ASTRAL POLY TECHNIK LTD : BUY

ASTRAL POLY TECHNIK LTD.

Revolutionising India’s Plumbing Industry!

Astral Poly Technik Ltd. (Astral) is a pioneer & market leader of CPVC  pipes & fittings in India. Astral is a licensee of Lubrizol, USA, (global specialty chemical behemoth; 70% of global CPVC market) to manufacture & market its world class plumbing products in India. Company has a techno-equity venture with Specialty Process LLC, USA (Global distributor of reengineered polymers) for providing technology required to manufacture CPVC products. 

Investment Rationale:  

Play on domestic housing & infrastructure growth story: Astral with a ~65:35 product mix (CPVC: PVC pipes and fittings & others) derives its demand from over Rs 17,000 Cr (G.I,PVC,CPVC&others) plumbing industry growing over 15% CAGR. According to the Ministry of Urban Development, India has a shortage of ~2.65 cr housing units - market of over Rs 34,450 cr (XIth five year plan).

Huge potential in unexploited replacement market: India has remained a Galvanized pipe dominated market (Rs 7,000 Cr). Consumer preference shifting towards CPVC due to cost advantage (25% cheaper than G.I & ~15% expensive than PVC), non-corrosive nature, resistant to high pressure & temperature etc. Huge replacement demand seen especially from housing & infrastructure sector. 

Astral’s products on high growth trajectory: Deep market penetration and brand recognition helped Astral tap 50%+ domestic market share of CPVC pipe industry (Capex 12x in 5 years signifies huge demand).

Efficient working capital management: Significant improvement - 75 days in FY  08  to  48  days  in  FY  11,  to  improve  further  as  strategically  located  new capacities (H.P & Gujarat) will reduce the lead distance. As a prudent policy Astral has been expanding its capacity in Q4 to avail taxation benefits.

High Entry Barrier: Technology to manufacture CPVC pipes is only with Noveon (Lubrizol) & Astral benefits from over a decade relationship with the global major; thus advantage of getting licenses of Lubrizol’s new products first in India. In addition, a CPVC pipe plant takes 3-4 years (set up & approvals) keeps competition at bay. 

New Products to boost profitability: Astral has an exclusive license to manufacture Lubrizol’s global top-seller Blazemaster FireSprinkler Systems, based on CPVC platform. The company has also picked up 85% stake in Advance Adhesives Pvt. Ltd. to produce Cement Solvent (solution for joining pipes) via technology developed by global Adhesives major, IPS, USA; could be a huge potential for Astral.

Valuations

We  expect  Astral  to  grow  at  37%  CAGR  for  next  2  years  &  maintain  itsleadership in CPVC pipes & fittings, moreover we feel the company is undervalued & deserves better valuations for key aspects : a) Robust business model  – market penetration & branding strategy; new facility being onequarter old only - 36% (17,565 MT) of total capacity (48,432 MT)   b) Quality return ratio profile  – ROCE>26% & ROE>25%,)  c) High entry barriers -  Raw material source, project time, technology. We have valued Astral at 9x FY13E EPS and arrived at a target price of  Rs 244 (potential upside 26%) with a horizon of 12-15 months.