Astral Ltd. (Earlier: Astral Poly Technik Ltd.) ~ Leading Pipes & Adhesives company

Stock Opportunities Not-so-Hidden Gems
182

Reconfirmed again… here is the detailed reply i got…

Management told that Lubrizol is supplying to 2 other companies other then Astral in India…One of them is Aashirwad…However, competitive position in CPVC itself is increasing considerably wherein many Japanese and other companies have started supply of the same…Hence, procurement of raw material is not as much a concern now as was before…This is one of the reason why Astral’s marketshare in India has reduced to ~45 %… In India, only RIL has the capability to manufacture CPVC but it has no interest in PVC itself so CPVC is out of question…Company is banking highly on exclusivity for Bendable which is the next promising area and Blazemaster.

Rgdg. Aashirwad, management told that they have high regards for the quality of products of the same and consider it as a formidable competitor.

Rgds.

183
Analyst Meet
Astral Poly Technik
The company held its Analyst Meet on 24thMay'12 and was addressed by Mr. Sandeep Engineer MD and the CFO Mr. Hiranand Savlani

Key highlights

  • The company grew at 40% CAGR in net sales and FY'12 was no different. The company today has about 13 Astral brands in the market and continues to enjoy the position of only licensee of Lubrizol for many products like Flow guard, Corzon, Blazemaster and Bendable.
  • As against the installed capacity of 48,432 MT at the beginning of FY'11, the company utilized about 38,824 MT capacity (up by 37% y.o.y) during FY'12. By the year end of FY'12, the installed capacity has been increased and stood at around 65,496 MT. If one includes the 1100 MT capacity of new bendable pipe machine, then total installed capacity stands around 66,596 MT. During Q4 FY'12, the company utilized capacity to the tune of around 11,698 MT.
  • About 63% of total sales of FY'12 came from CPVC pipes and rest from PVC pipes.
  • A total of about 68 crore has been incurred during FY'12 including the Bendable pipe machine. This capacity of about 66,596 MT, is sufficient to generate sale of around Rs 1000 crore.
  • Management has indicated that the Q4 FY'12 was an abnormal quarter, where the management made price increase of about 7% due to rupee depreciation when it was at 53 and then the rupee went all the way to Rs 50. So the margin of about 21% was an abnormal margin. Going forward management expects OPM of around 13-14% on annual basis, which is more realistic. A further 5% rise in prices of products has been made in May'12, to tackle the further depreciation of rupee and thus higher raw material costs.
  • The company has 3 plants in India now, one in Himachal Pradesh where it has 3 more years left for tax holidays and another 2 in Gujarat. One plant in Gujarat at Salej is dedicated for clear water related pipes and the other one at Dholka is dedicated for sewage, wastage and drainage related pipes. A land at Hosur of about 22500 sq meter is already purchased by the company for future development. This is to reduce the transportation costs and better delivery for South Indian market. The JV in Kenya where company has 32% stake operated satisfactorily during FY'12 and 2 machines already have been laid down and has started its local operations. .
  • Astral has commenced the commercial production of bendable pipes first time in the world with the technical support of Lubrizol during May'12. Lubrizol has exclusivity of this technology for about 20 years. This is a very complex technology where by CPVC will be blended with Aluminum using laser technology and will replace the traditional copper pipes. Although cost wise it is same as a copper price, it is far better in terms of heat resistance, thermal expansions, pressure, velocity etc.
  • The company has so far installed 1 bendable machine although it has laid down the infrastructure for 4 more such machines. Each of such machines cost about Rs 20 crore and can generate sale of about Rs 80 crore at its optimum capacity. Initially the capacity will be used for exports to Lubrizol and simultaneously the local demand will also be created.
  • The solvent cement plant for PVC pipes is performing well. The company has just commenced solvent cement plant for CPVC pipes. The entire solvent chemicals are manufactured in Astral's 100% subsidiary company. The solvent cement plant for CPVC pipes can generate strong sales in next couple of years.
  • Blazemaster product continues to be used by many players even though the BIS requirements from government of India have yet not come.
  • Wavin pipes which have high impact strength and produces no noise whenever the application is made is accepted well by the market. They are particularly applied in Hotels, high-rise buildings, commercial offices etc.
  • The company has also tied up with AlcaPlast, a UK based company for selling products like shower channels, waster trap, flush tanks and other sanitary products. All these products will be traded at present.
  • The strong network of Astral, in terms of dealers, now more than 9500 as compared to around 5000, 2 years back, distributors, brand awareness, education among plumbers and dealers etc all have played significant role in the growth of the company. The company now has presence in all the geographies of India through its distributors and dealers.
  • Availability and pricing of raw material is not an issue for the company, but rupee is definitely, as the company imports its raw material requirements. However it tries to minimize the costs to the extent through plain vanilla hedging.
  • The company so far does not export much since the domestic market is growing phenomenally well. However it does export some of the products to Bangladesh, Maldives, Nepal. Lubrizol has allowed the company to export its products to SAARC countries, Russia, Middle East and African countries.
  • Management expects capex of about Rs 45-50 crore for FY'13.
  • Overall the company continues to expect sales growth of around 25-30% for FY'13.

