Astral Poly: Adhesives business to aid margin improvement in FY19
Astral Poly Technik posted robust quarterly numbers as GST issues waned and demand uptick was visible. While the company appeared to be on a solid wicket in pipes business as far as operational and capacity expansion plan is concerned, improved traction in adhesives was ahead of expectations.
Stellar quarterly results
Astral Poly’s standalone Q2 net sales growth of 20 percent YoY was aided by 27 percent YoY increase in volume. EBITDA margins improved considerably to 14.9 percent (+149 bps) helped by a muted increase in raw material costs. This was also aided by the start of its new PVC compounding facility in the south (Hosur) in August which reduced logistic costs.
In case of adhesives, it sprung a surprise with ~18 percent EBITDA margin. Sequential increase in volumes was visible as the adhesives facilities in both Kanpur and Santej, Gujarat plants were operational.
International operations (SEAL IT) witnessed improved traction particularly due to the induction of new machinery in US operations. Its US unit is expected to export high margin adhesives products to both UK and India from next year onwards. The company guided to double-digit EBIDTA margin for SEAL IT next fiscal.
Benefitting from conversion to CPVC pipes from PVC
One of the trends the company has benefitted from is customers’ conversion to CPVC pipes from PVC. This has been aided by a narrowed price difference between CPVC and PVC pipes from about 100 percent to just around 20 percent now.
Further, compared to other manufacturers who have higher exposure to the agriculture segment, Astral benefitted from improved demand in the industrial segment.
For the current year, Astral continues to guide for 14-15 percent EBITDA margin, which we think is quite achievable given the recent traction. Further, the company feels that the full benefit of company’s initiatives on cost savings (power plant, PVC compounding) and new capacity would be visible next year. Astral is hopeful of better margins as the contribution from high margin adhesive products adds to the topline.
Additionally, the company is looking for a pipe plant, within a year, in the eastern part of India for better geographical reach.
Next fiscal year to witness volume and margin expansion
By Q1 2019, the company is expecting new capacity in pipes division (~ 30 percent of current capacity) to be available. Further, higher contribution from both Resonova and SEAL IT divisions is expected to aid margins.
We expect the company to benefit from backward integration in pipes business. On account of this, we continue to pencil in 22 percent sales CAGR growth for 2017-19E and expect a 120 bps margin expansion over the same period.
At 41x 2019e earnings, the stock is trading at a premium to its peers. However, stock continues to be a candidate for accumulation as it witnesses tailwinds from demand for CPVC pipes backed by capacity expansion, cost savings from backward integration and the margin expansion as it successfully diversifies to other product categories.