Astral Poly Technik Management Q&A: Dec, 2011

Management Q&A

Questions emailed to Astral Poly Technik CFO Hiranand Savlani. Telephonic Update

1. FOREX FLUCTUATION IMPACT ON OUTSTANDING ECB BALANCES. AS ON SEP 30, TOTAL DEBT IS 53 CR.

How much of this is ECB? And what are the interest costs and repayment terms. 

5 years with quarterly repayment instalments at roughly Libor +3%.

And what is the quantum of this ECB?

Majority of the debt is ECB.

That’s more like close to 50 Cr?

Yes

2. YOU HAVE MENTIONED A M2M LOSS OF ~8 CR FOR 1HFY12 – LOSS ARISING ON FOREIGN EXCHANGE RATE FLUCTUATION ON OUTSTANDING BALANCES, WHICH WILL BE ACCOUNTED FOR AT THE END OF THE FINANCIAL YEAR.

This can at best account for 4-5 Cr of loss on ECB loan outstanding balances. Does this mean the 8 Cr loss includes losses from the Payables as well, how much?

Yes, this is on account of M2M accounting for both ECB loans outstanding as well as on the Payables front, because of the steep Rupee depreciation. Together the M2M loss has been put at 8 Cr.

So is it right to say ECB Loans would have accounted ~5 Cr and the balance would be on account of Payables?

Roughly, it should be around that.

3. AS PER AS-30 ACCOUNTING NORMS, ASTRAL WOULD ALSO HAVE THE FLEXIBILITY TO CAPITALISE THIS (INCLUDING INTEREST OUTGO). MANY COMPANIES SPENDING ON CAPEX EXPANSION HAVE DECIDED TO CAPITALISE THIS – BALKRISHNA INDUSTRIES, PI INDUSTRIES, FOR EXAMPLE.

Why is Astral not considering capitalising this part – Is that not an option at all?

We are also thinking considering on those lines as majority of the expenses is related to Capital Expenditure. The options are open. We will take a call at the year end.

Is partial hedging also an option? Why, or why not?

We do take near term hedge. So 1 year equivalent of installments are hedged. So till March 2012, we are safe. Beyond March 2012, we will have to see what measures to take.

If that is the case that you are hedged on installment repayments, why was there exceptional items (1.22 Cr) loss due to changes in Forex rates on repayment of borrowings accounted for in Q2FY12?

That was on account of payments due…Buyers Credit dues. You see the Buyers Credit rollover is in 6 months.

We thought your credit terms with Lubrizol was 120 days, not 6 months?

Lubrizol credit terms are 120 days. But we had switched to 6m Buyers Credit. Current borrowing costs are 13-14% to take advantage of that.

Why the shift from 120 days Lubrizol credit to 6m Bank Buyers credit? What’s the advantage?

Well we get another 2 months extra credit isn’t it? Isn’t it better to extend the payment for 2 more months and have more funds available for Working Capital requirements. We need to pay 2.5%-3% for the buyers credit in lieu of the current 13-14% interest norms. We end up saving a flat 10%!

So, why don’t we hear more of the 6M Buyers Credit facility? Why is it not that common?

It is very popular. Out of 100, 95% of the companies will be taking this route.  In a Rupee stable situation, the flat 10% gain works to everyone’s advantage. And everyone is prepared for temporary spikes. Not for steep hikes.

But now the Rupee has depreciated by 16% meanwhile?

Yes, it doesn’t look so good now. Look, this is an extreme situation that has happened. You do business planning based on normal business forecasting. Normal forecasting or what anyone was prepared for was 4-5% moves. No one could have been prepared for a 10% plus or 16% plus depreciation, and that too in so short a duration!

We do business planning based on normalised situations. We can’t plan for extreme situations, can we?

Even from here if the Rupee remains stable at 52 to a US$, it will work out very well.

4. Q2 CONCALL MENTIONED RAISING ANOTHER 15-20 CR ECB AT LIBOR +3%.

What further tranches has the company drawn in Oct, Nov and so far in Dec? and at what rates respectively?

We raised $2 Mn in Dec and maybe we will raise another $2 Mn in Jan 2012.

And you did not draw any money earlier? In October, November?

$1 Mn in November

So totally some $5mn more has been drawn since September 2011?

Yes.

5. THE RUPEE HAS SINCE APPRECIATED TO 52 TO US$.

Is it correct to surmise that if the Rupee remains at ~52 to US$ till the year end, there will be additional liability of another ~4cr that will need to be accounted for by 31st Mar 2012, on the loans till Sep 30 alone?

See the situation is very dynamic. Everyday the positions change. Payments need to be made in between. We made some payments $1-2 Mn at 51.70 a couple of days back, and today when I check it has changed to 52.40.

