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Sector report: Home Improvement; Plastic Pipes – A secular growth story!

Plastic pipes, though an esoteric product, is a household name in India, thanks to the efforts of large organized players (~60-65% organized). The industry (pegged at ~Rs270bn in FY18) is a multi-year growth story slated to register ~12-14% CAGR over FY18-23E, driven by real estate development (including affordable housing), irrigation and replacement demand (versus galvanised iron (GI) pipes). Within pipes, CPVC (24-25% CAGR) and HDPE (15-16% CAGR) should see faster growth than the industry, while PVC is expected to move at a measured pace of 10-11% CAGR over FY18-23E. Large organized players with dominance in sub-segments, strong brand equity, distribution and product portfolio will continue to do well. We initiate coverage on Astral Poly Technik (ASTRA; target price Rs1,330) and Supreme Industries (SI; target price Rs1,355) with Outperformer ratings. We like ASTRA’s product innovation and execution capabilities (~20% PAT CAGR over FY13-18) and SI’s dominance, pan India reach and superior profitability over market cycles (~14%+ EBITDA margin/25% RoCE over FY09-18).

Large but still enough scope for growth: India’s plastic pipes industry is expected to post 12-14% CAGR over FY18-23E to ~Rs490bn by FY23E (10-12% over FY12-18). Affordable real estate segment (PMAY-U/PMAY-G deliveries have picked up), rising irrigation coverage (only 49% of net sown area under irrigation) and replacement market (done most heavy-lifting in recent times) should propel demand in the mid-term.

Established players leave little room for newbies: We see strong brand equity, wide manufacturing/distribution reach, broad product portfolio, a healthy balance sheet and good product quality as key ingredients for success in the industry. Existing players have been exhibiting these attributes to gain strength within sub-segments (eg, ASTRA is a top CPVC player, SI is largest in real estate PVC pipes and Finolex is the largest agricultural pipes player). As a result, these players are able to support growth in new markets and defend market shares in existing markets, leaving little room for new players to attain scale.

Pipes unlikely to get disrupted like Tiles: Unlike Tiles, there exists a vast difference in product quality between unorganized and branded pipes players. Moreover, ~60-65% of the pipes market is organized (50% for Tiles) and procures raw materials from large petrochemical companies (versus unorganized supply chain for Tiles, making it easier to evade taxes) assuring raw material price parity (mostly). As pricing discipline is comparatively better in pipes, we see it as a favourable investable space.

Outperformer on ASTRA and SI: We initiate coverage on ASTRA/SI with Outperformer ratings. We value ASTRA at 45x FY21E EPS and SI at 30x core FY21E EPS (implied FY21E P/E at 28.3x), in line with their 5-year average 1-year forward P/E, respectively. Strong prospects, leadership, capital efficiency and healthy return ratios underpin our premium valuations. Key risk stems from slowdown in GDP growth, which could entail lower investments in housing and irrigation.