Astral Polytechnik
Aggressive growth
Increasing penetration of its niche products and introduction of higher value added products will keep the company on high growth track
| Buy | Astral Polytechnik |
| BSE Code | 532830 |
| NSE Code | ASTRAL |
| Bloomberg | ASTRA@IN |
| Reuter | ASPT.BO |
| 52-week High/Low | Rs 235 / Rs 100 |
| Current Price | Rs 189 (as on 7th May 2008) |
Astral Polytechnik (APL) is primarily engaged in the business of Manufacturing of CPVC/PVC (Lead Free) pipes & fittings. Astral is leader in this segment of the business. It is the first and major licensee of Noveon, USA (formerly known as Specialty Chemical Division of B.F Goodrich, USA) for CPVC piping and plumbing system in India. It has entered into a techno-financial (14% stake) joint venture with Specialty Process LLC of USA, for technical expertise to manufacture CPVC pipes and fittings for home and industrial application. Currently, APL manufactures 50-60 varieties of pipes and about 250-300 kinds of fittings.
Fast paced growth
For the quarter ended March 2008, Astral registered 44% growth in revenues to Rs 46.31 crore. Various cost heard were optimally managed due to increasing scale and higher value added products in the broad range of CPVC and PVC fittings, flanges and valves, adhesive solutions for joining pipes and fittings, underground specialty fittings and CPVC and PVC plastic pipes of a larger diameter. OPM improved 150 bps to 14.4%. OP increased 60% to Rs 6.67 crore. The PAT increased by an impressive 69% to Rs 5.23 crore.
Revenue for the full year ended March 2008 increased by 40% to Rs 135.82 crore supported by increasing sales of the company’s various products. OPM improved 120 bps to 15.2%. Thus OP increased 52% to Rs 20.68 crore. Other income increased 278% to Rs 4.68 crore. As a result PBIDT increased by an impressive 71% to Rs 25.36 crore. Interest cost and depreciation increased 43% and 48% each to Rs 2.69 crore and Rs 3.26 crore. PAT soared 87% to Rs 17.07 crore. As one of the company’s plant is in Himachal Pradesh and enjoy Tax free status the effective tax rate is low at around 12%.
Aggressive market penetration strategy along with huge 189% rise in capacity expansion
Following the aggressive market penetration strategy and capitalizing on the favourable market factors, Astral is continuously increasing its production capacities.
APL had come out with IPO in February 2007 at Rs 115 per share to part finance its expansion project of existing products as also to finance manufacturing facilities of their upcoming products such as Astral underground systems, Astral Blazemaster fire sprinkler system and Astral SWR
The company has been expanding its capacity every year over last few years. In FY 2006, the company produced nearly 2470 TPA of CPVC, which got increased by 106% to 5090 TPA in FY 2007. The company can produce all the different varies of CPVC pipes with same machineries. All it needs to do is to change the dice and raw material content requirements.
Now, with the Phase I of the expansion project having been completed, the present expanded capacity stands at 9000 TPA of CPVC.
Further, to take advantage of favorable Government Policies and strengthen its distribution network in North East and also to bring about significant improvement in the bottom line, the company has continued its expansion activity for manufacturing of various sizes of fittings & pipes at its Himachal Pradesh unit.
Phase II of the expansion project is already underway. Under this expansion, the company had envisaged doubling the existing capacity to around 18500 TPA by FY 2009. However, looking at the encouraging demand for its product the company has decided to increase the capacity further.
The management sees no additional marketing or distribution cost for the new products. The company has 150 distributors and 2000 dealers across the country for its existing range of piping and fitting products. The new products, in which the company is venturing into, caters to the same housing and industrial piping markets. In fact, the new products are value added products, which has been asked for by some of the existing customers. Hence the same distributors and dealers are going to sell the new products. So there will be no additional advertisement expenditure or marketing cost for the new products, unlike the case when the company initially launched its products for the first time in India.
Dominant Parent
Just as resins are the raw material for manufacturing PVC pipes, C-resins are the raw material for manufacturing C-PVC pipes. Worldwide there are only 3 players, which have the technology to manufacture C-resins. Noveon, USA is the world’s largest supplier and manufacturer of the raw material covering 85% of the world raw material market demand. Since the other two players in Germany and Japan are small and they cater to the demand locally, there is virtually a monopoly for Noveon as far as manufacturing of raw material is concerned.
Thomson group of US, which itself is a customer of Noveon, liked the idea of manufacturing CPVC in India considering the potential of the product in the world’s second fastest growing economy. Through its investing arm, Speciality Process LCV, it invested nearly 20% of the company’s equity share capital. Post public issue, its stake got proportionately reduced to 14%. Overall the promoters including Thomson group now holds 64% of the equity share capital of the company.
