TOTAL MARKET OPPORTUNITY
While there are no industry published figures, several estimates by analysts have pegged the annual market for Plumbing Pipes in India anywhere between 20000-30000 Crs. Of these 6000-7000 Cr is still GI use. Another 1000 Cr is for specialty solutions like Fire-Sprinklers, etc. About 30% is Replacement market.
EXISTING PRODUCTS COMPETITIVE LANDSCAPE
In the CPVC Lubrizol segment as you are aware Ahshirwad, Astral and Ajay are the only Players. Ashirwad is a big well-established player. Ajay is yet to show any significant volumes.
In CPVC Generic segment there are several players. But they still are facing issues on the RM (compounding) stage. Kaneka is supposed to set up a manufacturing plant by 2014 end.
There is a 6-7% price differential with the generic players. But if you look at it, pipes constitute only about 1-1.5% of overall cost of the plumbing solution. We haven’t seen any impact, our volumes are not dropping. There is room for everyone to grow.
Doesn’t Kaneka supply the CPVC Compound too?
Well they do. But in India everyone wants to be able to do the “jugaad”; people try to make their own compounds; that can save them some 5-7%. But that has not been working out.
And the PVC Segment?
PVC is a huge market by itself. But there is high competition. We are not present in the Agri segment which sees cut-throat competition, with very low margins. Players like Finolex dominate this segment. Then there are players like Supreme who are present in both Agri & Plumbing.
With the Hosur Plant in South India, we will be able to compete more effectively, as transportation costs are high; adds up another 7-8%.
BUSINESS GROWTH DRIVERS – PLUMBING SOLTION BASKET
Last time we understood …..End customer is really the Plumber, serviced by Large Distributors. The Plumber usually buys the entire solution basket -from one Brand. So large distributors can be attracted and retained – if you are able to offer a) complete solution basket, b) More number of solutions
We have about 300-350 distributors. All the states put together, no of dealers will be 9000-10000. Distributors keep 3-4% and the Retailer retains on an average 7-8% margins.
Project Sales are handled by Distributors with some 8-10% margins. Support is provided by the company for Project Sales..
We continuously try to interact & educate Focus groups. Consultants, Architects and Builders for Project Sales and Plumber Groups for Retail Sales. In the Southern Market we have seen Plumbers are more educated. The West market requires huge training. We conduct almost 3 trainings every week there.
Our product basket is widening and we are able to provide solutions for most requirements from the Astral brand umbrella. This helps our distributors and dealers as builders or retail customers usually like to source from one place.
As you know we have 4 products licensed from Lubrizol. Flowguard, CORZAN, Blazemaster and Bendable. Ashirwad & Ajay have only the Flowguard license.
We have Aquarius (lead free PVC) brand. SWR. Column Pipes is what we have recently launched and expect to be able to do about 40-50 Cr from this segment. In 3 years we are looking to do 300 Crs from this segment. Ashirwad has a virtual monopoly and derives 300 Cr from this segment of the ~500 Cr Column Pipes annual market.
Ashirwad claims some patent for Column Pipes?
These are Marketing tactics everyone employs! In terms of technology/design barriers there is no impact or value derived from these. You might be aware some other CPVC player also claims patent-pending Alignment technology!
As you are aware this is handled through a 100% subsidiary. We have plans to supply for the Generic players needs; also open to White-Labelling.
We have launched this for PVC segment. This is slow-moving, we are doing 8-10 Cr from this segment. Margins are better than existing products. In Q3, we will also be launching Solvent Cement for CPVC segment. There should be some positive impact on the bottomline, as this will be an import substitute.
This is a patented product from the Lubrizol stable. 3-4 years have gone in the R&D and commercialisation phase. So another 16 years of patented life exists. Astral is the only licensee of this product currently. Exclusivity for Indian market. We may be able to export some.
These products are good for Solar Applications. Because of thermal expansion properties of water, you may have seen the pipes become zig-zag and eventually break. So Bendable pipes come with a metal support, so the thermal expansion does not happen. Gas application is another market.
Limited market size. Currently metal pipes are used, only Copper, plastics are of no use. So Bendable offers a much cheaper solution. This will have better realisations, but initially market development efforts may require offering lower.
We have set up capacity of 11000 MT and are perhaps looking at 60-70 Cr turnover. Currently wen have tooling for 1/2”, 3/4” and 1”. We have ordered tooling for 1/4”, 1 1/2” and 2” that will complete the solution basket.
This is a CPVC solution for Fire Sprinkler system. Fire Sprinklers have the additional complexity of having continuous water, so there is heavy corrosion. So GI solutions are not very good here. Every 5-6 years you will have to paint/repair; there is replacement headache, besides all the transportation & handling. GI has been also banned in developed countries.
