Astral Poly Technik

Background

Astral Poly Technik (APL) has its production facilities at Gujarat and Himachal Pradesh to manufacture plumbing systems from ½” to 8” diameter.

APL was the first licensee of Lubrizol (formerly B. F. Goodrich), USA to manufacture and market CPVC (patent protected) piping and plumbing system in India in 1999. APL entered into a techno-financial joint venture with Specialty Process LLC of USA, which provided the required technical expertise for manufacturing CPVC pipes and fittings for home and industrial applications. Specialty Process LLC, USA has 14.08% ownership in APL as part of the Promoter group. APL claims to be the only Licensee of Lubrizol in India and neighbouring countries for the use of the trademarks ‘‘BlazeMaster” (since 2006), and “Corzan” (1998). “FlowGuard” (1998) license is also available with2 other unlisted players  Ashirvad Pipes (Bangalore) and Ajay systems (Delhi).

APL has ISO 9001:2000 certification for manufacture and supply of CPVC and PVC pipes and fittings for plumbing systems and industrial piping system. Astral is the only company in India whose manufacturing plant is approved by NSF, USA. The NSF certification represents the highest standards in public health & safety and environment protection. The NSF mark is recognized for its value in international trade around the world and is respected by regulatory agencies worldwide. Astral recently received ISI approval for its CPVC products in the country.

APL’s manufacturing facility at Barotiwal-Solan District (HP) enjoys tax benefits/ concessions, relating to duties of Sales Tax, Excise and Income Tax. Overall tax rate for the company in FY2010 was 16.90%. These benefits are expected to continue till FY15.


Main Products/Segments

Main products include Chlorinated PVC (CPVC) pipes and fittings for hot and cold water plumbing systems, CPVC industrial piping system for transportation of hazardous and highly corrosive chemicals, and lead free PVC systems for cold water application.

APL introduced a new product range in lead free PVC pressure pipes and fittings in 2004, again a first in india. With the concept of providing a one-stop source for all plastic piping systems, APL also began trading in products such as CPVC and PVC fittings, flanges and valves from Spears (USA), solvent cements (adhesive solutions) for joining pipes and fittings from IPSC (USA), underground specialty fittings from Hunter (U.K) and CPVC and PVC plastic pipes of larger diameters from Harvell Inc. (USA).

CPVC product segments contribute roughly 65% of Sales, balance is from PVC products.


Main Markets/Customers

  • Astral Flowguard & Astral Acquarius – for usual hot and cold water plumbing solutions
    • Residential Housing Projects
    • Hotels, Hospitals, Malls, SEZs, Airports – Construction projects
    • primarily sold through the distribution network
  • Astral Corzan – for transportation of highly corrosive industrial chemicals and gases
    • Industrial projects
    • primarily marketed by Direct Sales as it requires concept selling
  • 65-70% of Sales are reportedly from the Residential Housing sector. Balance from Commercial
  • Main demand is from Metros & Tier1 cities. However as per the company FY10 saw increase in demand from Tier2 & 3 cities.
  • As per the company increased focus on Replacement market (10% of CPVC Sales which has huge future potential especially in infrastructure, hotels, hospitals) and Projects in FY11
  • Some major customers in FY10
    • Bangalore – Apollo Hospital, Columbia Hospital, Hotel Novatel
    • Delhi/Gurgaon – Medicity, Max Hospital, Delhi international Airport

