Finance Minister in her budget 2021 has focused on 2 key sectors: One is healthcare and another is Infrastructure.
And when you build the infrastructure, you also need to set up the piping infrastructure. And that’s where Astral Polytechnic comes into picture. So in this article, we will investigate more about Astral polytechnic and understand what is so special about this company.
We will start the fundamental analysis of Astral Polytechnic by analyzing the company and its business in detail, its future growth prospect and the financial analysis to decide if Astral Polytechnic is fundamentally strong or not. Then we will analyse the valuations of the company to decide if it is worth investing in Astral Polytechnic at current levels or not.
Company & its business
Company operates in 2 high growth business categories:
- Established in 1996, Astral Polytechnic is one of the fastest growing piping companies of India with a comprehensive range of piping and adhesive.
- Astral Poly Technik Limited (Astral) commenced its operations about 21 years ago with a strong vision of manufacturing CPVC plumbing systems in India. Today, Astral is one of India’s largest manufacturers of Chlorinated Poly Vinyl Chloride (CPVC) and Poly Vinyl Chloride (PVC) plumbing systems used across various industries.
- It is now making robust progress into the adhesives segment and infrastructure products as well.
- The Company has six pipe manufacturing facilities in India and one in Kenya. It has three adhesive and sealant manufacturing facilities in India and another two in USA and U.K, respectively.
- By adopting innovative technologies and extensive R&D, Astral Poly continues to set trends with the introduction of new product line.
- As of today, it has a market cap of Rs 31,000 Cr.
- Pumping: CPVC, PVC and Pex
- Fire protection
- Epoxy adhesive & putty
- Silicone sealant
- Construction chemicals
- Industrial adhesive
- Hand sanitizer
If we look at the revenue breakup, 77% revenue of the company for FY20 is from the Piping business and rest 23% is from the adhesive business.
Overall, on company and its business, I would rate it 10/10.
- Strong brand equity: Over the years, Astral polytechnic has created a strong brand name in the piping and adhesive category. They currently have Ranveer Singh as brand ambassador of the company.
- Product innovation & value engineering: Astral polytechnic has been an innovator in piping business. It was the 1st company to introduce CPVS piping system in 1999. 1st to launch lead free uPVC piping system in India in 2004.
- Wide & deep distribution reach: Astral polytechnic has a wide distribution network of 800+ distributors and 31,000+ dealers for piping and 1300+ distributors and 130,000 dealers for adhesives.
- Top product quality: Astral Polytechnic brands are known for its quality.
- Seamless backward integration: Astral Polytechnic not only makes the CPVC pipes but it also makes CPVC compounds which is a raw material used for pipe manufacturing. This backward integration helps the company is commanding better margins.
- World class manufacturing capabilities: Over the years, Astral Polytechnic has built a world class manufacturing capability with automated material handling and feeding system that improves the manufacturing efficiency.
If we look at the competitors of AStral Polytechnic, Supreme industries is a major competitor in the Pipe category. Other competitors include Finolex Industries and Prince Pipe. Within the adhesive segment, the biggest player in the industry is Pidilite.
Overall, on competitive strength, I would rate it 9/10.
Future growth prospects
Over the past five years, domestic plastic pipe industry has clocked a 10% CAGR and now its market size stands at ~` 30,000 crores. The major driver behind the growth is Government infrastructural spending, increasing constructions, industrial production, irrigation sector, replacement of aging pipelines, among others. Besides, its superior properties and economical cost makes plastic pipes favourable over metal pipes. Going forward, the Indian plastic pipe industry is estimated to register a 10% CAGR by 2024-25 to reach ` 500 billion.Let us look at the key trends that would drive the growth for Astral polytechnic in the future:
Consolidation in the industry: Piping industry has 35-40% unorganised players and around 60-65% organised players. Now due to COVID, several unorganised and organised players could face trouble due to liquidity issues and weak balance sheet. As a result, organised players like AStral Polytechnic with robust financials are likely to gain sizable market share.
Government Initiatives: The Government schemes such as “Housing for All” by 2022, “Nal se Jal” by 2024, project AMRUT & Swachh Bharat Mission, National Rural Drinking Water Programme, among others would boost the growth for the plastic pipe industry.
