High margins of plastic pipe makers unlikely to sustain going forward

Volume recovery and cost rationalisation may offset some of the pressure on margins

PVC pipes — PVC prices have gained about 64 per cent since the start of May and are pegged at a record Rs 107 per kilogram currently

2 min read Last Updated : Nov 21 2020 | 12:07 AM IST

Stocks of plastic pipe companies Supreme Industries, Astral Poly Technik, Finolex Industries, and Prince Pipes have gained 24-74 per cent in the last three months. The recent gains come on the back of successive price hikes of polyvinyl chloride or PVC pipes announced by the players.

After an increase of 19 per cent in the June quarter, PVC prices are up 18 per cent in the December quarter. PVC prices have gained about 64 per cent since the start of May and are pegged at a record Rs 107 per kilogram currently. The rise in prices is due to global supply side issues, with some major PVC plants yet to restart.

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Analysts at ICICI Securities say sustained higher prices in PVC resin may provide a fillip to manufacturers through higher channel filling and inventory gains in the near term. Though the sales channel maintained minimal inventory, there has been selective re-stocking by distributors to gain from the sharp uptick in prices. This has led to robust volume growth for plastic pipe players — October volume growth for most players is expected to have been in double digits.

Inventory gains and price hikes had helped PVC players report multi-quarter or lifetime high margins in the September quarter, with gains in the 5-10 percentage points range.

While companies are looking at cost control measures to sustain margins, most have highlighted that the prices would stabilise and trend down in the March quarter, leading to inventory losses. Volumes have started to rise as economic activity improves and the second half is expected to see demand acceleration.

Among major players in the sector, Astral Poly Technik has guided for a strong growth outlook both in the pipes as well as adhesive segments. In addition to opening up of urban markets, the gains are expected to be on the back of distribution expansion, new product launches and market share gains.

With margin gains expected to moderate and stocks factoring in volume recovery, investors should await a correction and steady growth trends before considering an investment.