Instead of trying to take a call on the direction, we try to participate at every level. So we participated at 51.40, 51.70, and we had participated at 51.20 levels too.

Now that the Rupee is at 52 to US$ and assuming that it remains there till Mar end 2012, is it fair to say that another 4-5 Cr liability will acoount both on payables and ECB loan outstandings?

Its very difficult to give exact figures, situation is too dynamic.

But given that $ has moved from 50-52 since Sep, i.e  a Rs 2 difference, and in September there was a Rs 4-5 differential, isn’t an additional 4-5 Cr a fair ball park estimate?

That is correct.

6. FOREX FLUCTUATION IMPACT ON PAYABLES. LIABILITIES AS ON 30 SEP 2011 – 136.88 CR

Forex paybles were at what levels on 30 Sep? 50-60 Crs?

Don’t have exact figures, right now.

But is it roughly in the 50-60 Cr range, or higher?

No, it will probably be higher.

7. 120 DAYS CREDIT TERMS WITH LUBRIZOL. THIS NORMALLY WOULD WORK TO ASTRAL’S ADVANTAGE. BUT IN THE FACE OF THE RAPIDLY DEPRECIATING RUPEE THIS MIGHT BE POSING A CHALLENGING SITUATION.

Kindly explain the hedging policies followed by Astral on Payables. Do you hedge fully your net outflows, or partially? How much?

(missed this totally, TBD)

8. RUPEE HAS DEPRECIATED ONLY STARTING SEP 2011. IMPLICATIONS ON FOREX LOSSES IN FY12 ON ACCOUNT OF UNHEDGED PAYABLES.

Since 120 days credit terms are in place, is it right to say that in Oct-Dec FY11, you will be paying for payables of Jun-Aug FY11? And since rupee had not depreciated till August, there is no impact on this front? Does this mean there will be a big impact in Q4 as the full impact of rupee depreciation from Sep till date will need to be accounted for?

Already covered above.

9. ACCOUNTING NORMS

As per accounting norms, aren’t you required to account upfront -even if the payables are due months later? If so, what is the likely impact respectively in Q3 and Q4 FY12?

As discussed Payables that become due need to be paid as and when they become due. But M2M accounting for the same has to be done on a regular basis. We have taken the decision that we will take a final call at the end of the year how to account for the same, depending on the situation prevailing then.

10. THE RUPEE HAS SINCE APPRECIATED TO 52 TO US$

Is it correct to surmise that if the Rupee remains at ~52 to US$ till the year end, there will likely be another hit of ~6-8 Cr on the payables front (if fully unhedged)?

(TBD)

11. MARGIN PRESSURES FROM RUPEE DEPRECIATION. RAW MATERIAL IMPORTS FY11 146 CR. THIS IS ~50% OF RM AND ~36% OF SALES. RUPEE HAS DEPRECIATED BY MORE THAN 16% SINCE SEP 2011.  ASTRAL HAD TAKEN A 3.5%-4% PRICE HIKE IN Q2. IN OCT YOU HAD TAKEN A 2.5% HIKE AND EXPECTED 3-3.5% IN NOV.

What is the cumulative price hike effected by the company in FY12 till date? Is it already at ~10% price hike levels!

Actually we have taken another 5% price hike in December.

So cumulatively is that a 15% hike effected so far in FY12?

Whatever that adds up to. See we are very clear that ultimately input price hikes have to passed on. Maybe with some time lag, but we have to pass that on, else our survival will be at stake.

But how do you take the price hike decisions? Do you wait to see what the market is doing, competitors like Ashirvad what steps they are taking?

Well we take our own decisions based on our business situation. We dont look for cues from others.

Can’t that be used by the competitors to gain/wrest away market share from you in certain markets, say where they are not dominant?

Well if someone wants to pick up business at a loss, that is their call.

If Astral made sale of 100, Its RM import would be 36. Depreciated 16% (~42) would mean your margins reduce by 6%.  Since you have affected a 10-15% price hike spread over Q2 & Q3, does this mean you are more or less protected on the margins front from the rupee depreciation effect so far? (Margins may well slide for other operational issues)

Given the current situation, we feel we will be more or less covered on that front.

Should the Rupee depreciate further, is there room for more hikes, how much can you really pass on? Have you taken any more hikes beyond the 10% already?

Like we discussed before a 5% hike is taken in December. This is a business reality – we got to pass on the hikes, there are no two ways about it.

12. STABLE MARGINS IN FORESEEABLE FUTURE. MARGINS HAVE BEEN ON A DECLINING TREND OVER THE LAST FEW YEARS. FROM 18%  IN 2008 TO 13-14% IN FY11. AND FY DOES NOT LOOK TO DELIVER MORE THAN 12%

Where do you see margins stabilizing in the near to medium term?

