Favourable Market Dynamics and Strong Demand Should Lend Support to Prakash Pipes Limited

Market size of CPVC pipes and fittings should increase from INR45 billion in FY20 to INR103 billion by FY25E. CPVC pipes and fittings is categorised as fastest growing segment in pipes sector. Agriculture and construction sectors make up a major market for PVC pipes & fittings. Urbanisation of India should rise from 35% to 39% over this decade. This should result in higher packaging industry demand.

Prakash Pipes Limited

Prakash Pipes Limited is now a trusted brand for PVC Pipes and Fittings in market due to its utmost focus on quality. The company manufactures range of products including agri pipes, column pipes, plumbing pipes, casing pipes, SWR pipes, garden pipes and associated related fittings. The company’s products are applied in irrigation, drainage, housing and sanitation. It has entered into flexible packaging having state-of-the-art plant which conforms to ISO 22000:2005, ISO 9001:2015 and BRC standards. Prakash Pipes Limited manufactures high performance barrier films and laminates, which are applied in packaging of food, beverages, oil, personal care and pharma products. Given recent industry trends and to further make PVC and plastic division strong, Prakash Pipes Limited expanded into flexible packaging to offer complete packaging solutions to customers. 

Growth Enablers of Prakash Pipes Limited

• Strong Base Numbers Paint a Rosy Picture: During 3Q22, the company saw net sales of ~INR143 Cr. and EBITDA of ~INR19 Cr., exhibiting 12% and 20% growth against corresponding quarter of previous financial year. PAT for 3Q grew by 15% YoY to ~INR11 Cr. During 9M ended Dec 31 2021, the company has achieved net sales of ~INR442 Cr. and EBITDA of ~INR58 Cr., exhibiting 29% and 35% growth YoY. Flexible packaging division contributed to strong financial results as PVC pipe division was impacted by lower demand due to extended monsoons, ban on construction activities, COVID-19 environment and high volatility in resin prices. Flexible packaging division saw highest ever sales volume of ~3,000 MT during 3Q22, registering growth of 84% YoY. This growth stemmed from strong demand and increasing customer base in both domestic and overseas market. In 4Q22, PVC pipe division saw higher demand with stabilisation of resin prices and opening up of economy. Flexible packaging business should see strong 4Q22 as 4^th printing line is being commissioned. This is a major step to completing capacity expansion plan which the company undertook. This took total installed capacity to 19,200 MTPA. Enhanced capacity should offer existing and prospective customers confidence to commence supplies or purchase larger volumes from Prakash Pipes Limited.
• Focus Remains on CPVC Segment:  Prakash Pipes Limited added CPVC pipes & fittings in portfolio in Dec 2020 and realisations are 5% higher as compared to UPVC pipes. It focuses on increasing proportion of revenues from CPVC segment in FY22. The company is undisputed market leader in North India under Prakash brand. Its products are distributed through over 600 dealers and retail counters. It strengthened dealer franchise across markets of its presence. Business saw a rise in raw material prices, which was passed on to customers. Since the company engaged with large Indian raw material supplier in long-term agreement, it protected its resource availability and costs. Plans are there to increase revenues through deepening presence in existing markets, expanding logistical and brand economies, which should strengthen market coverage and market share.

• Flexible Packaging Business: Prakash Pipes Limited invested in equipment from country’s leading suppliers, having high manufacturing efficiency and product quality. Within only few years, it created pan-India and export presence as a result of its focus on value-added packaging segments including specialised pouches and WPP bags. Further, business was integrated backwards into manufacturing of blown PE films, printing inks and printing cylinders. The company has strong clientele and it services needs of FMCG brands including CG Group, Cornitos, Patanjali, Anmol, Cremica, Creambell, Crax, Amul and Bambino, etc. Flexible packaging business saw strong growth from INR54.18 Cr. in turnover in FY20 to INR126.81 Cr. in FY21. Growth stemmed from successive capacity expansions, new customers accretion and solid customer engagements that led to larger wallet share.
• Capitalising on Dynamics of Indian PVC Pipes & Fittings Industry: Total capacity of PVC polymers in India was ~1.64 MTPA in CY20. Industry should compound at 10% over FY24-25E to touch over INR500 billion by FY24-25E from ~INR300 billion currently. Category-wise, major part of PVC market has been dominated by pipes & fittings. This accounts for 40%+ of overall market demand. This was made up by extensive use of PVC in water distribution and underground irrigation pipes production.
• Expectations of Strong Demand: Upbeat expectations of strong demand should lend support to Prakash Pipes Limited. Rising urbanization, real estate growth and water management are some factors likely to support. Population of India should rise from 1.39 billion in CY20 to 1.52 billion by CY36 and urbanisation is likely to see a rise from ~35% to ~39% during this period. Rising income levels, growth in nuclear families and higher demand for commercial office space should continue to result in real estate growth which should result in increasing demand for PVC pipes. India uses ~2-3x water per unit of crop in comparison to agricultural nations including China, Brazil and US. India should soon make a transition from conventional flood irrigation to drip irrigation, strengthening demand for PVC pipes and fittings. 