SourceCapital Market - Live News
184

Based on these latest developments, is it fair to conclude that at 11x LTM EPS this company is fairly valued i.e. the forex risks and increasing competition risks along with margin erosion is fairly compensated against the massive growth opportunity? I do not see why it should get re-rated higher.

185

How are the latest results ? It seems that the company has not taken into account sizeable foreign exchange losses rather postponed it to year end. What does it signify ?

Any body who has analysed the results as the co is touching new high.

186

Result looks okay…

However crap it may looks, Forex losses carried forward is perfectly legal… Thanks to Ministry of Corporate Affairs…

http://business-standard.com/india/news/falling-rupee-ministry-breather-for-companiesforex-debt/460399/

and here’s good article on change in Accounting standards…

http://www.moneylife.in/article/taking-the-investor-for-a-ridemdashwith-government-sanction/22683.html

187

I am a bit scared, to be honest. With the forex losses being more than the net profit, I am not sure if the results being portrayed actually make sense. With the dollar unlikely to come down significantly, these losses cannot be wished away by year end. So, these are actual losses. And it might lead the management to make reckless things before year end to show profits.

188

Hi Guys,

Time to put forward discerning questions to Management.

We have an audience with Astral later this month, so fire away.

Please help preparing structured questions to crack/dissect specific issues, let say this vexing Forex management issue. In FY12 also similar situation & similar fears expressed, so let get to the bottom of this and any other top-of-mind questions you may have.

You may like to check the last Management Q&A for pointers on structured questioning of an issue.

Thanks in advance for your help.

-Donald

189

The main worry about this company is its inability to cope with foreign exchange losses.

Can it counter them by increasing prices ?

How are its competitors like Ajay and Ashirwad dealing with it ?

190

Hi Abhishek,

I think, the sales growth is too good to take care of these forex losses. Yes, these losses are actual but the way I’m looking at things is - that if INR remains at same level then these losses might get contained at these levels and seeing the growth, the co can do 775-800 Cr turnover and do 45 Cr NP.

Ayush

191

I agree. That is why I still am holding on to the stock. Sales growth is good. FY12 NP was 51cr. Even if they grow 15% (conservatively), it comes to around 58cr. Rupee loss may be around 10-15cr. So, 45cr NP seems reasonable. But in that case, the upside is limited from here.

What worries me more is the inability of the management to manage the forex. This time the dollar appreciation was far gradual that last year and the company should have been able to hedge its positions. Not sure why they were not able to do so. Or maybe they have hedged on a 1-year long hedge so its stil MTM. Not sure.

192

Hi Donald,

Based on your post it seems you are quite bullish with Astral. Makes sense to me looking at the past growth, and future potential.

I had a small position in Astral. After hearing of apparently legal, but not so nice practice of forex loss forwarding, I decided to sell.

Don’t you consider the forex loss forwarding an unethical practice and questions management integrity?

