Plastic pipe makers may underperform in near term on Omicron stress

Weak Q3, lower PVC prices, demand uncertainty are key concerns

A muted December quarter (Q3) performance and near-term demand worries over the spread of the Omicron variant of the novel coronavirus could put pressure on the stocks of listed plastic pipe makers. What could have an incremental negative impact is falling prices of polyvinyl chloride (PVC) resins, the key component in plastic pipes.

After peak prices in October, which led to higher realisations, PVC prices have corrected about 20 per cent. After a price increase in October, PVC makers cut prices in November. Given the declining trend of prices, distributors have been de-stocking inventory. This is expected to weigh on volumes and hit the companies’ Q3 performance.

Sneha Talreja and Rohan Gupta of Edelweiss Research expect the plastic pipes industry to see a drop in volumes both year-on-year (YoY) and sequentially. Along with general market weakness in November, there was a further anticipation of a price cut, which dampened sentiment among distributors, who cut their inventory from 30 days to 15-20 days.

The muted demand and falling prices have impacted most segments and geographies. Arafat Saiyed of Reliance Securities says demand for agricultural pipes was muted in Q3 as was industrial, drainage and plumbing demand. These segments had seen robust demand over the past few quarters.

Average volumes may fall 12 per cent YoY for the sector, while the fall in revenue is expected to be 3 per cent on account of higher realisations. The impact could be lower on chlorinated PVC makers, given strong volumes and lower inventory losses. Going ahead, any further correction in PVC prices is expected to be gradual though realisations and margins will be lower in financial year 2021-22 (FY22), compared with the peak in the second half of FY21, says Reliance Securities.

Despite the concerns, brokerages are positive on the prospects of companies in the Rs 33,000-crore sector, which has grown annually by an average of 10 per cent over the FY14-21 period. There has been consolidation with the share of organised players growing from 55 per cent to 65 per cent. Market share gains over the last couple of years have been on account of supply disruptions, as smaller players haven’t been able to match the sourcing arrangements of larger companies. About 55 per cent of domestic demand for PVC resin is met with imports.

ICICI Securities expects organised players to sustain a significant portion of market share gains even as supply disruptions normalise. This is expected to be aided by higher advertising, distribution expansion and balance sheet strength that helps tide over raw material price volatility.

Among the listed companies, the stock of Astral has been the biggest gainer, rising 16 per cent since December 20, while Supreme Industries, Prince Pipes and Fittings, and Finolex Industries have seen lower single-digit gains during this period. Given the near-term worries, investors could get better entry opportunities for investment.