outflow of ₹191 crore, stemming from dividend and interest cost payments, along with repayments of borrowings. The company also made payments for acquiring non-controlling interests in a subsidiary.
• In fiscal year 2024, the company has allocated a budget of ₹350 crore for capital expenditure (capex) investments. Noteworthy capex initiatives include:

(I) Establishment of a CPVC/PVC pipes and fittings plant in Telangana, with production expected to commence by fiscal year 2024.

(II) Construction of a new greenfield plant for the pipe business in Hyderabad, with a total capacity of 70,000 metric tons (MT). The first phase, entailing the production of 30,000 MT, is set to begin in the second half of fiscal year 2025, while the remaining 40,000 MT is scheduled for production in the second half of fiscal year 2026. The estimated investment for this project is approximately ₹100 crore.

(III) Introduction of an additional 22,000 MT pipe facility in Guwahati, expected to become operational in the first half of fiscal year 2024. It's worth noting that the plant building will follow a lease model, with capex being primarily allocated to machinery.

(IV) Implementation of a third unit in Uttar Pradesh, featuring a production capacity of 50,000 MT. The first phase of this project is slated for completion by fiscal year 2025, with the second phase following in fiscal year 2026.

In fiscal year 2023, the asset turnover ratio stood at 1.33x. During this period, the plumbing segment reported a capacity utilization rate of approximately 60%. The management anticipates a substantial increase in capacity utilization following the completion of decentralization work.

KEY CONCERNS:

• A sustained reduction in the scale of operations, resulting in total operating income (TOI) falling below ₹3,500 crore, accompanied by a persistent decline in the PBILDT (Profit Before Interest, Taxes, Depreciation, and Amortization) margin to below 15% and the return on capital employed (ROCE) dropping below 18%.

• Engaging in significant debt-funded capital expenditures or acquisitions that lead to a deterioration in the total outside liabilities (TOL) to net worth (TNW) ratio, exceeding 0.75x, and the total debt to PBILDT ratio, net of cash and liquid investments, exceeding 1.0x, along with a substantial reduction in available liquidity.

• An extension of the company's operating cycle beyond 80 days, resulting in adverse effects on cash flow from operations and liquidity.

• Undertaking unrelated diversification initiatives that have an adverse impact on the company's overall creditworthiness.

KEY FEATURES & VALUATION

• The company remains committed to its previous guidance provided in fiscal year 2021, aiming to double its revenues within a span of five years, reaching this milestone by fiscal year 2026. It foresees the generation of approximately ₹1,500 crore from new products in the upcoming 4-5 years, a substantial achievement considering it has already realized ₹400 crore from these innovations in the current year.
• In fiscal year 2024, the company aspires to not only outperform the pipe industry but also achieve a noteworthy volume growth ranging between 15% and 20%. This growth will be predominantly driven by the launch of new products and an expansion into diverse geographical markets. Furthermore, for the adhesive business, it envisions a growth rate exceeding 20%.
• The company holds the expectation of maintaining robust margins, specifically within the range of 16% to 18% in the plastic segment. Additionally, it is geared towards attaining mid-teen margins in fiscal year 2024 within the sanitaryware and faucets business.
• An exciting development on the horizon is the comprehensive launch of the company's faucet and sanitary segment, with a strategic initial focus on Western markets. Over the next few months, the company anticipates that nearly 100% of its faucets will be produced in-house.
• The company is committed to establishing a minimum of 500 showroom display centers by the end of the fiscal year. While the primary focus is on the retail sector, the company also plans to target project-based business opportunities.
• In terms of expanding its global presence, the company is actively exploring the export of its valves to Europe and certain parts of America. According to the management, the valves business presents a significant opportunity, potentially exceeding ₹100 crore in the coming 1-2 years, with the added benefit of improved margins.
• Looking ahead, the company's growth trajectory will be underpinned by the introduction of innovative products, a renewed emphasis on branding, an expansive distribution network, and an ongoing commitment to capacity expansion. These strategic pillars are expected to drive continued success and deliver an improved overall performance. We recommend BUY recommendation, with a target price of 2200.

SOURCE:

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