193

Not at all. The company has valid arguments for what they are doing. As long as they are accounting for it in the year, I dont find it unethical.

Ayush took the lead in dissecting the Forex and other opex issues. I was fully satisfied with what the MAngement came up in robust defense with:) But I am not an expert.I will let Ayush answer in detail the various points and related counterpoints on Forex.

Management Q&A will take some time. I decided to concentrate on fixing the transparency/accountability issues first…making the measures robust…before moving on to recommendation discussions.

194

Hi,

I too had the good fortune to accompany valuepickr core team for the Astral management discussion. Of the 4 cos we visited (Atul, Astral, Alembic and GRP) my favorite is Astral followed by Atul and then GRP.

Meeting the 2 dealers (who told they have also invested in the shares of the com -reminded me of what Lynch says in one-up on using one’s edge) helped in building more confidence incom’s distribution strength and succeeding across India.

My conviction level in this com is very high and am waiting to find some time to check the valuation part and invest.

Forex is a short term issue.I am sure the management Q&A will sort out the doubts in your mind.

Cheers

Vinod

195

Astral Poly Technik Ltd has been awarded for the Power Brands Rising Stars India 2012 Award.

Shri Sandeep Engineer, Managing Director of the Company has been awarded “PowerBrands Leadership Enterprising Entrepreneur 2012 Award”.

Both the Awards have been presented to Shri Sandeep Engineer, the Managing Director of the Company at the PowerBrands Hall Of Fame Ceremony on August 29, 2012 in Dubai. This Award has been given to upcoming Leaders who shall be the torch bearers in the near future.

196

Hi Donald,

This answers my doubts, so this is the second part of the question (which ideally should have been asked in a thread dedicated to your portfolio). As you have mentioned in some other thread in valuepickr, you want to make astral portfolio weight as much as mayur. Do you feel that astral will show similar growth in share price as compared to mayur (which has moved up quite a bit recently, but still undervalued at a PEG of around 0.25-0.30)

Regards,

-Subash

with:)) expert.I

197

I have a good feel about Astral. Need to validate the “feel” with data points. let me establish the premise.

This is a simple pipes business, where they have established an edge with the right customer set - as prefred brands - with a decent product basket, to satisfy complete customer needs (you dont need to go to someone else…you can buy your whole requirement from one brand)

1). Plumbers - for Retail sales

2). Architects/Consultants/Builders - for Project Sales

The market is huge, enough room for everyone to grow. Those who can keep adding capacities (with strong balance sheet), keep introducing new products (this is real key), enjoy some exclusive pockets, enjoy some preferred brand status (not play the pure commodity game) 1 or 2% more on the margins side, maintain margins …ought to do well.

Is Astral placed well on all these parameters - I certainly think so. Don’t forget it enjoys product exclusivities, 60% of the business is negative working capital…these are big barriers for others to cross!

Why can’t it do in the next 10 years what a Supreme has done?? Is a question I have to answer for myself. For that I have to play with last 10 years data. Look at Supreme’s growth, the way it has grown, the sources and the quality of that growth and at what profitability.

And think, why Astral can’t repeat that story?

We need to keep trying to pick holes in the story - what can go wrong fro Astral and why?

If we can’t find enough pointers after trying extensively for a week or so, I should be ready to make my allocation change decision.

Over to the skeptics!! Abhishek - fire away. You know Supreme best, you have maxed Supreme a couple of times, why cant Astral repeat a Supreme …with 50% of the business being qualitatively better than Supreme’s PVC, enjoying some exclusivities, and negative working capital??

Aren’t forex handling issues pretty short term in this big picture. Isn’t the 25% depreciation in 5 months and suddenly 10% appreciation in 1 month - something that no company could have been prepared for to handle. Has anyone who imports RM on Astral’s scale able to manage any better??

Where are the real holes??

198

Just a feeder - Astral has gone ahead and done a huge matrketing spend in Kolkata atleast. All along Kolkata, all the trams and buses are loaded with Astral’s posters (full bodied).

