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Astral Rs448.60 - BUY More flow in the pipe Initiating coverage Chirag Shah chirag.shah@clsa.com A strong building materials franchise in the making +91 22 6650 5055
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  Astral Rs448.60-BUY Financials Year to 31 March15A16A17CL18CL19CL Revenue (Rsm)14,29917,19018,82621,88525,638Ebitda (Rsm)1,6832,0512,5062,9563,524Net profit (Rsm)7591,0141,3081,6292,093EPS (Rs)6.48.510.913.617.5CL/consensus (10) (EPS%)--948891EPS growth (% YoY)-8.732.128.924.628.5PE (x)68.952.140.432.525.7ROE (%)16.214.516.71920.3ROCE (%)2319.721.623.225Net debt/equity (%)20.810.213.7-9.5-30.5Dividend yield (%)0.10.10.10.20.2 Source: CLSAFind CLSAresearch on Bloomberg, Thomson Reuters, Factsetand CapitalIQ -and profit from our evalu@tor proprietary database at clsa.com For important disclosuresplease refer to page37. Chirag Shah chirag.shah@clsa.com+91 22 6650 5055 7 March 2017 India Materials ReutersASPT.NSBloombergASTRA IN Priced on 6 March 2017 CNX Nifty@ 8,963.5 12M hi/lo Rs519.80/349.85 12M price target Rs545.00 ±% potential +21% Shares in issue 119.8m Free float (est.) 40.7% Market cap US$809m 3M average daily volume Rs29.5m(US$0.4m) Foreign s'holding 14.8% Major shareholders Promoters59.3%FPIs14.8% Stock performance (%) 1M3M12M Absolute7.413.328.2Relative5.42.97.1Abs (US$)8.215.128.8 Source: Bloomberg www.clsa.com I ni   t i   a t i  n g  c ov er  a g e 36151266381496611 (Rs) 01002003004005006007008009001000 (%) Mar-12Jul-13Nov-14Mar-16Astral (LHS)Rel to Nifty (RHS) More flow in the pipe A strong building materials franchise in the making AstralPoly Technik, a leader in residential pipes (CPVC) with a unique competitive advantage of manufacturing its own compounds,is emerging into a strong building material franchisewith a focus on product innovation.The companyis now rapidly expanding into the attractive adhesives/construction chemicalsbusinessthroughrecent acquisition of Resinova,which has helped it gain a footholdin the business. We expect Astral to report27% EPS CagrinFY16-19CL with sharp improvement in asset turns (ramp-up in adhesives utilisation) leading to strong RoEexpansion.Initiate with a BUY andRs545TP(based on 31x FY19CL PE). CPVC pipes –Leadership positionin an expanding market Astral has been the pioneer inthe residential CPVC pipes market in India. It has achieved industry-leading growth due to its strong innovation track recordandproduct-related tie-ups with global majors. Astral’s novel idea of branding a commodity product has helped the company to gain significant market share.Increasing product applications, awareness and affordability should lead to market expansionfor CPVC, in our view. Astral has also entered into agricultural pipes,offering additional growth opportunity. Adhesives –Distribution strength is underestimated Astral is aspiring to build India’s second-largest adhesives business franchise. Acquisitionsof well-established brands in India (Resinovain FY15)and UK (Seal IT also in FY15) havehelped Astral gain a strong foothold in the lucrative adhesives business. Astral plans to leverage on Resinova’s strong distribution platform to launch new technologically superior products and garner market share. It aims to address the white-space opportunities by penetrating marketswhere leader Pidilite has a relatively weaker footing. Backward integration, higher utilisation to help RoCE expansion The new resin sourcing agreement with Sekisui for in-house compounding provides a competitive advantage in the CPVC business. This should not only lead to margin expansion and working capital improvement but also provide Astral the opportunity to differentiate its productoffering and improve utilisation through competitive product pricing. This coupled with improving asset turns in adhesives should helpina sharp RoE expansion. Creating a strong consumer franchise; initiate with BUY Astral is transitioning from a pipes manufacturer to a scalable building materials franchisee by leveraging its strong brand strength and distribution network. We believe astrong EPS Cagr(27% FY16-19CL), improving FCF generation and returns profile justifypremium valuations.       More flow in the pipe Astral-BUY 7 March 2017chirag.shah@clsa.com2 Investment summary Astral is transitioning from a pipes manufacturer to a scalable building materials franchisee by leveraging its strong brand strength and distribution network. A strong EPS Cagr(27% FY16-19CL), improving FCF generation and returns profile justifypremium valuations, in our view. Strong building material franchise in the making Astral has created a superior position in the Indian plumbing products market with its product innovation track record, strategic tie-ups for technology and aggressive brand campaigning. The strength of the franchisee is visible in its very strongperformance over the last decade (41% revenue Cagr;52% CFO Cagr) alongside maintaining a strong balance sheet(0.1x D/E in FY17CL). Figure 1Figure 2 Astral has created a superior position in the Indian pipes market Astral has a strong brand recall due to its aggressive brand campaigning vscompetitors Source: Companies data, CLSA Astral is nowtrying to replicate its success in pipes to build India’s second-largest adhesives/construction chemicals franchise. Acquisitions of well-established brands in India (Resinova in FY15) and UK (Seal IT also in FY15) havehelped Astral gain a strong foothold in the lucrative adhesives business. Figure 3 Shift from a single product company toa building materials franchise Source: Company, CLSA 40% 10yr Net Profit Cagr (%)41%38%1x/0.1x10yr revenue cagr (%)10yr Ebitda Cagr (%)Net debt/Equity -FY06/FY1652%~11x Capacity