As (and if) India opens up more to foreign investment, the trend will be for foreign companies with good technology to set up independent operations similar to other countries, the implication for investors is that one should not over value Indian companies that derive valuation support from foreign JVs.
Some Back of the envelope calc…(ref. Screener.com)
EV ~ 2849 cr
PAT(TTM) ~ 80 cr.
If one is expecting 20% ROI, One will be making money on this investment when PAT reaches ~ 560 cr
If we expect PAT to grow by 40% a year, It’ll take almost 5.5 years to reach at 560 cr. level and from then on one will be getting expected ROI of 20%.
If PAT grows at these levels, one can also expect a decent growth in Market Cap.
But how likely is that it will continue to give such extra ordinary growth?
There are, of course, some positive indicators that it has now backing of many funds and FIIs and it can propel the growth further but it’s double edged sword…It can swing both ways.
Aksh,
A excellent business will keep commending higher multiples. We cannot explorate the current valuation to see how long it takes to achieve that,rather the pointed to be noted here is can the underlying business affected or can it keep growing steady if yes it will not affect the valuations of the business and it will continue to commend such high multiples.
@Aksh I’m sorry but I could not get your point. @20% ROI on my money invested in shares or the return this business is generating.
If I’ve understood it correctly you are saying that 20% of EV right? Why you are calculating ROI on EV ?
Can you please explain the logic. Sorry If the question is too naive.
@Prabeesh,
I agree that if the business continues to grow at higher rate, Mr. Market, in all probability, will continue to give it high valuations…but for that to happen, as the numbers suggest, it has to grow at high rate for long period of time, for any new entrant, at this price, to make good ROI.
Looking at the nature of the business, competition can catch up any time putting pressure on the margins and overall growth thus by affecting your returns.
Even if you look at that percentage increase in M-Cap over the years, with larger base, that far exceeds percentage increase in the earnings…so price has overrun the fundamentals…which I call, “Pot hotter than Tea” Syndrome…Which is making it riskier by the day.
Having said that…if business grows in terms of sales, earnings etc., with new private equity coming into play, Mr. Market might propel it to new heights giving exit option in a short time, but for a longer time, at the moment, I think it’s quite risky for retail investors.
If you are a new entrant in the equity, you are interested in the return that you get on your investment not the return that the business generates…
So if you are buying the entire business, it’s available at EV of 2849 cr. That’s the amount you have to pay, so that’s the amount on which you expect your returns, Isn’t it?
So you’re right, It’s 20% on EV…to simplify it also means 20% on your purchase price per share…in which case you have to see EPS…at current price of Rs. 489/share, business has to generate EPS of Rs. 97.8 @20% expected returns.
I hope it helps 
Astral valuations have moved up very sharply in the recent months. But the business has a very clear growth plan and has been at the forefront of bringing new innovations to the Indian market. The quality of management is excellent. The opportunity size is very high, with cpvc the overall cpvc sector growing consistently for all players. So, a PE based valuation may not be the right metric to value such companies.
Hi Abhishek,
I agree with you that business is very good with lots of positives like large opportunity size, very good brand visibility, very good distribution network, growing CPVC sector, early mover’s advantage etc. The only concern here is it’s only licensee and If I’m not wrong they don’t have exclusivity for all products and Lubrizol has now plans to set up shops in India. Lubrizol, in all probability, may give license to other players also to sell more of its products. With competition coming in, they can make all the difference over a period of time.
The Management, i must say, is excellent and has been very aggressive and you can see Astral all over. They have been superb in their execution and not allowed competition to catch up. With access to lots of capital now, they can get even better.
As far as price is concerned, I think all positives are already priced in and it’s little over stretched because it’s ultimately the earnings from which you would draw your returns. …No?
So, Business is very good, Management is excellent, Price, I think, is not so good, in that order
How would you value such business? What price is the right price to pay?
By any valuation method, Astral is way too expensive. Any business with an ROE of 24% odd commanding a multiple of 35 seems very stretched to me.High PE businesses without a healthy ROE is a big No for me. I am sure it will keep on growing but the overall returns perhaps will be subdued compared to the historical returns.
Disc: Had been invested in astral, sold all recently.
Excellent story on Astral in latest issue of Outlook Business.As per MD atleast 20-25% CAGR growth expected to continue for several more years due to
1). Huge demand expected from new houses to be built n infra projects like Airports n Astral has diversified product range . Cos product were extensively used in T2 N T3 airport projects in Delhi n Mumbai.
2). Huge opp coming from underground drainage system for which co is making presentations to several municipalities n will involve replacing existing sewer lines.
3). Export foray in Kenya n neighbouring countries
4). Co has full pricing power n products are placed 7-8% above competition sale still v brisk.
5). Blazemaster approval received after 5 years wait expected to be a 200 crore market.
6). Agriculture market comprising of column pipesn made only from PVC is a huge market with 6000 cr opp n column pipes forborewell another 3000 cr opp.
7). Fire safety pipes in cpvc segment is another 1500 cr opp
8). Cpvc margins are as high as 25 % as Lubrizol makes 70% of the compound worldwide.