This is a very promising product line. Fire Sprinkler systems are becoming mandatory for commercial buildings, malls, hospitals. This is projected as a 700-1000 Cr annual market.
Astral is the exclusive licensee of Lubrizol in India.
Nothing to add really. The relationship is going strong. We are the only Licensee in the world to have 4 products form the Lubrizol stable. Bendable, their patent-protected technology – Astral is the first and only licensee globally.
MEDIUM TERM OPERATIONAL OUTLOOK
We have always tried to communicate, ours is a Growth-led strategy. Consistent Margin expansion is NOT our focus. We are happy to achieve a 25-30% growth rate consistently and at 12-14% sustainable EBITDA margins.
There are no easy solutions here. You must have seen everyone struggling to manage the extraordinary volatility. In Astral’s history, this is the first time we have seen 20-25% depreciation of the Rupee (versus the US $) in 6 months and a 10% appreciation back in 1 month.
We need to weigh the Forex Loan (2%) versus the domestic Interest cost (13%). So there is an 11% interest cost arbitrage available which needs to be weighed against the liability size of possible Forex loss.
We had taken a Forex currency loan of 15 Cr in 2003. We have been taking Forex currency loans. For the next 6-7 years this has worked hugely to our advantage, as the currency movement was only of the order of 5%. But this is obviously not working in the current environment of extreme movement.
And the forex payable to Lubrizol for the 120 days credit terms? Why don’t you hedge this?
In a stable environment the 120 credit period from Lubrizol has been a great advantage to us – leading to negative working capital for the CPVC side of the business. If we were to hedge the payable, we would have to pay a 4-5-7% premium and this will take away the credit period benefit and impact our margins.
As a corporate we make long term strategies and work on it…when such extreme currency movements happens which are beyond anyones imagination, its obviously tough to handle. We need to understand what’s going on and revise strategies, and tweak them to see what works. Everybody faces the same choices – including the Generics. Strategy can’t be based on Abnormal conditions.
If you look at it properly, there is undue focus on the 1 to 1.5% drop in EBITDA margins. We can actually take a 60-90 day cover and there will be no change in EBITDA level, will you be happy with that?
From our perspective, it is also not correct to look at it from a Quarterly basis,either. In Q1 there was some M2M, in Q2 there was Zero M2M. And in Q4 everyone was hugely surprised to see the 18% EBITDA margin – no one had expected this. This was because of the price hikes we had taken, the lag effect and the effect of currency appreciation. In Q2 we had taken a 6-7% price hike, overall for the year 13% price hike.
We have tried to explain this to everyone. 18% EBITDA levels are not sustainable, 12-14% is. No need to be happy about the 18% EBITDA margin in Q4. No need to be PANICKY either. Better be prepared for reasonable margins of 12-14%.
Overall we don’t think all this is such a problem. Quarterly adjustments do not provide the right picture. So we have opted to adjust on a yearly basis at the year-end due to reasons mentioned above.
We are at 65000 MTPA today in Gujarat. We are incurring 40-50 Cr Capex for putting up another 15000-20000 MTPA capacity at Hosur. This will be available by the year end.
LONGER TERM OUTLOOK
Ours is a simple Pipes business. The Indian plumbing market is growing at 12-15% annually. We are capable of growing at 25-30% rate consistently, which we should be happy for. The growth drivers are Capex and Working Capital. One part of the business CPVC (60%) is Working Capital negative. And another part PVC (40%) has huge working capital requirements. For a couple of more years we will need to keep borrowing to finance this growth.
Do not jump to conclusions based on Q1 results. Our business is slightly seasonal. 1st half delivers 40% and the 2nd half 60%.
This is a very simple business. Any player can grow in this market. It’s a Capacity game. It’s a New Products game. It’s an Asset Turnover game. What goes to our advantage is Asset Turns of 5x. Supreme Industries is a live example in front of you.
In 2007, we were preparing for an addressable market (ours) of 1000 Cr. We are now preparing the plants for addressing a market of 2000Cr.
8. BRAND BUILDING. PROMOTIONS
We have been building up the Astral brand with our target customer base – Plumbers, Architects, Consultants, Builders/Project segment.
We will next attempt on educating the CONSUMER directly. There are some mass media events planned in October/November timeframes.
Astral products have typically been behind the Wall. There is no aesthetic appeal per se. We are trying to formulate plans for future products which will come in Front of the Wall. Since the customer segment and typical distribution network is the same, it may make sense for us!
Vinod Ms: No Holdings in the Company; ;
Gaurav Sud: No Holdings in the Company; ;
Ayush Mittal: Less than 5% of Portfolio in the Company; Holding for more than 1 year;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years;