Astral – A building materials behemoth in the making

[vc_row type=”in_container” full_screen_row_position=”middle” column_margin=”default” column_direction=”default” column_direction_tablet=”default” column_direction_phone=”default” scene_position=”center” text_color=”dark” text_align=”left” row_border_radius=”none” row_border_radius_applies=”bg” overflow=”visible” overlay_strength=”0.3″ gradient_direction=”left_to_right” shape_divider_position=”bottom” bg_image_animation=”none”][vc_column column_padding=”no-extra-padding” column_padding_tablet=”inherit” column_padding_phone=”inherit” column_padding_position=”all” column_element_spacing=”default” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” column_border_radius=”none” column_link_target=”_self” column_position=”default” gradient_direction=”left_to_right” overlay_strength=”0.3″ width=”1/1″ tablet_width_inherit=”default” tablet_text_alignment=”default” phone_text_alignment=”default” animation_type=”default” bg_image_animation=”none” border_type=”simple” column_border_width=”none” column_border_style=”solid”][vc_column_text css=”.vc_custom_1688472749951{margin-right: 16px !important;margin-left: 16px !important;border-right-width: 10px !important;border-left-width: 10px !important;}”]Astral is the leader in the CPVC piping segment and expanding into other building material businesses like adhesive, paints, and sanitary ware. Astral is the Third largest piping company with a market share of 9.6 percent. In FY23, plumbing, paints, & adhesives contributed 73 percent and 27 percent, respectively, to its revenues. It has over time expanded its plumbing and piping product range into drainage pipes, fire sprinkler pipes, etc. Astral is now well on its way to becoming a building products company with a well-diversified product range.

Recovery in sales in Q4FY23

Astral reported consolidated net revenues growth of 7.5% year-over-year at Rs. 1,512 crore in Q4FY23. This quarter saw a recovery in revenues and net profits, which had declined in the first two quarters of the financial year. The net profit growth was encouraging with a year-over-year growth of 45% at Rs 205.7 crore, which was the highest ever quarterly profit in the history of the company.

The company reported consolidated OPM at 20.5%. The plumbing business EBITDA margin stood at 22.8%, while paints and adhesives were at 15.1%. The consolidated operating profits rose by 43% year-over-year to Rs. 309 crore. Last year, the company entered the sanitaryware segment. Speaking to analysts, the management said that the rationale to enter sanitaryware and faucets was to make the brand more visible to the customer, and the distribution channel needed some more products.

FY23 was remarkable as the company recorded its highest-ever revenues at Rs 5,185.2 crore. The company was also able to double its revenues and profits compared to FY19. This growth is noteworthy as it was achieved despite a period of two years affected by the pandemic. Yet, the company has witnessed consistent growth in annual revenues over the past five years.

The management retained its earlier guidance given in FY2021 of doubling revenues over five years by FY2026. For FY2024, industry growth is estimated at 8-10% YoY, while it is expected to grow its volumes by 15-20% YoY. Over the next five years, it is targeting to grow its topline at a 15% CAGR.

One concern is that, though revenues have consistently risen over the last four years, the EBITDA margins have been falling. The EBITDA margin fell from 21.6% in FY21 to 17.0% in FY23. This drop was due to the high price of PVC raw material. Although the prices have fallen since then, the inventory of finished goods is still partially made from the higher priced PVC, adversely impacting the profitability of the pipe segment due to inventory losses.

Similarly, the high increase in raw material prices for adhesives is also impacting the profitability and demand in this segment.

The revenues from the plumbing segment grew by 4% YoY and 21% QoQ to reach Rs 1123.5 crore in Q4FY23. The volumes in the plumbing division also increased by 15% YoY and 19% QoQ, while realizations declined by 10% YoY. In the paints and adhesive business, revenues rose by 25% YoY and 14% QoQ, reaching Rs 383 crore in Q4FY23.

Expansion planned across product lines and verticals

Astral will be adding 70,000 MT capacity in Hyderabad in two phases: Phase I of 30,000 MT by H2FY2025 and Phase II of 40,000 MT by H2FY2026, with a total capex of Rs. 100 crores.

In Guwahati, they have just signed and taken over the complete premises of sheds on rent. They will start a plant for pipe production in the next two to three months. Since they have leased the plant building, the capex will be limited only to machinery. The production of 15,000 MT capacity is expected to begin by H1FY2024.

The expansion plant at Dahej for adhesives is complete and will be fully operational in two months. Astral will also be undertaking balancing expansions at existing locations.

New business verticals are picking up traction

Astral has successfully been able to scale any new product or product expansion, and that is one of the reasons for their meteoric rise. In the plumbing vertical, in the past two years, new products included fire sprinkler systems and specialized valves.

According to the management, the fire sprinkler CPVC has picked up in many markets in the last few quarters, while the valves project was a little slow because of Covid-19.

Speaking on the valves project in an analyst conference call, the CEO Sandeep Engineer said, “Especially if you see why I was passionate is that we are a country where we are net importers of valves for industrial applications, and with the vision which we have ‘make in India,’ why can’t we make it if Europe or America can make it? Today all the industrial valves, if you see in all our industries used, are coming from abroad. So that’s why I’m passionate that this thing could still replace a big market of India. The way the industry revolution is coming and the way it is used in especially water systems and products, and all. And if you see our product, especially made with the international standards, we are even above seven for that. So we took a lot of time, and we actually made a point to launch it when we are perfect. We never wanted to launch it half-heartedly. Now if you see, our valves have gone as samples to developed countries and are getting acceptance.”

Two new verticals that the company is focusing on gaining market share are sanitaryware and faucets and paints.

Astral’s rationale to enter sanitaryware and faucets was to make the brand more visible to the customer and addition of products to the distribution channel, which has accepted bathware products. The company has set up a new manufacturing plant in Jamnagar for manufacturing faucets.

Astral clocked in faucets revenue of Rs 22 crore in FY23. It has 383 showrooms/display centers and plans to add another 177 showrooms/display in the various states by the end of FY24.

The Paints business (Gem Paints) was acquired last year, and this year Astral will work on rebranding and launching of the same. The management indicated that there is no major capex required for the paints business, and it can scale from Rs 250 crore topline to Rs 700-800 crore topline without any major investment. Astral has appointed a majority of directors on the board of Gem Paints and Esha Paints (a subsidiary of Gem Paints).

Investment Rationale

The management has guided that the new products, such as tank, faucet, sanitaryware, paint, and valve, will together generate revenue of Rs 1,500 crore in the next five years. At the end of FY23, the company has a total cash balance of Rs 682 crore. The company will utilize the cash for future growth opportunities.

With the addition of new verticals and the expected growth rate of existing products at 15%, Astral could see its annual revenues double in the next five years. If this is accompanied by favorable raw material prices, margins are expected to grow at a higher pace than revenues.

Astral’s journey over the past few years has been one that has created tremendous wealth for investors. It is likely to continue this journey further with the addition of newer products and verticals like sanitaryware and paints. The stock has the potential to reach a level of 3600 per share within the next three years.

 

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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