Bullish Viewpoints

  • Proxy play on the growing domestic construction sector – 26.53 million dwelling units housing shortage in India by 2012 is the estimate by a Technical commitee of the Ministry of Housing and Urban Poverty Alleviation. The plumbing segment is expected to grow between 15-20% annually for next few years based on demand from new residential, commercial and industrial projects. Apart from this, incremental demand also comes from the replacement of GI pipes installed in the existing projects. APL with its strong product basket catering to a diverse demand base (residential, hotels, malls, SEZ, airports, and replacement market) should do well.
  • Excellent growth – Check out the Astral Poly Technik Growth Snapshot here. Sales over last 5 years has grown at an astonishing 52% CAGR to clock ~300 Cr in FY10 from little over 58 Cr in FY06. And Earnings have grown at a much higher 62% CAGR going up over 7x in 5 years from ~4 Crin FY06 to over 28 Cr in FY10. Starting out in 1999, the company has set a scorching pace and is likely to cross 400 Cr Sales in FY11 in just 12 years.
  • Quality of growth – The rapid growth has been achieved with decent returns and margins. Check out the Astral Poly Technik Profitability snapshot here. Normalised Return on Equity (RoE) and Return on Capital Employed (RoCE) is 20% plus. Operating margins have been between 13-15% generally.
  • Timely expansions have propelled growth – Capacity has been gradually but regularly scaled up by APL from 4000 MT in FY05 to over 30000 MT in FY10, or over 7x in 6 years. Reportedly this has been enhanced further to over 45000 MT by FY11 end. Capacity utilisations have generally remained over 75%.
  • Strong Balance Sheet – APL had raised ~Rs 34 Cr in March 2007 as IPO proceeds to part finance its expansion plans. It is pleasing to note that the balance sheet has been progressively strengthened while this stupendous growth was being achieved.  Check out the Astral Poly Technik Financial Health Snapshot here. Debt-to-Equity has come down from 1.18 in FY06 to 0.34 in FY10.
  • Backward Integration may help shore up margins – In Oct 2010, APL bought 85% stake in Advanced Adhesives Pvt. Ltd. The subsidiary company will manufacture Solvent Cement in India. Equity base of the company is around Rs 5 lakhs and expected to incur Rs 4 crore of capex. Solvent Cement hitherto purchased by APL used to be ~6% of Sales.
  • New product launches to be growth drivers – APL has a good track record in regularly launching new products and bringing in advanced technology into the country. In FY10 various products launched by the Company were SWR Pipes, Underground Drainage Pipes, Foam Core Pipes etc. These products were extended pan India in FY11 apart from new launches in FY11 like Manholes and Inspection Chambers. Blazemaster Fire Sprinkler system slated to be launched in FY12 is anticipated to lead to huge growth in volumes as these are becoming compulsory for multistoried buildings, Hospitals, Hotel, Malls, Airports etc. It has UL approval and awaiting BIS approval for launch. Fire sprinkler systems will require many more pipes & fittings than conventional.
  • Strong distribution network – A distributor in every state. APL has set up an extensive distribution network having India wide presence with 250 distributors and 5500 dealer network. They have an access to large numbers of resellers across the territory and enjoy good relationships with architects, consultants, plumbers, builders, etc.
  • Recent Financial performance – In 9mFY11, APL has already done 269 Cr in Sales (187 Cr in 9mFY10) clocking over 43% growth. This shoould be maintained for full year FY11 as the second half traditionally records higher sales. However earnings growth will probably be in the lower 20% range (9m earnings growth is 26%).
  • Further expansion plans – The company has purchased land in 2 more places as part of its FY12 expansion plans. 44,000 square yards in Dholka (Gujarat) and Hosur (Karnataka). Capacity is indicated to be ramped up to 60,000 MT by FY12 end.

