Event update: Astral Poly Technik (Outperformer) - Building blocks in place for the next stages of growth!

We met the management of Astral Poly Technik (ASTRA) at their annual analyst meet. Following are the key takeaways:

• 15% volume growth in Pipes (ex-Rex): Excluding REX, ASTRA expects ~15% volume growth in FY20E. In REX it expects to grow at 20-25% CAGR over the next 3-4 years. Medium term growth outlook for pipes segment is strong led by (1) new product launches, (2) new market seeding (incl. East India), and (3) tapping the infrastructure segment (through REX). On margins front, ASTRA believes that FY19’s figure of 17%+ could be an aberration, but 15% should be sustainable over the medium term. In FY20E they will endeavour to maintain FY19 margins.
• 20% revenue CAGR in Adhesives: ASTRA expects adhesives business performance to continue its 20% growth trajectory, and expects this to sustain over the next 3-4 years. Current capacity can ensure Rs15bn in turnover (FY19E at Rs6.35bn), and incremental growth would aid margin expansion as well. Near-term, margins are expected to also improve through lower A&P spends versus FY19.
• Scope for further improvement in NWC: Focused approach on reducing receivables has led to DSOs falling to 43 days (vs 51 yoy), and believes that this can still be brought down further, given that its credit period is still lenient versus peers. However, the reduction from these levels would be more calibrated in nature. In FY20E, ASTRA would instead focus on cutting inventory days (FY19 level at 57 days vs 61 yoy). Overall, NWC has come off from 47 days to 38 in FY19.
• Capex cycle on the verge of conclusion: Hosur pipes expansion, and three DWC lines across ASTRA’s non REX plants are expected to go online by Q1FY20E end, while its East India plant is expected to go online by Q3CY20E (near Cuttack, Orissa). Post these expansions, no major pipes capacity addition plans are envisaged for the next 3-4 years and adhesives capacity is already sufficient for mid-term growth. Thus, ASTRA’s FCF should get a strong boost post FY20E.

Outlook & Valuation

We remain constructive on the growth prospects of ASTRA, given its leadership position in the CPVC pipes space, proven managerial and innovation capabilities in the pipes market and significant ramp up in the adhesives segment. Its twin engines would ensure sustainable growth over the medium-to-long term and management is ahead of time in investing in management bandwidth to steer the same. We believe ASTRA will continue to gain market-share across both its segments and thus expect higher valuation multiples to sustain. We maintain OP (TP Rs1,334/47x FY21E EPS) and every weakness should be bought in.