Replacement of Ageing Pipes: Traditional pipe material like iron, steel and concrete used in the cities and buildings are getting older and corroded, reducing its stability. PVC/CPVC pipes are highly recommended as replacement by the plumbers owing to its lower cost and ease of installations. Think about it. Astral polytechnic is one company that is working on replacement of the entire traditional piping infrastructure of the country. The potential is simply amazing!
Rising aspirations of middle class population: The demand for pipes is influenced by rising disposable income of the middle class population. Presently, there is a shift in terms of lifestyle changes, wherein people prefer branded and quality tiles/faucet/ceramic to renovate their homes and enhance the aesthetic appeal of bathrooms. This will in turn create demand for pipes.
If we discuss the adhesive industry, adhesives are widely used across numerous end user industries such as packaging, construction, furniture, automotive, assembly operations among others. The major demand for adhesive comes from the packaging and automotive industry in the country. Increase in disposable income levels and booming retail markets are propelling growth in packaging industry which would drive the demand for adhesives. Rapid urbanisation coupled with growing infrastructure and real estate construction projects is further projected to fuel the demand.
In the Budget 2021, the government has focused a lot on Infrastructure building. In Jal Jeevan Mission for Urban households, the government would be setting up 2.86 crore water tap connections at an outlay of Rs 2.87 lakh crore over the next five years. This would benefit plastic pipe companies with incremental demand of PVC pipes. And Astral polytechnic would be a major player for piping infrastructure. Company is already increasing its manufacturing facility in Bhubaneswar to meet the incremental demand which will be ready by March 2021.
Hence, there is immense growth potential for Astral Polytechnic in the next 5-10 years. On future growth prospects, I would rate it 10/10.
- Growth Ratio: Over the last 10 years, Astral polytechnic revenues have grown consistently from Rs 402 Cr to Rs 2,677 Cr at a fantastic CAGR of 21% and Profits have grown from Rs 32 Cr to Rs 335 Cr at a brilliant CAGR of 24%. That is an exceptional performance. Astral Poly is one of the few companies that has consistently grown in terms of revenue & profits for the last 10 years. Overall, on growth ratio, I would rate it 10/10. Hence, on growth, I would rate it 10/10.
- Profitability Ratio: Over the last 10 years, the operating margin of the company has been consistent. In fact, it has been increasing since 2016 and the recently operating profit margin stood at 18% which is great. Now if we look at the return on equity and return on capital employed which are key parameter to gauge the profitability of the company, both ROE and ROCE of Astral Poly are great. The latest ROE and ROCE is 17.5% and 23.1% respectively. In fact, since 2015, it has been on the rise. A company with both ROE and ROCE above 15% is good and 20% is great. Astral Polytechnic ROE is 17.5% and ROCE is 23.1% which is great. Hence, on profitability, I would rate it 10/10.
- Debt to equity: If we look at the debt to equity of the company, it has been falling consistently and currently at 0.06. It signifies that the company has almost negligible debts which is again great. Hence, on debt to equity, I would rate it 10/10.
- Reserves: If we look at the reserves of the company, it has been increasing consistently from Rs 136 Cr in Mar 2011 to Rs 1,595 Cr in Sep 2020 which is again brilliant.
- Promoters shareholding: If we look promoters shareholding, it is 55.74%. Over the years, both FII and DII have increased their shareholding in this company which singfies trust of financial institution in this company.
If we look at the current share price, Astral Polytechnik is trading at Rs 2030 at a PE of 110. The median PE of 3-5 years is ~65. So clearly, Astral polytechnic is trading much above its median PE which makes it overvalued. Although, one of the reasons for high PE is due to COVID which impacted the earnings of 2 quarters. The PEG ratio is 3 which is also on the higher side. In the current state of the market, many companies are trading at premium valuations. Specially if the company is fundamentally strong with solid growth prospects then it is very difficult to find it at an attractive valuation. Now when the share is commanding rich valuation, what should be the ideal strategy for investment? I would personally prefer to buy this company on a regular interval or if there is a correction in the share price, I will accumulate more. Because Astral Polytechnic is a fundamentally superstrong company with immense growth potential. And has the potential to give a multibagger return.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.