• Sectoral Opportunities: Being 4^th largest sector in Indian economy, FMCG sector presents significant potential for flexible packaging. Sub-segments including F&B and personal care represent major end-user segments of flexible packaging within India. With this sort of market growth, flexible packaging demand should sustain growth. Demand for organised, hygiene focused and off-shelf products continue to pick up pace. India’s per capita consumption of packaging stood ~4.5 Kg against 20+ Kg in China and 42+ Kg in Germany. This exhibits attractive opportunity for the company. Considering future growth prospects in sector due to demand growth from construction and irrigation sectors, Prakash Pipes Limited undertook capacity expansion at PVC Pipe & Fittings plant. Flexible packaging sector has been categorised as one of fastest-growing segments in packaging industry. Flexible packaging market is pegged at INR456.24 billion in CY19 and should touch INR1,149.45 billion by CY25, exhibiting compounding at ~16.66%. Flexible packaging business holds strong growth potential resulting from shift in consumer preferences to branded /packaged products and strong overseas demand.

Conclusion

Business operated at ~60% capacity utilisation during FY21. Absence of panic food stocking through consumers and continued closure of schools moderated market demand, impacting flexible packaging offtake. Higher demand for convenience products was seen as portable and disposable packaging for food & beverages, electronics etc. and consumer durables industries adopted convenient packaging options. This has supported growth of flexible packaging market in India. COVID-19 pandemic had a varied impact on packaging industry. Industry segments servicing essential services like fresh and processed food, hygiene/home care products, healthcare consumables saw significant growth in flexible packaging services demand. Non-essential segments saw short-term demand contraction. Thus, well-established players were able to capitalise on opportunity as they strategically allocated their resources. Demand for PVC pipes should likely to go northwards due to resumption of economic activities, stabilisation of commodity prices and construction activities. In Apr 2021, Indian Government approved PLI scheme for food processing sector. This focused on incentive outlay of INR10,900 Cr. spanning 6 years commencing FY22.

Stock price of Prakash Pipes Limited has shown a healthy performance between Jan 1, 2021- Feb 18, 2022.  Stock of the company currently trades at ~9.2x of FY21 EPS, exhibiting a deep discount against sectoral average of ~15.43x. Growth in stock price is expected to be supported by growth of agricultural sector on one hand and FMCG consumer spending on other. Increased focus on water security, agriculture infrastructure and farm profitability for PVC pipes & fittings sector are expected to support these sectors. By virtue of large addressable market, lesser debt burden and accruals deployment in business growth, Prakash Pipes Limited expects to compound revenues by ~20% over next 2 years and generate reasonable growth. The company focuses on increasing market presence which should stem from expansion of customer base, strengthening of dealer network and penetration into new markets. Thus, investors can consider going long on this stock. 

·        Sectoral Opportunities: Being 4^th largest sector in Indian economy, FMCG sector presents significant potential for flexible packaging. Sub-segments including F&B and personal care represent major end-user segments of flexible packaging within India. With this sort of market growth, flexible packaging demand should sustain growth. Demand for organised, hygiene focused and off-shelf products continue to pick up pace. India’s per capita consumption of packaging stood ~4.5 Kg against 20+ Kg in China and 42+ Kg in Germany. This exhibits attractive opportunity for the company. Considering future growth prospects in sector due to demand growth from construction and irrigation sectors, Prakash Pipes Limited undertook capacity expansion at PVC Pipe & Fittings plant. Flexible packaging sector has been categorised as one of fastest-growing segments in packaging industry. Flexible packaging market is pegged at INR456.24 billion in CY19 and should touch INR1,149.45 billion by CY25, exhibiting compounding at ~16.66%. Flexible packaging business holds strong growth potential resulting from shift in consumer preferences to branded /packaged products and strong overseas demand.

Conclusion

Business operated at ~60% capacity utilisation during FY21. Absence of panic food stocking through consumers and continued closure of schools moderated market demand, impacting flexible packaging offtake. Higher demand for convenience products was seen as portable and disposable packaging for food & beverages, electronics etc. and consumer durables industries adopted convenient packaging options. This has supported growth of flexible packaging market in India. COVID-19 pandemic had a varied impact on packaging industry. Industry segments servicing essential services like fresh and processed food, hygiene/home care products, healthcare consumables saw significant growth in flexible packaging services demand. Non-essential segments saw short-term demand contraction. Thus, well-established players were able to capitalise on opportunity as they strategically allocated their resources. Demand for PVC pipes should likely to go northwards due to resumption of economic activities, stabilisation of commodity prices and construction activities. In Apr 2021, Indian Government approved PLI scheme for food processing sector. This focused on incentive outlay of INR10,900 Cr. spanning 6 years commencing FY22.

Stock price of Prakash Pipes Limited has shown a healthy performance between Jan 1, 2021- Feb 18, 2022.  Stock of the company currently trades at ~9.2x of FY21 EPS, exhibiting a deep discount against sectoral average of ~15.43x. Growth in stock price is expected to be supported by growth of agricultural sector on one hand and FMCG consumer spending on other. Increased focus on water security, agriculture infrastructure and farm profitability for PVC pipes & fittings sector are expected to support these sectors. By virtue of large addressable market, lesser debt burden and accruals deployment in business growth, Prakash Pipes Limited expects to compound revenues by ~20% over next 2 years and generate reasonable growth. The company focuses on increasing market presence which should stem from expansion of customer base, strengthening of dealer network and penetration into new markets. Thus, investors can consider going long on this stock. 

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