Lower growth, lack of valuation comfort to weigh on pipes maker Astral
The stock of plastic pipes maker Astral slipped 4.6 per cent in trade on Monday due to margin pressures in the June quarter, growth concerns going forward, and expensive valuations. Given the profitability pressures and a cut in growth guidance across segments by the management, brokerages have lowered earnings estimates. The stock has been an underperformer over the past month, shedding 16 per cent during this period.
Led by a 16.4 per cent improvement in the volumes of the plumbing segment, the company reported revenue growth of 7.8 per cent, which was marginally lower than what the brokerages had estimated. What further pulled down the overall performance was the weak contribution of the adhesives and paints segments.
Plumbing revenue was up 8 per cent year-on-year (Y-o-Y) and was lower than Street estimates due to lower volume growth at 16 per cent, compared to 23 per cent in Q4FY24. The realisations were lower by 1 per cent on a sequential basis and 7 per cent over the year-ago quarter, as the company was unable to pass on the higher polyvinyl chloride (PVC) prices.
Though plumbing volumes were in double digits, BOB Capital Market notes that this was lower than its nearest competitor, Supreme Industries (Supreme), for the tenth straight quarter. Supreme had reported revenue growth of 19.5 per cent in the quarter.
While the operating profit increased by 6.3 per cent over the year-ago quarter, profitability was impacted. The margins contracted by 15 basis points to 15.5 per cent due to higher employee expenses as well as other expenses related to advertising and promotions.
The company has given a 15 per cent volume growth guidance for the plumbing business and margins in the 16-18 per cent range. The management expects volume growth to be impacted in the near term due to price volatility, with the trend possibly reversing in the second half of FY25.
The company has revised its guidance downwards for its segments for FY25. While pipe volumes are expected to grow at 15 per cent plus (down from 15-20 per cent earlier), Resinova (adhesives) revenue is slated to increase by 15-20 per cent, down from 20 per cent earlier. The company has increased its capex guidance for FY25 to Rs 350 crore.
Aditya Bansal and Anil Sharma of Kotak Research have cut their FY2025 earnings per share estimates by 7 per cent due to higher expenses related to new product launches and geographical expansion.
However, given tailwinds from continued robust real-estate sales and the ramp-up of new verticals, they expect Astral to deliver revenue growth of 16 per cent over the next three years. Operating profit and bottom line are expected to grow at a three-year average of 19 per cent and 25 per cent, respectively. The brokerage has maintained a sell rating as Astral is trading at premium valuations (60 times FY2026 earnings), leaving no room for disappointment on execution.
Prabhudas Lilladher Research has also revised its earnings estimates downwards by 7-8 per cent over the next two years. The lower earnings are due to margin contraction, rising domestic price competition, and lower volume growth guidance of 15 per cent in the pipe & fittings segment.
BOB Capital Market has maintained a hold rating with an unchanged target price of Rs 2,200. Even as the brokerage believes that the earnings per share of Astral will grow at a strong 22 per cent over FY24-27, its hold rating is due to expensive valuations of 76.5 times, compared to the five-year average of 71.2 times.
First Published: Aug 12 2024 | 10:31 PM IST