Bearish Viewpoints

  • Over-dependence on a few suppliers to meet raw material requirements. APL largely depends on a few suppliers to meet its raw material requirements. CPVC is the primary raw material for manufacturing operations. 60-65% of raw materials are sourced from Lubrizol, USA. Any disruptions or changes in supply terms may adversely affect its operations and profitability of business.
  • Foreign currency fluctuations – APL imports raw materials, finished products and machinery. It also has FCNR loans. Both these involve risks associated with foreign exchange fluctuations, and in extreme situations as in FY09 have drastically affected the revenues and profitability of operations. Despite an excellent 42% sales growth, APL had registered degrowth in profitability for FY09. The US$ had increased from Rs. 40 to Rs. 52 level which resulted in a loss to the tune of Rs.7.34 Cr in foreign currency loan liability and Rs. 6.10 Cr on account of cost of import of raw material. In aggregate, APL had incurred a loss of Rs.13.44 Cr due to foreign exchange fluctuation. In FY10, the FCNR loan stood at 23.5 Cr and RM imports at 104 Cr.
  • Aggressive expansion plans carry execution risks – The only way APL can keep growing is continuous expansion. So far APL has managed this judiciously. However any slippages in execution or reversal in demand situation, can pose serious risks.
  • Stronger Competition – Its a matter of time before the Indian market for plumbing & fittings solutions, esp. growing CPVC markets attract the attention of other global/bigger players in the Indian plumbing & fittings market. Other CPVC compound suppliers could start focusing on India and license bigger players/suitors from PVC or GI segments. Even Lubrizol could license other new players setting up bigger capacities.
  • Recent performance on margins front needs watching – Operating profit margins have been coming down sequentially since last 4 Qrs. APL had registered OPM of 16.19% in Q4 FY10. Since then OPMs have sequentially been 14.49%, 12.40%, and down to 11% in Q3 FY11. Thats a significant drop of over 5% in the last 4 quarters. RM as a percentage of Sales meanwhile has gone up but only by 2.5% or so. This may need watching over next few quarters to see if things revert to normalised levels.

Barriers to entry

  • First mover advantage – First licensee of Lubrozol in India for its main brands “FlowGuard”, “Corzan” and BlazeMaster”. To set up a facility for manufacturing CPVC it requires typically 18 to 20 months. Approval from various authorities like UL, BIS and NSF typically takes another 24 months.
  • Company continues to have strong support from Lubrizol, with which it has right to receive the CPVC-resin, key raw material to manufacture CPVC in India. Lubrizol doesn’t revise the prices of raw materials more than 3 times in a year, which gives time for the company to adjust unlike for other raw material producers of PVC business which change prices frequently.
  • Astral has historically maintained stringent working capital cycle especially in the CPVC business. The company gets around 120 days credit from the supplier i.e. Lubrizol for the raw materials. It gives around 45 days credit to its distributors. The conversion time from raw material to pipes/fitting is just around an hour so the inventory days are mainly a function of transit period. Whatsoever working capital the company requires is mainly to fund its PVC business.
  • New product launches seem to be planned well in advance in this company. For e.g it had licensed Blazemaster (Fire Sprinkler system) from Lubrizol in 2006 itself and applied for UL certification which it has recieved. Local approval is awaited
  • Astral is now in a position to provide the complete solution for Plumbing which covers Drinking Water, Sanitation,Waste Water, Rain Water Harvesting, Hot Water and Transportation of Chemicals, etc.
  • Strong brand image and distributor pull – Regular product launches – Innovative product introduction, technologically advanced products, NSF and UL standards compliant products, coupled with a broad product basket has created a strong brand image and distributor pull for the company.

