Home construction: Analysts bet on pipe makers; wary on tile, paint segment

The combined market size of the building material sector could touch Rs 2.7 trillion by FY26 from Rs 1.3 trillion in FY22

Despite expectations of a pick-up in construction activity during the seasonally strong January-March quarter (Q4), analysts are cautiously optimistic on the building material sector – encompassing paints, pipes, wood panels, tiles, metals, and cement – as volatile input costs, coupled with fears of a global slowdown, is making demand projections uncertain.

Against this backdrop, analysts suggest investors stay selective in the space and pick stocks of companies with stronger brand recall, expanding distribution networks, diversified product profiles, healthier balance-sheets, and sustainable cash flows.

"The government’s various proposals under Budget 2023 may lead to the building material growing between 8 and 12 per cent for the next five years. However, disruptions in the supply chain, a rise in the price of key input materials, a slowdown in domestic real estate, a delay in commissioning or a slower ramp-up of newer capacities could delay growth," said Anil Rego, founder and fund manager at Right Horizons.

Meanwhile, the budgetary allocation towards capital expenditure was raised to Rs 10 trillion for financial year 2023-24 (FY), up from Rs 7.5 trillion for FY23. Allocation towards Affordable Housing via Pradhan Mantri Awas Yojana (PMAY), too, was pushed upwards to Rs 79,000 crore for FY24 from Rs 48,000 crore for FY23.

According to a report by Prabhudas Lilladher, the Indian real estate sector grew at 10 per cent CAGR from $50 billion in 2008 to $120 billion in 2017, and is expected to see 17.7 per cent compounded annual growth (CAGR) to $1 trillion by 2030.

As the demand for home building materials are directly correlated to real estate market’s growth, the combined market size of the allied sector could touch Rs 2.7 trillion by FY26 from Rs 1.3 trillion in FY22, the brokerage said.

However, volatile input costs amid renewed geopolitical tensions may cloud near-term outlook.

Among the lot, plastic pipe companies are the most preferred pick across brokerages as companies are aggressively focusing on innovation, product launches, and market opportunities beyond plastic pipes and fittings.

Astral Pipe has entered into the bathware industry, which has a market size of Rs 15,000 crore vs plastic pipes market size of Rs 38,500 crore). Prince Pipes, too, has guided for the launch of its Bathware product portfolio by March-April, 2023.

"Organized players account for 67 per cent of the total plastic pipe market. Industry grew at 10-12 per cent CAGR between FY15-20, with demand likely to expand at 12-14 per cent CAGR between FY21-25 to reach more than Rs 60,000 crore by FY25 amid increase in government spending for irrigation, Water Supply and Sanitation projects, urban infrastructure, and replacement demand. Thus, we initiate coverage on Astral, Finolex Industries, Prince Pipe, and Supreme Industries with a ‘Buy’ rating," said Prabhudas Lilladher.

Moreover, the strong growth in fixed asset investment upcycle across the industrial, infrastructure, and residential end markets, as per Shrinidhi Karlekar of HSBC, will drive double digit revenue growth for Polycab India, and KEI Industries, within the cables and wires segment, in CY23 and FY24.

Metals, too, remain a bright spot as prices of coking coal, one of the key input raw materials, have plunged over the last few days with easing supply concerns.

"Demand for long steel has remained firm on the back of the government's push to fast-track infrastructure projects. As Indian markets slowly scout European markets, post the roll back of export duty and constraints faced by Turkey (post the earthquake) to supply to European markets, the near-term outlook seems to be positive with price hikes expected in the coming weeks," said Motilal Oswal Financial Services. It has 'neutral' rating on Tata Steel, JSW Steel, and Vedanta, and 'buy' on Hindalco, and Jindal Steel and Power.

That said, analysts remain cautious in the cement, wood panel, and tile space as elevated input costs, and weak export markets, may dent sustainable volume and margin recovery.