Astral Ltd is superior in every respect; outlook strong. Buy for target price of Rs INR 1,983: Nuvama

• The strong increase (15% YoY and 18.7% QoQ) in plumbing volume was the primary revenue contributor. Revenue rose 8% YoY to INR1,506cr and was 1%/4% higher than consensus/our estimate of INR1,489cr/INR1,444cr.

• Gross margin rose sharply (692bp YoY and 573bp QoQ) driven by inventory gains in the pipe business and a drop in raw material prices, resulting in normalised margin in the adhesives business.

• EBITDA surged 42% YoY to INR309cr on lower PVC and other raw material prices along with higher volumes, which was 25%/23% higher than consensus/our expectation of INR248cr/INR252cr.

• EBITDA margin expanded by 492bp YoY and 581bp QoQ to 20.5%, exceeding consensus/our estimate of 16.7%/17.5%.

• Due to strong operational performance, net income (up 39% YoY to INR201cr) was 35%/33% higher than consensus/our expectation of INR149cr/INR151cr.

• We remain positive on ASTRA given its: i) market share gains in the core plastic piping business; ii) strong brand recall; iii) product launches (it recently forayed into faucets and sanitaryware, tanks, infrastructure pipes, DWV piping system, valves, and paints to increase its addressable market); iv) strong cash flow and net debt-free Balance Sheet, with an improvement in working capital; and v) robust growth in the adhesives business. Maintain ‘BUY’.

Strong volume growth in the plumbing business; demand improves on stable PVC prices

ASTRA’s plumbing business posted a revenue of INR1,124cr (up 3.6% YoY versus a rise/fall of 2% each for Apollo Pipes/Supreme Industries), led by healthy volume growth (up 15% versus a rise of 14%/16% for APOLP/SI) on restocking by dealers and a positive demand momentum from end customers. However, realisation remained weak (down ~10% YoY as against a fall of 11%/15% for APOLP/SI) due to lower PVC prices. As per the management, seasonal demand for CPVC/agri pipes remains strong in the fourth/first quarter. EBITDA margin improved by 475bp YoY to 22.8% due to an improvement in the sales mix and some inventory gains. Faucet and sanitaryware business incurred an EBITDA loss of INR3.5cr in Q4FY23 due to higher operating expenses on a smaller revenue base. In its second year of operations, the company is projected to achieve midteen margin (compared to a loss of INR16.5cr in FY23).

Healthy revenue growth in paints and adhesives with a recovery in margin Revenue from the paints and adhesives segment stood at INR383cr (up 14% QoQ).

Revenue from adhesives/paints grew 27%/20% YoY to INR323cr/INR60cr. The adhesives/paints business contributed ~21%/4% to sales. EBITDA margin for the paints and adhesives segment improved by 414bp YoY to 15.2% due to lower raw material cost and consumption of most high-cost inventory in Q3FY23. Margin from adhesives is expected to normalise to 15–16% in FY24. The adhesive business in the UK can grow at 15–20%, but India will grow more than 20% on a lower base and due to strong demand. The management targets a FY24 revenue growth/EBITDA margin of ~15% each. ASTRA’s planned expansion of its adhesive plant in Dahej (Gujarat) is on track. The management intends to grow the paint business to INR600–700cr (from INR217cr in FY23) over the next three to five years (without additional capital expenditure).

Valuation and view — maintain ‘BUY’

Given the management’s track record of successfully scaling up new businesses, its guidance of double-digit volume growth in the pipes business, and more than 15% CAGR in the adhesive business over the next four-to-five years, we anticipate ASTRA’s growth trajectory to steepen. In Q4FY23, the paints business saw healthy revenue growth. It has introduced a line of faucets and sanitaryware and expects this segment to generate INR500cr over the next three-to-four years (compared to INR22cr in FY23). The company remains a consistent quality performer and is a compounding story. We maintain ‘BUY’ with a revised TP of INR1,983, at 72x FY25E earnings (in line with its five-year average P/E ratio)