Near term margins may remain subdued for Astral, high valuation weighs

The company underperformed peers on the volume front in Q2, though margin impact was lower given value-added mix

The stock of the country's largest plastic pipe maker by market capitalisation, Astral shed 6.7 per cent over the last three trading sessions as brokerages cut their earnings estimates on the back of weak volumes and margin miss in the September quarter. Brokerages believe that the softening polyvinyl chloride (PVC) prices are expected to impact its margins in the December quarter as well.

Consolidated revenues fell 2 per cent YoY and was dragged down by the plumbing segment (72 per cent of revenues) which fell 11 per cent. The company underperformed its peers on the volume front posting a 4 per cent decline y-o-y (as compared to volume growth by competitors) due to destocking by channel partners. However, it had a higher base as compared to competition. Barring Prince Pipes which posted a 10 per cent volume decline, other players posted better volumes with Supreme Industries and Finolex Industries registering a growth of 7-9 per cent.

The impact at the operating level was higher. Consolidated operating profit was down 32 per cent and missed street estimates by 15 per cent largely due to the 36 per cent fall in the plumbing segment. This was on account of a hit to gross margins, lower volumes and inventory losses.

Operating profit margins were down by 520 basis points due to inventory loss of Rs 45 crore, higher advertising and promotional spends given launches in the faucets and sanitaryware business and rise in employee costs. Segment level margins of the plumbing business was down by 540 basis points to 10 per cent on decline in PVC prices by about Rs 30 per kilogram.

Though margin pressures were high, Ruchitaa Maheshwari of BOB Capital Markets, points out that the company is better placed than peers given a better value added product mix and higher contribution of chlorinated PVC or CPVC which has higher profitability. While Astral’s plumbing margins were at 10 per cent, Supreme Industries plastic pipe margins were at 1.9 per cent, while Finolex had a loss at the operating level.

With most of the high cost inventory getting absorbed over the last six months there would be limited impact on profitability in the current quarter and the management expects a revival in the March quarter. The company has guided for double-digit growth in volumes in the current year.

Most brokerages have cut the earnings estimates by up to 9 per cent for the current year and have a hold rating given near term margin pressures and high valuations. While the management remained confident of high teens growth in core businesses as well as new businesses to contribute meaningfully in near term, IDBI Capital is skeptical about margins and believe that incremental growth may come at a cost, denting operating margins.

At the current price, the stock is trading at 58 times its FY24 earnings estimates. Investors should await clarity on PVC pricing, margin trends as well as a better entry point before considering the stock.