Astral Poly Technik's Q2FY20 results (Outperformer) - Pipes strong, Adhesives distribution rejig complete…

Q2FY20 result highlights

• REX amalgamated with ASTRA’s standalone entity from 10 July 2018.
• Pipes (incl. REX): Adjusting for REX, volume growth stood at a healthy ~16.7% yoy at ~31.8k MT (reported vol. growth of ~27%), while revenue came in at ~Rs5.3bn (+14% yoy; in-line). Pipes EBITDA came in at ~Rs1bn, registering a strong ~38.1% yoy growth (15% beat) – operating leverage benefits, improving REX margin and slight inventory gains have driven the outperformance here.
• Adhesives: Revenue fell ~9.5% yoy to ~Rs1.5bn (10% miss) – distribution model changes in Resinova (which led to higher sales returns) and tightening receivables cycle continues to weigh on growth. EBITDA fell ~14.3% yoy to ~Rs204m (15% miss).
• Overall: Cons. rev at ~Rs6.8bn grew 8.5% yoy (2% miss), while EBITDA grew 26.2% yoy to ~Rs1.2bn (margin at 17.5% vs IDFCe: 16.4%; +240 bps yoy). EBITDA outperformance was driven by Pipes. Net income grew 67.4% yoy to ~Rs853m on account of low tax payments (new 25.17% tax rate adopted for FY20E).
• FY20E Guidance: Pipes vol. growth of 15%+ (could beat this est.). Adhesives rev. growth to be in double digits in H2FY20E.

Key positives: Strong pipes volume growth / margin performance.

Key negatives: Weak adhesives revenue growth.

Impact on financials: 1%/2% EBITDA cut for FY20E/21E. EPS cuts on account of bonus shares adjustment.

Valuations & view

We remain constructive on the growth prospects of ASTRA, given its leadership position in the CPVC pipes space, and proven managerial and innovation capabilities in the pipes market. The corrective measures in REX are now in the base, and this particular business segment should begin contributing meaningfully to revenue/EBITDA once the infrastructure cycle begins to move upwards. The recent ADD imposition on CPVC resin should also aid companies like ASTRA as competition reduces in the industry. The adhesives business is undergoing a correction (on the distribution side) and benefits from this would start accruing from H2FY20E onwards and build on from there onwards. We maintain our OP rating on ASTRA with a TP of Rs1,169 (50x FY21E EPS). We expect premium valuations to sustain given strong execution and ability to stay ahead of the industry in terms of innovation.