The company’s products are gaining acceptance
The demand for water and its use whether on account of residential, industrial or agricultural usage has only grown due to the increase in population. Liquid transportation through Galvanised Iron (GI) pipes, copper pipes can cause corrosive surfaces, leakage etc due to its chemical properties. Any fluid including water will have different properties and effects on the materials it comes into contact with while being transported. Hence it is essential that this fluid retain its core characteristics and quality for its suitable end usage.
Globally, CPVC is replacing various traditional piping systems (Galvanized Iron (GI) or Copper tubes). India is mainly a GI user. The current size of GI Pipes in India is about Rs 2500 crore p.a.
In India a very small market is shared amongst Copper and various Plastic polymers such as PVC, CPVC, PPR, etc. CPVC has a better tensile and impact strength without UV resistance and having excellent fire retardant properties. It can be used for high-pressure application for carrying hot/cold water and carries anti scaling and corrosion properties.
APL is currently the licensee to manufacture and distribute CPVC plumbing systems for home and commercial use, under the international brand "FlowGuard" and industrial systems under the International brand "Corzan" for transportation of highly corrosive industrial chemicals. CPVC is new product for Indian markets and creating awareness is a challenge for the company. To address this problem, Astral has trained a large number of plumbers, consultants, architects, builders and contractors in India, under various workshops over a period of five years to familiarize them about the superior characteristics of CPVC. It enjoys monopoly status in the higher end products Corzan and Blazemaster in Indian markets as of now.
Considering the advantage of CPVC pipes, all the frontline organized players like DLF, Sobha, JP group, Kalpataru, Unitech, Parsvanath, etc are the customers of Astral. In every new project of these frontline players only Astral CPVC pipes and plumbing is used.
Further there is lot of replacement market also coming up apart from the demand from primary market. Hilton Towers recently placed their orders for CPVC pipes and plumbing after being fed up by the corrosion of GI pipes.
Rising prices of competitive product is a major plus point
In 1999, when the CPVC product was introduced in India it was 10% costlier vis a vis GI pipes. Hence the acceptance of the product was relatively slower. So the company was able to penetrate only the A-class builders and contractors. However with steel prices rising, the GI pipes cost also continues to rise and it has reached a stage where the company’s products have become 25% cheaper to GI pipes. Hence a lot of demand from the B-class and other builders has started.
So it has now become very easy for the company to penetrate the market. Also with income level rising, people are going for quality and what more one requires if that quality is available at a better price vis-a-vis competitive product. Further unlike the prices of GI pipes, which are difficult to predict, the prices of company’s product are steady as Noveon keeps the raw material prices stable.
As the awareness about the company’s products grow, market will continue to expand.
Venturing into high value added products apart from becoming a one stop solution provider
With a view to operate as a one-stop source for all the plastic piping systems, Astral also began trading and then subsequently manufacturing products such as CPVC and PVC fittings, flanges and valves from Spears (USA), solvent cements (adhesive solutions) for joining pipes and fittings from IPSC (USA), underground specialty fittings from Hunter (U.K) and CPVC and PVC plastic pipes of a larger diameter from Harvell Inc. (USA). Its product list also includes pipes and fittings for hot and cold water plumbing systems, CPVC industrial piping system for transportation of hazardous and highly corrosive chemicals, lead free PVC systems for cold-water application.
The company also markets ASTRAL "BlazeMaster" which is a CPVC based Fire Sprinkler system. APL has signed license agreement with Noveon Inc, USA in this regard. APL believes that there is a huge local market opening in India for fire sprinkler systems. Government has recognized the need for such system and more number of local authorities are making installations of such system in all new and old building compulsory. The product has been recently commercially produced and launched in India. APL is the first producer of such fire sprinkler system in India and second in Asia (the other manufacturer is in Taiwan). There already exists an export market in Middle East, Africa and other neighboring countries.
APL is the distributor in India for Hunter Plastics Ltd UK, a producer of underground specialty fittings. There is a lot of untapped market for underground sewerage, wastewater and rain water systems (SWR) for residential, industrial constructions, which is currently catered to by many players from unorganized sector. APL with its adherence to high quality and international standards along with collaboration from international players would be producing world-class products in SWR once the second phase of expansion is completed by mid-FY2009.
Apart from the GI market, the company has huge opportunity in the PVC market also
The company also received lot of inquiries about from the user industry of PVC pipes of the problems, which they were facing because of the lead content in such pipes. As a result of which the company has already started manufacturing PVC with Lead free content pipes. Looking at the success of its PVC without lead content product, and also considering that there is no product in between PVC and CPVC pipes the company has also introduced a new product APVC pipes which will be somewhere in the mid of PVC and CPVC. Thus it will be more cost effective compared to CPVC and will cater to the well-established market of PVC pipes.
