Are pipe companies a good investment idea?

Shares of pipe companies Supreme Industries, Astral Poly Technik and Finolex Industries rose on Tuesday after the global brokerage firm Jefferies initiated the coverage on them with a 'buy' rating. 

Shares of Astral Poly Technik climbed as much as 1.75 in the intraday trade while those of Supreme Industries and Finolex Industries surged 2.60 per cent and 1.68 per cent, respectively.  

"We believe the Indian pipes industry is well-poised for a multi-year dream run, bolstered by the government's impetus for agriculture, housing & infrastructure, coupled with a fillip to organized volumes, courtesy GST and E-Way Bill. Also, buttressing growth is the value-added product diversification embarked upon by key players, to enhance their profitability," the brokerage added. 

Jefferies noted that post GST implementation, the Indian plastic industry is gradually witnessing demand traction from unorganised players and it expects this trend to accelerate post the implementation of E-Way Bill, formalising inter-state and intra-state transportation of goods. Hence, key players with established capabilities should benefit the most from this transition.

The brokerage has set Astral Poly Technik's target price at Rs 1,090, while that of Finolex Industries and Supreme Industries has been set at Rs 690 and Rs 1,350, respectively. It noted that the key trigger for initiating the coverage with a 'buy' rating was diversification into value-added sales streams (adhesives, packaging, consumer products, CPVC pipes etc.) which command premium valuations over pure-play PVC pipes. Companies showcasing superior growth prospects with stringent financial discipline should sustain valuations, a premium to most peers in the sector. 

TABLE - VALUATION

"We view the recent market crash as a good opportunity to enter such quality stocks. While NSE Mid Cap and NSE Small Cap indices have corrected by 15 per cent and 20 per cent on MoM basis, Astral, Finolex and Supreme Industries have declined by 25 per cent/13 per cent,/16 per cent respectively, leaving them within 5-10 per cent of their five-year average and 30-40 per cent lower than YTD peaks."

Gaurang Shah, Head of Research at Geojit Financial Services, agrees. "We have been positive on Finolex and Supreme Industries for last three-four years. We believe it's a very good idea to invest in proxy plays of real estate because they have a good new order market and secondly, they have a great replacement market also. Hence, investors with a long-term view should buy these stocks," Shah added. 

On a year-to-date (YTD) basis, Astral Poly Technik has risen 2.30 per cent, while Finolex and Supreme Industries have fallen 23 per cent and 0.24 per cent, respectively. The BSE Midcap and BSE Small Cap indices have plunged 23.56 per cent and 30 per cent, respectively.

However, AK Prabhakar, Head of Research at IDBI Capital, doesn't agree. He explains that pipe companies are crude-related ones and high crude prices will have a negative impact on these companies. So, they are not a good buy at the present levels. If they correct another 15 per cent, then one can consider. "I am not positive. All consumption companies are facing a lot of selling pressure. So, I would avoid any fresh buys in consumption space because these stocks are very expensive. Neelkamal, Astral all are very expensive. Yes, the company (Astral) was consistent in their growth, but the stock has not corrected to the desired level. Hence, I don't see value in these stocks, now. I would wait for another 1-2 months, till crude doesn't stabilise. I will not buy crude where crude is the derivative," he puts up firmly.