CLSA has initiated coverage on Astral Poly Technik with a buy call and target price of Rs 545 as it expects the company to report a 27 percent EPS CAGR in FY16-19 with sharp improvement in asset turns (ramp-up in adhesives utilisation) leading to strong return on equity expansion. The stock rallied more than 6 percent intraday.
The brokerage house believes a strong EPS CAGR, improving free cash flow generation and returns profile justify premium valuations. Astral is transitioning from a pipes manufacturer to a scalable building materials franchisee by leveraging its strong brand strength and distribution network.
The company has been the pioneer in the residential CPVC pipes market in India. It has achieved industry-leading growth due to its strong innovation track record and product-related tie-ups with global majors. Astral's novel idea of branding a commodity product has helped the company to gain significant market share. It has also entered into agricultural pipes, offering additional growth opportunity.
According to CLSA, increasing product applications, awareness and affordability should lead to market expansion for CPVC.
Astral is aspiring to build India's second-largest adhesives business franchise. Acquisitions of well-established brands in India (Resinova in FY15) and UK (Seal IT also in FY15) have helped Astral gain a strong foothold in the lucrative adhesives business.
CLSA says the company 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 markets where leader Pidilite has a relatively weaker footing, it adds.
Its new plant of Resinova Chemie at Santej in Gujarat will be fully operational by end of March, 2017.
The brokerage house says the new resin sourcing agreement with Sekisui for in-house compounding provides a competitive advantage in the CPVC business. It believes this should 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.
This coupled with improving asset turns in adhesives should help in a sharp return on equity expansion, CLSA says.
The CPVC pipes & fittings manufacturer had said its profit on consolidated basis grew by 54.29 percent year-on-year to Rs 32.4 crore on strong operational performance in quarter ended December 2016. Revenue during the quarter increased nearly 12 percent to Rs 449.8 crore.
The stock has seen a gain more than 25 percent in last one year and more than 18 percent upside in three months period.
At 12:19 hours IST, the stock was quoting at Rs 461.30, up Rs 19.65, or 4.45 percent amid high volumes on the BSE.Posted by Sunil Shankar Matkar
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