Recovery in pipeline for pipe makers with price correction down the tubes

Margins to expand, given demand recovery in key segments and falling input costs

The stocks of plastic pipe makers could see multiple tailwinds, riding on the back of a fall in raw material prices, liquidation of high-cost inventory, and improving demand. In addition to an uptick in margins, lower prices are expected to give a fillip to volumes of two key segments critical to the sector’s growth — construction/housing and agriculture.

While other segments in the building material space were also impacted in the July-September quarter (second quarter, or Q2), the plastic pipe segment was perhaps the worst hit, reporting flat volumes on account of a correction in polyvinyl chloride (PVC) prices.

Plastic pipe companies reported muted volume growth of 2 per cent year-on-year (YoY) and flat on a sequential basis on account of destocking by the channel as correction in PVC prices continued during the quarter, says JM Financial.

Domestic PVC resin prices have dipped Rs 61 per kilogram (kg) since April this year to Rs 76 per kg in October due to decline in global PVC prices on account of weak housing demand in the US, the UK and China, together with easing supply-chain issues.

The Street will keenly watch out for the volume trends.

ICICI Securities expects pipe segment volume growth for key listed players, except for Finolex Industries, to be between 16 per cent and 20 per cent YoY for the second half of 2022-23 (FY23).

Analysts Arun Baid and Sohil Kaura of the brokerage observe that the uptick in volume is led by a rebound in the agriculture segment, healthy demand momentum from housing, and channel restocking.

Agriculture demand has been tepid for the past three years due to elevated PVC prices, which have since declined by about 43 per cent in FY23 year-to-date and are close to their 10-year average.

Since the agriculture market is price-elastic, demand is likely to increase due to recent price corrections, says the brokerage.

The other segment — plumbing — is expected to get a boost from the continuing momentum in the real estate/construction market.

Falling raw material prices will also improve the profitability of pipe makers. The prices of key raw materials, such as PVC, high-density polyethylene, low-density polyethylene, and vinyl acetate monomer (VAM), have witnessed a contraction of 30-52 per cent from their peak in March 2022 (12-21 per cent from Q2FY23 levels).

While inventory destocking has had an impact on volumes, inventory losses weighed on the margins of key players.

Analysts Ashish Poddar and Pranay Shah of Systematix Institutional Research say that the sustained fall in PVC prices — already at near-bottom levels — could cause margins to stay low even in the October-December quarter. They expect margins to normalise in the fourth quarter once the high-cost inventory gets liquidated.

Plastic pipe companies are likely to benefit from easing raw material prices from their recent peaks and subsiding inventory losses.

Analysts, led by Sanjay Manyal, of ICICIdirect, have a built-in margin recovery to the tune of 700 basis points (bps) for Supreme Industries and 400 bps for Astral Pipes (Astral), respectively, in the second half of the year, compared to the first half.

What should help pipe makers balance out the risks in one segment in the long term is their foray into adjacent categories like bathware and storage tanks.

Plastic pipe companies are aggressively focusing on innovation, product launches, and market opportunities beyond plastic pipes and fittings, which have helped them increase their total addressable market and ensured sustainable long-term growth, says JM Financial Research.

The brokerage has a ‘buy’ rating on Prince Pipes and Fittings due to its medium-term growth drivers of increasing distribution footprint, improving chlorinated PVC, and business-to-business mix and recovery in the agriculture segment.

ICICI Securities, on the other hand, has upgraded Astral’s rating to ‘buy’, given its significant presence in the plumbing market, which is being augmented by demand tailwinds on account of a pick-up in the housing market. Also, it will be a beneficiary of improved margins in the adhesive segment due to falling raw material prices.

The average VAM prices in the current quarter to date have corrected 44 per cent. While the brokerage prefers Supreme Industries for its leadership in the pipe segment, it has downgraded it to ‘hold’, from ‘buy’, after a 23 per cent rally in the stock price.