expansion over FY08-1610yr CFO Cagr (%) 0.0%0.5%1.0%1.5%2.0%2.5%3.0%AstralSupremeFinolex CablesFY16 - A&P (% of sales) PVC37%CPVC46%Adhesives17% Revenue mix -FY15 (%) PVC32%CPVC41%Adhesives27% Revenue mix -FY19CL (%) PVC35%CPVC60%Adhesives5% Revenue mix -FY11 (%) We would like to thank Evalueserve for its help in preparing our research reports. Aniket Sethi (Cement, Oil & Gas); DhruveshShah (Capital Goods, Utilities, Power); Niket Gajra (IT); Nikhil Gada (Midcaps); and Vishal Nathany (Financials) provide research support services to CLSA. Transitioning from a pipes company to a scalable building materials franchiseeAstral has created a superior position in the Indian plumbing products market       More flow in the pipe Astral-BUY 7 March 2017chirag.shah@clsa.com3 Pipes-Leadership in an expanding market; strong margin levers Astral has been a pioneer and market leader in the CPVC pipes in India,a market that is seeingincreasing shift from the conventional galvanised iron (and PVC) market. Increasing awareness of CPVC coupled with more product application should lead to market expansion. Astral is wellpositioned to benefit from this market shift,as it completes its geographical penetration.Astral has also entered into agricultural pipes, offering an additional growth opportunity. Figure 4Figure 5 Astral’s ability to pass on material prices is strongBenefits of backward integration Source: Bloomberg, Company, CLSASource: CLSA In the CPVC business, the entry barriers are relatively high as there are only three major global suppliers of CPVC raw materials (compounds). Astral earlier (untilOct-16) had a tie-up with Lubrizol (global leader in CPVC) to source compounds. However, Astral has now commissioned and stabilised its own compounding unit. It now has a resin sourcing agreement with Japanese supplier Sekisui for in-house compoundingwhich provides a very competitive advantage to the company. Thisshould not only lead to margin expansion and working-capital improvement but also provide Astral the opportunity to differentiate its product offering and improve utilisation through competitive product pricing. Adhesives –The new growth engine Astral (Resinova)has created a niche in the adhesives space, largely dominatedby Pidilite.We believe Resinova’s robustdealer/retailer network is underutilised. Astralplans to leverage this networkby introducingnew technologicallysuperior products to achieve exponential growth from the segment. -60%-40%-20%0%20%40%0102030405060FY11FY12FY13FY14FY15FY169MFY17Gross profit/ton (Rs)Ebitda/ton (Rs)% Change in WTI crude prices, rhs Benefits of backward intergration ~100bps gross margin improvementHuge competitive advantage ~ 25days reduction in working capital Increasing awareness of CPVC coupled with more product application should lead to market expansionWe believe Resinova’s robust dealer/retailer network is underutilised       More flow in the pipe Astral-BUY 7 March 2017chirag.shah@clsa.com4 Figure 6Figure 7 Astral has an opportunity to create a #2 adhesives franchiseeAggressive entry into adhesives with acquisitions Source: Industry sources, CLSA. Note:*Revenues are as of FY15; Pidilite revenues are standalone numbersSource: Companies data, CLSA. Note: AAL is Advanced Adhesives Ltd Astral is rapidly adding new products in the B2C segment, expanding its geographical reach (south India markets) to leverage on Resinova’s strong distribution strength,setting the floor for a 20% revenue Cagr in adhesives over FY17-19CL. Astral will not face major competition from Pidilite as its products currently have a strong positioningin only ~30% of Pidilite’s overall opportunity pie, in our view. Figure 8 Astral (Resinova) currently has limited category presence in adhesivesCategoriesPidilite market shareMarket size (in Rs bn)Astral (Resinova) penetration Polyvinyl acetate –Water based gluec.70%~26WeakRubber adhesivesc.45%~12WeakAcrylicsc.60%~6StrongEpoxy Sealantc.60%~3.5StrongEpoxy Adhesivesc.7%~8StrongConstruction chemicalsc.50% (in waterproofing)~40Weak Source: Industry sources, Companies, CLSA Strong management background with an innovation track record Astral’s management has constantly focused on driving innovation-led growth through differentiated product launches. Astral’sstrategy to penetratethe market by launching differentiated products has helped the company to improve its visibility and gain market share.We believe Astral’s proven track record of innovation can help the company achieve industry-leading growth on a sustained basis. Figure 9 Innovation-led growth strategy through launch of differentiated productsYearRemarks 1999  o Was the first to receive licence for CPVC piping system from Lubrizol India2004  o First to launch lead-free uPVC piping system2007  o First to get NSF certification for CPVC piping system in India2012  o First to launch lead-free uPVC column pipes2013  o First to launch CPVC -AL -CPVC bendable pipes Source: Company, CLSA 05,00010,00015,00020,00025,00030,00035,00040,00045,00050,000PidiliteHuntsman*Sika*Fosroc*Astral(Resinova) Revenue (Rs m) -FY16 01,0002,0003,000 4,0005,000 6,0007,0008,000      F     Y     1     1     F     Y     1     2     F     Y     1     3     F     Y     1     4     F     Y     1     5     F     Y     1     6     F     Y     1     7     C     L     F     Y     1     8     C     L     F     Y     1     9     C     L Adhesives (Rs m) Acquisi-tion of AALAcquisition of Resinova and SEAL IT UKAcquisition of Rowe Industries by SEAL IT UKAdhesivescapacity doubled Competition from Pidilite will be limitedAstral’s management has constantly focused on driving innovation-led growth through differentiated product launches     
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