Astral Poly Technik's Q3FY20 results (Outperformer) - Strong margins cover-up top-line weakness!

Q3FY20 result highlights

• REX amalgamated with ASTRA’s standalone entity from 10 July 2018.
• Pipes (incl. REX): Ex. REX, vol. growth was ~6.5% yoy, 5% miss, on account of extended monsoons and construction activity ban in NCR region. This was much better than flat volume of Supreme Industries and 11% fall of Finolex in this quarter. Pipes EBITDA grew ~29% yoy to ~Rs1bn with margins up ~180 bps yoy to 19.7% (much better than est. of 17.5%) - lower logistics costs/rising REX margin have helped.
• Adhesives: Revenue grew ~3% yoy to ~Rs1.6bn (in-line) – growth remains muted but is picking up since Dec as distribution restructuring is now firmly in the base. EBITDA grew ~14% yoy to ~Rs187m (15% miss) while margins improved ~120 bps yoy to 12% but was lower than expected. Gross margins have expanded ~400bps yoy.
• Overall: Cons. rev at ~Rs6.6bn grew 5.4% yoy (6% miss), while EBITDA grew 29% yoy to ~Rs1.2bn (margin at 18.2% vs IDFCe: 16.7%; +330 bps yoy). Both segment margins improved yoy. Net income grew 54.5% yoy to ~Rs700m on account of lower tax rate.
• FY20E Guidance: Pipes volume growth of 10-15% is achievable. December/January have been strong so far. Adhesives still in correction mode (although Jan has seen double-digit growth). Overall EBITDA will still grow faster than revenue.

Key positives: Pipes margins strong at ~20%.

Key negatives: Pipes volume growth weak.

Impact on financials: 8%/2% FY20E/21E EPS upgrades. Introduce FY22E.

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 starting to bear fruit, 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 correction is also complete and benefits from this should start accruing from FY21E onwards and build on from there onwards. Maintain Outperformer with a TP of Rs1,363 (roll-forward to 47x FY22E EPS). We expect premium valuations to sustain given strong execution and ability to stay ahead of the industry in terms of innovation.