9). Housing n industrial sector expected to grow 35% each year but industrial takes time to adopt specially in chemical sector where they still use polypropylene
10 excellent understand n sponsorship with plumber association who acts as wonderful word of mouth influencer . Extensivetarini g always going on for plumbers fraternity.
11Hosur plants commissioned which will result in 7-8% freight saving which will be passed on to cuts omers in Southern India.plant to be made in eastern India too.
12). Big investment in branding to continue.
13). Westbridge sitting on a 5 bagger after investing in 2012 n 13 n no plans of exit.
14 . From 4000 tones to 95000 Mtpa now all expansion funded thru internal accrual n DE only 0.37
15). Besides Lubrizol tie up with other world reputed makers like IPS for solvent cement, Harrell plastics for PVC fitting,hunter plastics for underground speciality fittings, Spears inc for cpvc n PVC fittings,flanges
one suggestion to anyone who is interested in doing this -
compare the various parameters for cera sanitaryware and astral like ROE, debt equity, asset turns, growth over 5 years , cash flow etc. dont look at absolute numbers, just look at the ratios and the trend. you will find a remarkable amount of similarity. maybe it because both supply to the housing or maybe its just a coincidence
now compare the valuations. you will find an interesting difference
Rohit-
I’d a quick look and while all the ratios are similar (Astral’s marginally better within ~5% of that of Cera) the valuations that Mr Market is assigning Astral is a hefty premium over Cera. However, I guess the market will assign Astral a premium valuation. This has to be seen in the light of:
1). Cera has competition like HSIL, Parryware, Jaguar, etc. Isn’t Astral in a sort of monopoly considering the unique product?
2). Comparing of market share trend of Cera and Astral will help. Is Cera able to maintain/increase market share? How is Astral doing in this regard?
3). If housing/reality sector takes a knock, Cera will be affected. It is more of a lifestyle product. Astral is somewhat protected as it a commonly used product?
The RoIIC of both Cera and Astral should also be similar.
Disc: Do NOT own Astral or Cera.
Ashwin
the various ratios and trend appear to be oddly similar. maybe thats just a fluke. however the underlying economic driver for both companies are quite similar - new housing, replacement demand etc
I dont have an answer for all the valid points you have raised. but is astral really a monopoly or a very well run company ?
If astral deserves a 35+ time valuation , does cera deserve ‘only’ 20 times ?
i dont have an answer, but i found the situation interesting. i may be baised here as i own Cera sanitaryware
Hi Rohit,
Astral’s story is about iron pipes getting replaced by cpvc pipes for new houses aswell as old ones. And competition is much lesser than for Cera.
Cheers
Vinod
**“If astral deserves a 35+ time valuation , does cera deserve ‘only’ 20 times ?” **
Good question. I feel both are by and large fairly valued (or maybe Cera is relatively a better buy at CMP if one has a gun pointed and had to choose one). Will Astral able to show good growth over the next 3-4 years? Will they have market to the increasing product they may churn out? I don’t know have an answer to that question as market share, big market opportunity and high RoIIC matter more than growth. I’ll buy Astral at CMP if I know the company has market for their products for the next 5 years at least.
P.S: Why is Mr Market assigning only 24 times earning to Mayur? It has better ratios than Astral.
Cera profits are bumped up majorly due to its access to APM gas till Dec 15. Its competitor dont enjoy it. What cud be the effect of current profits on Cera & its impact post Dec 15.
why do you think competition is any lesser ? the market share and pricing does not seem to point to that. there a few entry barriers and early mover advantages, but does not look too different between the two industries
i am just thinking aloud here …not pitching for cera or against astral. i just find the difference wide and cannot find an obvious reason to explain it.
if i compare a nestle versus a cement company, that is easy to explain and understand.
why do you think competition is any lesser ? the market share and pricing does not seem to point to that. there a few entry barriers and early mover advantages, but does not look too different between the two industries
i am just thinking aloud here …not pitching for cera or against astral. i just find the difference wide and cannot find an obvious reason to explain it.
if i compare a nestle versus a cement company, that is easy to explain and understand.
vivek - gas accounts for 4% of total cost, so a 50% rise should impact the company 1-2 % post tax in margins if the company cannot pass the price increase. however if you believe they have some pricing power (which they proved recently), then they should be able to pass that cost.
the above however may just prove that CERA is over priced. however if you compare the numbers for astral with other similar companies, the difference is still difficult to explain (atleast for me).
**
i just took cera as an example as the numbers are oddly very similar. mayur is good example too …
i am not trying to knock down astral or say mayur is better. its just that it makes sense to compare all these companies with each other. maybe all are good buys 
"If**
Rohit,
In my experience, the markets during normal times are quite accurate in assigning PE multiples to various sectors and companies. There are plenty of industry insiders in the market that know the business a lot better than we as outsiders can possibly can.
Ratios can only be relied on to a certain extent, they are backward looking and mostly static. What really matters is future prospects.
Bobby