Near-term growth on market share gains to remain robust for Astral Poly

Valuations, PVC price moderation may, however, keep the stock under pressure

After gaining 42 per cent between January and mid-March, the Astral Poly Technik stock has lost steam over the last month, shedding some of the gains. Wh­ile the outlook for the plastic pipe major remains strong, expected correction in polyvinyl chloride (PVC) prices and high valuations are weighing on the stock.

The prices of PVC have almost doubled from the lows of last year because of global supply shortages and are currently hovering at Rs 130 per kg. This has led to higher realisation and inventory gains for companies in the sector. Analysts, however, believe that the sharp rise in PVC prices is unlikely to sustain in the medium term. The March quarter results and management commentary on pricing will be key. 

Analysts at ICICI Research expect plastic pipe players such as Supreme Industries and Astral Poly to post strong volume growth in the 21-23 per cent range on a favourable base and market share gains from the unorganised market and regional players. Pre-buying given the rising input prices may also have contributed to volume growth. They expect consolidated sales to grow 36 per cent on a low base and dealer additions in the adhesives business. Operating profit margins are expected to rise by 180 basis points year-on-year (YoY) to 19.7 per cent. Investors will be watchful about margin impact from PVC prices and the newer businesses such as tanks. 

While valuations have corrected a bit, analysts remain bullish about the prospects of the PVC pipe sector. Reliance Research expects the sector to post 10 per cent annual growth over the FY20-25 period and hit the Rs 50,000 crore-mark by FY25. The growth will be led by government initiatives like housing for all by 2022, Nal se Jal by 2024, Project AMRUT, and Swachh Bharat Mission. While demand from the real estate sector has been strong, expiry of government concessions and tax relief on volumes will need to be seen. 

At the current price, the stock is trading at 69 times its FY22 earnings estimates as compared to 36 times for Supreme Industries. Though the prospects are strong and execution track record of Astral is exemplary, the valuation gap with peers is still very high. Await further corrections before considering the stock.