Astral Poly Technik - Star in the pipeline

When ace investor Warren Buffet decides to partner with a company, one can be rest assured of the quality of its management and the business they do. Recently US-based specialty chemicals maker Lubrizol Corporation, a wholly-owned subsidiary of Buffett’s investment company, Berkshire Hathaway, announced its plan to set up a chlorinated polyvinyl chloride (CPVC) unit, in partnership with Astral Poly Technik (ATPL) at the Gujarat Industrial Development Corporation complex in Dahej. This news, though in the very initial stage of discussions, set the market buzzing and the stock surged by 19% to its all-time high. This is exactly why we decided to analyse the company in further detail.

APTL manufactures CPVC (it contributes 65% to its total revenues) and lead-free polyvinyl chloride pipes (these bring in 35% of the total revenues) in India since 1999 with production facilities at Ahmedabad and Himachal Pradesh capable of producing both pipes as well as fittings. The company is assisted with state-of-the-art technology provided by Specialty Process, USA to manufacture CVPC pipes and fittings. Over time, backed by a strong network of 10000 dealers and 300 distributers, ATPL has emerged as a market leader (60% market share) in the Rs 600 cr domestic CPVC pipes and fittings market.

Since its IPO in 2007 the stock has provided 159% returns and even on a YTD basis the counter has been an outperformer, providing 18% returns against a negative 17% by the Sensex. Moreover, the company also has a reputation of consistently rewarding its shareholders by way of dividends since the issue of its IPO.

Growth Potential

The Indian pipe industry is estimated to be around Rs 17000 cr and is growing at a CAGR of over 15%. With a varied presence across all the categories of pipes, India is among the top 3 manufacturing hubs after Japan and Europe. Predominantly, India has always been a GI (galvanised) pipe market. But now, GI pipes are facing tough competition from the increasing usage of CPVC/PVC pipes due to their cost advantage and anti-corrosive features.

The real estate sector, which consumes around 40% of pipes manufactured in India, has also started to prefer these pipes due to its superior features. Moreover, incremental demand is also expected from the replacement of GI pipes installed in the existing projects. Going forward, owing to robust urbanisation, massive need for drinking water and sanitation and the government’s increased focus on irrigation to boost agricultural productivity, we expect the demand for CPVC pipes to be high, which in turn will prove beneficial to a market leader like ATPL.

Properties	GI	PVC	CPVC
Life (Years)	10‐15	20-25	30-35
Cost	Rs 50 per feet (15 mm)	Rs 12 per feet (15 mm)	Rs 15 per feet (15 mm)
Corrosion	Corrodes faster and deteriorates	No effect due to chemical resistance	Anti-corrosive properties
Fire Resistance	Easily catches fire and sustains burning	Less resistance (45 deg Celsius) than CPVC	Does not catch fire or sustain burning, resistance up to 95 deg Celsius
Leakage	Vulnerable	Leakage-free	Leakage-free for lifetime
Bacterial Growth	Higher than copper and CPVC	Relatively low	Extremely low
Thermal Conductivity and Insulation	Very high thermal conductivity increases heat loss and requires high insulation levels	Low thermal conductivity reduces heat loss and requires reduced insulation levels	Low thermal conductivity

Growth Initiatives

Over the past 5 years, ATPL has aggressively expanded its capacities from 4000 TPA in 2006 to 48400 TPA currently (12x higher) to meet the vigorous demand. The company further intends to expand it to 70000 and 100000 TPA by the end of FY12 and FY13 at its 2 new locations – Dholka (Gujarat) and Hosur (Tamil Nadu). While commercial production at Dholka is expected to start from December 2011, that in Hosur may start from April 2012 onwards. The management has outlined a total capex requirement of Rs 80-85 cr, which it plans to meet mainly through internal accruals and partly through debt. We believe that these new capacities will enable the company to serve the steady hike in demand in the CPVC/PVC segment. Also, the new plant at Tamil Nadu will help reduce its logistics cost, thereby helping the company to meet the strong demand down south too.

On the input side, the company meets its key raw material requirements from Lubrizol Inc. (USA). At present, Lubrizol is a key global supplier of CPVC products and resins and commands 80% of the global market share. We have observed that ATPL has been successful in maintaining a very healthy relationship with Lubrizol, which is evident from the fact that it is the only major player in India with an exclusive license from Lubrizol for manufacturing and marketing CPVC products.

Moreover, with a view to provide backward integration for cost reduction to its manufacturing activities the company has entered into a technical collaboration with IPS, USA, through its 85%-owned subsidiary, Advanced Adhesives, to manufacture cement solvents that are used in joining the pipes. The quality of expertise provided by IPS is regarded to be excellent and looking at the growing demand in the Indian market coupled with its irreplaceable application in CPVC/PVC pipes, ATPL has set up a manufacturing facility of solvent chemicals with the help of IPS.

The company has already started manufacturing activities for its PVC pipes and expects to start the same for CPVC within a year. The solvent chemical manufacturing activity will contribute significantly to ATPL’s topline in the years to come and the company expects sales from this product to be more than Rs 250 cr in the next 3-4 years. The management has also added that the chemical solvent business is a high EBIDTA margin business, indicating that this segment will also contribute significantly to the bottomline.

ATPL has also extended its wings into the emerging markets of Africa, Bangladesh, Sri Lanka and Nepal by exporting its products there. With a view to cater to the increasing demand of CPVC/PVC pipes in Africa coupled with the intention to reduce its import duty burden and logistics cost, ATPL has set up a manufacturing facility at Nairobi with an installed capacity of 6000 TPA. Based on our observations, this is a very long-term plan as currently the exports contribute a meagre 1.5% to ATPL’s total revenues. However, given the fact that its export revenue has grown by over 21% to Rs 6.5 cr in the past 1 year, there surely is some potential for growth in the future.

Among other benefits, ATPL’s HP plant enjoys lower tax, excise holidays and CST of just 1% for a period of 10 years, in addition to around 25% cheaper power cost. The company has enjoyed all these benefits for 6 years already and will continue to receive the same for the next 4 years until FY15.

Financial Performance

On the financial front, the company has been consistently improving its performance over the past 3 years with the topline and the bottomline registering a CAGR of 30% and 32% respectively. At the end of September 2011, the company has managed to post a half yearly topline and bottomline growth of 38% and 30% respectively.

ATPL which derives growth by regularly launching new products has introduced its PVC-based column pipes used in borewell applications, which will fuel growth in the coming quarters. The company is also eyeing the high-growth oil and gas industry by launching aluminum CPVC pipes, production of which is expected to commence in FY13.

Going forward, the management has indicated a growth estimate of 40% for FY12. But keeping in mind the global macro-economic concerns and our very own domestic dilemmas, we expect the company to face some headwinds in term of slowdown in demand and increase in input cost as a result of the depreciating rupee. We, at DSIJ, expect the company to grow at 30% for FY12.

On the valuations front, based on our growth estimates for FY12, we expect the company to report an EPS of Rs 18.32 which discounts the CMP of Rs 187 at 10.20x. One may look into buying the counter at its current levels with a medium to long term target of Rs 240.