We see Finolex continuing to grow at a steady pace for the next couple of years as it is witnessing good traction in the high-margin CPVC business
Plastic pipe manufacturers delivered a strong set of numbers for the second quarter of this fiscal year. The government's push on agriculture, irrigation and infrastructural development has had a positive impact on organised players in the sector and this was evident in the Q2 performance of major companies in the sector.
Here, we discuss the results of 3 leading plastic pipe manufacturers -- Astral Poly Technik, Supreme Industries and Finolex Industries -- that are trying to enhance their profitability through expansion of distribution networks, product diversification and capacity expansion.
Quarterly earnings snapshot
Astral Poly Technik
Astral Poly Technik's sales for the September quarter rose 22 percent on year, primarily due to a strong performance by its adhesive and sealant business.
Revenue from the company's pipes business grew 9 percent on year, driven by an amalgamation of higher volumes (up 5 percent YoY) and improved realisations (up 4 percent YoY).
Operating profit jumped 20 percent, while operating margin remained largely unchanged.
Astral has fortified its presence in the adhesive and sealant space over the past few years through its acquisition of Resinova Chemie and Seal It Services.
For Q2 FY19, the company's revenue from its domestic adhesive and sealant business (Resinova Chemie) grew at a rapid 18 percent on year.
Seal It Services, the UK-based subsidiary, grew much at faster pace, reporting topline growth in excess of 40 percent.
The segment continues to gain market traction and therefore, its share in the company's total revenue has increased from around 30 percent in FY16 to more than 45 percent now.
In a strategic move to further enhance its presence in the pipe segment, the company has announced a merger with Rex Polyextrusion, a leading manufacturer in the double-walled corrugated pipes space.
The transaction marks a strategic point in Astral's diversification into high-growth segments of the pipe industry, like urban infrastructure and cable ducting in telecom.
The deal also gives the company a head start in a less-crowded product segment with relatively high entry barriers.
In the quarter gone by, the company has initiated commercial production at Ghiloth Plant (Rajasthan) post the successful completion of trial runs.
Further, the Hossur plant (Karnataka) is expected to come on-stream by FY19-end. These two plants together will add around 37,000 tonnes of capacity in the pipes segment.
Supreme Industries
Supreme Industries' Q2 sales were 18 percent higher than its sales in the same quarter last year, thanks to a combination of a 5 percent rise in volumes and 13 percent rise in realisations.
Volumes from the industrial and piping segment grew in the mid-single digits, but the overall growth was much higher on account of higher realisations.
The packaging division had a muted quarter as business was impacted by a plant shutdown and price erosion. The consumer business saw volumes falling by 2 percent.
The improvement in realisations, along with lower employee costs, drove the significant jump in the company's operating profit. Operating margin expanded 230 bps on a sequential basis.
Given the competitive environment in the industry at the moment, the management has revised its full-year volume guidance downwards to around 10 percent (from 12-15 percent at the start of the year).
The company's operating profit margin is expected to be at around 15 percent for the full year.
Finolex Industries
Finolex Industries' topline increased 14 percent on year, on the back of a sharp jump in realisations across both the resins and pipes segments.
Volume growth remained largely flat during the seasonally weak monsoon season. The sharp jump in operating profit was aided by a low base as well as an expansion in margins.
Higher realisations, coupled with inventory gains, led to the company's operating profit margin expanding.
While overall pipe volumes were muted in Q2, the chlorinated polyvinyl chloride (CPVC) business continued to witness a rise in volumes.
The management expects the trend to continue and expects volumes from the business to grow at healthy rate of more than 30 percent over the next couple of years.
On the margin front, the company could witness some moderation in its operating profit margin as input costs continue to inch up.
Finolex is on track to expand its capacity to 370,000 tonne by FY19-end. It plans to add 30,000 tonne of capacity every year by incurring an investment of Rs 30 crore.
Outlook and recommendation
Astral Poly Technik trades at a premium valuation because of its track record, growing presence in the adhesive segment and earnings visibility.
In our view, Finolex Industries put up a good show in the first half of this fiscal year. We see the company continuing to grow at a steady pace for the next couple of years as it is witnessing good traction in the high-margin CPVC business, which registered a volume growth of more than 30 percent in H1 FY19.
The company's margins are also seen moving higher with increasing economies of scale and new product launches. The stock's current valuation (FY19 P/E of 18 times) is at a significant discount to that of its peers and appears to be fairly reasonable from a long-term perspective.
