Lower growth, lack of valuation comfort to weigh on pipes maker Astral

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 stock of plastic pipes maker Astral slipped over 9 per cent since August 8 (results announ­ced) to Rs 1,888.60 on the BSE due to margin pressures in the June quarter (Q1FY25), growth concerns going ahead, and expensive valuations. Given the profitability pressures and cut in growth guidance across segments by the management, brokerages lowered earnings estimates. The stock has been an underper­former over the last month and has shed nearly 17 per cent during this period. 

Led by a 16.4 per cent improvement in 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 show 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 on account of lower volume growth at 16 per cent while it had registered a growth of 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 not able to pass on the higher polyvinyl chloride or PVC prices. 

Though the plumbing volumes were in double digits, BOB Capital Market notes this was lower than nearest competitor Supreme Industries (Supreme) for the tenth straight quarter. Supreme had reported a 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 on account of 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 on price volatility and the trend may reverse in the second half of FY25. 

The company has revised its guidance downwards for its FY25 segments . While pipes volumes would grow at 15 per cent plus (it was 15-20 per cent earlier), Resinova (adhesives) revenue is slated to go up by 15-20 per cent 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 FY25 earnings per share estimates by 7 per cent on higher expenses related to new product launches and geographical expansion. 

However, given tailwinds from continued robust real-estate sales and ramp-up of new verticals, they expect Astral to deliver revenue growth of 16 per cent over the next three years. 

Operating profit and bottomline are expected to grow at a three-year average of 19 and 25 per cent respectively. The brokerage has maintained a sell rating as Astral is trading at premium valuations (60 times FY26 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 was on account of margin contraction along with rising domestic price competition and lower volume growth guidance of 15 per cent in the pipe & fittings segment.
 

After the results, BOB Capital Market has maintained a hold rating with an unchanged target price of Rs 2,200. Even as the brokerage believes that earnings per share of Astral will grow at a strong 22 per cent over FY24-27, its hold rating is on account of expensive valuations of 76.5 times as compared to five year average of 71.2 times.