Looks like the company is trying to improve visibility

199

Thanks a lot Ashwini. These field inputs are very very important. Astral is one of those few companies where you can touch n feel every part of the company - products, customers, decision influencers (plumbers, architects, builders), employees - and the size of the opportunity before it is probably the biggest in current ValuePickr kind of stocks - that we are looking into.

Encourage everyone to keep their eyes & ears open for any kind of market activity - also tap your local harware store (when you visit for something), plumbers or builder friends etc - and keep feeding this kind of field intelligence data. Collated properly,this is a**huge Information edge Link: …/…/…/forum/the-investors-edge/133226923 **that we as normal consumers can have on this story.

200

Hi,

The recent trip to Gujarat and visiting Astral has been an eye-openerand quite learning. All the credit goes to Donald who took pains in forcefully taking us to dealers to do the ground work…though we were satisfied with the CFO interaction.

Lets ignore the nos for once and try to understand the journey in brief.

This co started from scratch in 2000 and in a decade they have captured a decent share in plastic industry. Today they score above the other players like Finolex and are able to sell even the PVC products at a 3-5% premium. (The co has almost 40% turnover from PVC). In these 10 years, they have 350distributorsand almost 10,000 dealers.

The MD started CPVC marketing from ground level by educating plumbers and industry people when the majority had rejected the CPVC technology. So Astral has always had a lead of atleast 5 years vs the competitors. The best thing is that the co has been a innovator all the years, they keep introducing new products and keep expanding the product range. Plus the MD is very hard working, he ensures that he keeps all the people in chain - dealers, suppliers, customers etc together. He keeps investing in customer development and marketing of new products. They even say that their plant is the best in India!

The kind of smiles and confidence we could see on the people associated with Astral is un-parallel and has a huge intangible value.

Now coming to Forex part - it has two parts:

1). The co imports key raw material from Lubrizol and enjoys a 120 day credit period. This strategy has been a key factor in past growth as they have enjoyed negative working capital. If we look at competitors or plastic cos in general, they have to pay for raw material on spot basis and hence need a lot of working capital.

But this strategy backfires whenever the rupee depreciates quickly in short span as it takes time to increase prices. So though a business loss but it will happen once in a while.

2). The other portion of loss is the M2M loss on foreign currency loan. The co has been taking foreign currency loan as they can get loan at just 4-5% cost while rupee loan will cost atleast 12%+. So they save interest cost. Infact despite this forex loss, on longer term basis, the foreign currency loan will work out to be cheaper. So we should ignore this loss.

So in my opinion we shouldn’t be looking too much into these losses as the probability of major rupee depreciation would be low.But yes to understand things better, lets tryseparatingthe two losses till now and understand how much was business loss and how much was foreign currency loss. And then try to calculate normal earning.

1 Like
201

Hi Donald,

When you talk about Astral repeating a Supreme are you pointing to a successful com in plastic goods manufacturing? Supremes business has different verticles including furniture and packaging.

Plastic pipes systems contributed 46% of the t/o. The current product line is mostly catering to agri sector.** CPVC had a growth of 60% in 2012 (July 2011 to June 2012) and the company expects same growth in 2012-13 aswell!**

They are adding capacity in pipe systems by investing 150 Cr in 2 phases for 50000 MT. Around 20000 MT will be ready by March 2013. Not sure how much of this is CPVC(Abhishek mentioned capacities can be used interchangeably for both PVC and CPVC).

The OPM for pipe systems is 13%.

The growth of Supreme’s CPVC shows the potential and as already stated there seems to be room for everyone at the moment.

I think Astral will definitely show very good growth with quality earnings for atleast 5 years till existing big GI and PVCplayers sort out capacity and rawmaterial issues. By then the brand would also be stronger. The com has some all India campaigns planned this year for better visibility and demand pull from end customers.

The icing on the cake would be the export market contributing and the lubrizol jv for manufacturing the compound in India taking shape which willwipe outthe forex issues. Even if this happens only in 5 yrs time its fine.

Cheers

Vinod

Disc: I have a very meagre exposure in Astral at the moment but would like to increase the same to 12-15% in due course