Interesting Viewpoints

  • Sourced from Draft Red Herring Prospectus 2006, Astral Polytechnik
    • CPVC Technology – CPVC Resin technology is patented by B. F. Goodrich of USA, which has been taken over by Lubrizol. This technology enables enrichment of the chlorine content in PVC by chlorination. This modifies some of the root characteristics of the polymer and results in an altogether new range of polymer called CPVC. The characteristics like tensile strength, capability to withstand high-pressure, impact strength, capability to withstand high temperature; anti-flaming characteristics etc. make CPVC very different from other plastics. PVC can not withstand temperatures of more than 55◦C, whereas CPVC can carry liquid upto 93◦C. The density and viscosity of the material is increased substantially but yet it is capable of extruding and moulding like PVC.
    • CPVC vs PVC – PVC is one of the most used plastics in piping and plumbing systems. However, PVC has much lower tensile strength, capacity to bear pressure and temperature resistance as compared to CPVC. Hence, it is not recommended to be used for high pressure applications, hot water applications and also in concealed environment. CPVC is also more UV resistant as compared to PVC, which renders it more suitable to applications where the piping system remains exposed to sunlight for long time. Similarly CPVC is truly fire retardant material whereas PVC is not. Thus for all purposes, CPVC is a better material as compared to PVC and both are not comparable on most grounds. Thus there is a very limited area of competition between PVC and CPVC which is low pressure, low UV exposed, non concealed, cold water application segment.
    • Competition in PVC Market – PVC pipes and plumbing is a highly crowded market. The market is highly fragmented by many small and regional players. However, there are many established players such as Supreme Industries, Finolex Industries, Prince, Kisan and more. PVC piping system is increasingly becoming popular amongst Indian housing sector for transportation of cold water in low pressure environment. Being fragmented in unorganized sector like GI, the quality varies in wide range from organized sector players to small local players. Most PVC pipes manufactured in India are made out of compounds containing some lead elements.
    • Tin Based – Lead Free PVC – is a chemical compound prepared by APL, investing in in-house research and development. Presently most of the PVC pipes available in India are made of lead based compounds. This tends to render them unhygienic for applications, which involve direct or indirect human consumption. World Health Organisation (WHO) has also prescribed lead free systems for transportation of potable water. APL has developed a lead free compound and introduced the same through its plumbing solutions under its brand name of “Astral Aquarius”.
    • Competition with other CPVC pipe makers in India – There are two other manufacturers of CPVC apart from APL in India. Ashirvad Pipes Private Limited, originally a PVC pipes manufacturer is manufacturing CPVC systems for residential and commercial plumbing out of Bangalore and Ajay Industrial Corporation manufactures CPVC systems out of Delhi. APL claims it is the first licencee of Noveon to introduce CPVC systems to Indian plumbing market in 1999.
    • Other sources of CPVC compound – Other than Lubrizol, there are few other manufacturers of CPVC. Further, at present demand for CPVC in India is still in its initial stage and therefore very small as compared to Europe and North America. The prices of the end product are also low as compared to North America and Europe. It is for these reasons that other players have no focus over Indian market for now. However, as the size of CPVC market in India grows, other players may start focusing on this market and this may give rise to new competition in coming years.
    • Raw Material – There are two major raw materials required in the products manufactured by APL, CPVC and PVC. APL imports CPVC from Lubrizol, USA. PVC is generally purchased from Reliance Industries Limited from their Gujarat plant. Apart from that APL requires some chemicals, which are easily available, locally both in Gujarat and Himachal Pradesh.
    • CPVC vs Galavanized Iron (GI) – Worldwide, CPVC is replacing various traditional / legacy piping systems such as Galvanized Iron (GI) or Copper tubes. Thus the primary competition is with incumbent dealing in legacy materials. India is predominantly a GI user. Even today GI enjoys a lion’s share in the plumbing market. A very small market share is shared amongst Copper and various Plastic polymers such as PVC, CPVC, PPR, ABS etc. Amongst all the polymers or non metallic material CPVC is the only polymer which overcomes all the limitations of GI and other metals. It is comparable in terms of tensile strength of GI, it is UV resistant, Fire retardant, resistant to high pressure and high temperature and carries anti scaling and anti corrosion properties.
    • GI business is highly fragmented amongst large number of players in unorganized sector; however, some of leading brands are Tata, Jindals etc. CPVC is different from GI in terms of the features and characteristics. In terms of price, in 2011, CPVC was available 20% cheaper than the prices of branded GI materials. Thus, CPVC is competing GI in upper strata of residential and commercial construction market. CPVC is expected to compete with GI even in the middle segment of the residential and commercial construction market.

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


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