Near-term concerns weigh on Astral's demerger despite long-term positives

Brokerages back Astral's demerger strategy but warn that rising competition, weaker PVC prices and execution risks could weigh on earnings in the near term

The stock of plastic pipe major Astral Pipes slipped 8 per cent in trade on Monday after the company announced a demerger that splits the existing structure into plumbing and chemical businesses. While the demerger per se is positive, some brokerages have downgraded the stock on concerns related to intensifying competition, correction in polyvinyl chloride (PVC) prices, and pressure on margins.

 

The stock of market leader Supreme Industries was also under pressure, falling 6.7 per cent in trade. Though the near-term outlook remains subdued, most brokerages believe that the demerger is in the right direction and should help allocate capital better, improve return ratios, and offer shareholders the option to choose between the two business segments.

 

The demerger will entail the transfer of its chemical business, which includes adhesives, paints, and speciality chemicals, to Astral Chemie, while all plumbing-related businesses — pipes and fittings, bathware, and chlorinated polyvinyl chloride (CPVC) resin — will stay with Astral. Astral Chemie will be listed as a separate entity on the exchanges. Current Astral shareholders will receive one share of Astral Chemie for every share held in Astral.

 

The plumbing business is expected to benefit from the upcoming CPVC backward integration, continued product additions, and healthy growth across the faucets and sanitaryware portfolio. Astral Chemie, according to the company, is entering a phase of stronger profitability driven by the completion of its major capital expenditure (capex) cycle, improving performance in the paint business, the turnaround of its UK and US operations, and the scaling up of the high-margin differentiated and sustainable solutions speciality chemicals platform. 

 

The restructuring, according to Antique Stock Broking, will transform Astral from a diversified building materials company into two focused, independently managed businesses with distinct growth strategies and capital allocation priorities. The brokerage has a ‘buy’ rating with a target price of ₹1,630 per share.

 

While there may be some incremental costs, synergies are expected to more than offset these expenses. A positive is that no significant capex is required for the two demerged entities in the chemicals and paint businesses in the coming years.

 

While management’s intention behind the demerger is positive, rampup in its India and overseas adhesive businesses and the newly added paint business will be key, according to Motilal Oswal Research, and will determine Astral’s overall valuation. It has a ‘buy’ rating with a target price of ₹1,710.

 

The management also expects transparency in segment reporting to improve, as both businesses will operate as separate entities. In addition to efficient capital deployment, ICICI Securities believes that the demerger will likely result in greater disclosures from both businesses, enabling investors to value each business better. The brokerage has retained a ‘buy’ rating with a target price of ₹1,738.

 

JP Morgan, however, says that the paint and adhesive segment might suffer on account of the demerger. While Astral’s announced demerger frees up the mature plumbing segment to be more aggressive on capital allocation, margins, and channel incentives, it could negatively impact the growth prospects of the still relatively sub-scale paint and adhesive segment.

 

While the plumbing segment has a 14-15 per cent profit before tax (PBT) margin, 18 net working capital (NWC) days, and a return on equity (RoE) of 24 per cent, the chemical segment has a 4-5 per cent PBT margin, 39 NWC days, and a 5 per cent RoE in 2025-26. The capex and advertising and promotions of the chemical entity were being supported by the plumbing business.

 

It has downgraded the two largest players in the sector, Supreme and Astral, and indicated that competitive intensity may increase after the demerger. The demerger does pose a risk for Supreme, as a potentially higher-growth focus by Astral in pipes could be a drag on Supreme’s growth and make it difficult to underwrite margin improvement at Supreme, says JP Morgan.

 

Given the uncertainty and the fact that near-term domestic PVC prices are likely to correct further (driving inventory losses/channel destocking), the brokerage recommends staying on the sidelines and has a ‘neutral’ rating on both.