The machineries, which can be used to manufacture CPVC pipes, can be easily used to manufacture PVC pipes. Hence there is no additional cost for the same. However vice versa is not possible.
Enjoys huge advantage in exclusive access to raw materials
Astral is the only large Indian company in the manufacturing of CPVC pipes having exclusive access to raw materials from the world leader Noveon-USA who holds patents for these products and controls about 85% of world market share in supply of CPVC. Although Noveon has tie-up for these products with only two other firms in India, their size is small and they have access to one out of the two raw material i.e. Flowguard and not Corzan. In fact the two other firms are buying some of their fitting requirements from the company. APL has access to both the raw materials i.e. Flowguard and Corzan. This exclusivity acts as a barrier to entry for new players and gives a competitive advantage to Astral.
There is a huge entry barrier in this industry as the raw material supply is limited and the machines and techniques used are highly sophisticated.
APL presently sells its products through a chain of distributors and dealers. It has a nationwide network of around 142 distributors and 1500 dealers who cater extensively to clients in the country. Selling and distribution costs form a major portion of costs (after manufacturing costs).
The raw materials used by APL are NSF approved which make them a preferred choice for the end-users. NSF is The Public Health and Safety Company™, providing public health and safety risk management solutions to companies, governments and consumers around the world. NSF International developed Standard 14 - Plastics Piping System Components and Related Materials in October 1965. APL has also applied for license from NSF for its own products, which is expected to be received by 2008.This license, will enable APL to export their products to the US. Currently APL exports its products to UAE, Phillipines etc, where the NSF approval is not mandatory.
Rising crude oil price will not have any impact on the raw material cost
The company’s raw material price is fixed by Noveon, which sets the price with an eye on increasing volume and does not vary the price based on price of crude oil. The higher the volumes from the licensee, better the pricing. Normally both Noveon and Astral keeps the price stable and focuses on growing the volume.
Buoyant outlook
The growth in housing construction, commercial construction, malls and SEZ throughout the country offer great opportunity for the company. The increasing quality and brand consciousness amongst the builders and consumers will help the company to perform better in the years ahead supported by its concerted and continued efforts in brand promotional activities.
Astral continues the endeavor of increasing its efficiency in operations, thereby building sustainable competitiveness. The main thrust of the company is on product innovation and diversification. All efforts are made to reduce cost of production to make its products more competitive in Indian Market. Its alliance with Specialty Process LLC, USA continues to play a significant role in the growth and also helps it in introduction of new products and in achieving market growth.
Further to take the incentives available in the country, Astral has already ramped up its production facilities at Himachal Pradesh where the company enjoys all kinds of tax incentives.
To take the advantage of its strong distribution net work across all the states of the country the company is coming up with more product lines such as Under Ground, Pipes & Fittings, SWR pipes & fittings, ABS pipes & fittings & CPVC Blazemaster pipes & fittings. This will help it to increase its presence in all segments of building product and it can utilize the same channel of distribution, which it is presently using. With addition on new product line company will be in a position to increase both its topline and bottom line sizably.
Attractive valuation
In FY 2009, we expect the company to register sales and net profit of Rs 196.94 crore and Rs 22.62 crore respectively. On equity of Rs 11.24 crore and face value of Rs 10 per share, EPS works out to Rs 20.1. The share price currently trades at Rs 189. P/E works out to just 9.4. Considering that the company has recorded and is likely to continue to record high growth rates in earnings due to its niche product range in a fast growing market, current valuation is attractive.
| | 0503 (12) | 0603 (12) | 0703 (12) | 0803 (12) | 0903 (12P) |
| Net Sales | 35.46 | 51.47 | 96.92 | 135.81 | 196.94 |
| OPM (%) | 14.3 | 14.4 | 14.0 | 15.2 | 16.0 |
| OP | 5.08 | 7.4 | 13.6 | 20.68 | 31.51 |
| Other inc. | 0.09 | 0.18 | 1.24 | 4.68 | 3.00 |
| PBDIT | 5.17 | 7.58 | 14.84 | 25.36 | 34.51 |
| Interest | 1.18 | 1.26 | 1.88 | 2.69 | 3.77 |
| PBDT | 4.00 | 6.32 | 12.96 | 22.67 | 30.74 |
| Dep. | 0.91 | 1.37 | 2.20 | 3.26 | 4.89 |
| PBT | 3.09 | 4.95 | 10.76 | 19.41 | 25.85 |
| Tax | 0.88 | 0.93 | 1.65 | 2.34 | 3.23 |
| PAT | 2.21 | 4.02 | 9.11 | 17.07 | 22.62 |
| EPS (Rs)* | 2.0 | 3.6 | 8.1 | 15.2 | 20.1 |
| *Annualised on current equity of Rs 11.24 crore; | |||||
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