18% days were in those days when we were not growing this fast. Growing at 40% in these times is not an easy task. In recent times, we have been prepared to shed a couple of percentage points in pursuit of higher growth. But we hope to see uptrend in margins as we start producing at full capacity utilisation. Operational efficiencies will go up as economy of scale effects kick in.

So in the medium term, where do you see margins stabilising at?

It will probably be in the 12-14% range.

13. COMPETITION. SUPREME TIE UP WITH KANEKA. MEGHAMANI JV/FACTORY WIH KANEKA FOR 20000 MT

Please give us your sense of market developments. Who do you see as your most significant competition, and why? How’s it on the pricing front with Kaneka sourced products? Do you see any margin pressures developing due to heightened competition?

Well the Kaneka plant is not coming up before 2014, probably 2015. By year-end we will be at 65-70000 MT levels. And we will not be staying still till then. We will be making our own plans. We will also be somewhere else.

See there is a problem with the sourcing of CPVC compound from non-Lubrizol sources. Otherwise things would have changed long back. Competion plans, our business plans are never static. Everybody assesses the situation and takes measures appropriate to ensure survival and growth.

We read somewhere, Kaneka’s global production of CPVC is 46000 MT is that correct?

Well I don’t have those details. But this is for sure, Kaneka’s commitments in other markets will not allow it to significantly change the dynamics in India atleast in the next 2-3 years. 

Nothing remains static, right. By that time ….Lubrizol will also take some steps, isn’t that likely.

So you don’t see any significant competition in the next 2-3 years?

I didn’t say that. Competition is a part and parcel of life. There is no monopoly, right. But everybody is growing, there is enough room for everyone to grow…the market is big enough for more. Forget CPVC, look at the PVC market. In every small nook and corner they are making PVC. Despite that everybody is growing.

By 2013-2014 we will also be a certain size. We will be much stronger. You can put your own numbers if we continue to grow at current rates.… We will be able to dictate certain terms.

14. REALTY/INFRASTRUCTURE SLOWDOWN

Have you seen any impact on the ground so far? 

Look we are getting our Orders regularly and without any interruption. Supplies are being made. Uptil now we have seen no discernible effect on the ground.

So, how confident are you of delivering 30-35% growth in the coming 2 years?

We are certainly hopeful of maintaining the growth trends. The interest rate and credit availability cycle reversal may start sooner than later. If we go by the recent statements from RBI, these is coming soon.

And when that happens, demand will start groing faster. Because the main hindrance to this sector, is the finance rates. 

15. PROMOTER SHARES CHANGING HANDS. MR NIMISH DALAL SELLING HIS STAKE TO MR ENGINEER IN OPEN MARKET TRANSACTION.

Mr Nimish Dalal had also earlier tendered his resignation as a director of the company. Is this a fallout of the Lubrizol relationship? Kindly explain the reasons behind the transaction and the timing of these transactions.

Not at all. Why should Lubrizol be in the picture? Se they are family members. They have a family understanding within which the stakes have changed hands within the family. See Mr Dalal is Mr Engineer’s Uncle. The family will be together for a lifetime.

But Mr Nimish Dalal is employed with Lubrizol, right?

No, Mr Nimish Dalal is not with Lubrizol. He is a Doctor!
Mr Girish Dalal, who is Nimish’s father was with Lubrizol. Kabka retire ho chuke!
In the market people will talk all sorts of things without verifying back with the Management!

But Mr Nimish Dalal also resigned as a Director from the Board? Why did he need to do that?

Well these are not related. Mr Nimish Dalal is a US resident and was not very active.

16. Lubrizol relationship

Do you have anything to report on developments on this front? When can we expect a formal announcement of progress on this front?

The relationship is strong and progressing well. What do we have to report on that

We meant, the proposed investment from Lubrizol taking the relationship to the next level?

That’s and ongoing thing. Negotiations going on…studies going on from Lubrizol side…there is no formal agreement.

Moreover, we have already said that we signed an NDA with them on project confidentiality. It’s not that we don’t want to share any progress, we can’t. Till there is any formal agreement signed, there can be no clarification form Astral. This is to protect the interests of the company.

Things may or may not happen. That is why we had to issue a formal clarification that look these things are very far away. There is nothing material at the moment. If investors took a call on the basis of that Lubrizol announcement that would have been sort of misleading. In order to protect the interests of the investors in our company, we issued that clarification – that don’t make an investment call based on any announcement like that, it will be entirely misleading to do that.

So, do we take it that no news is good news?

We would like the long-term investors in the company to take conservative calls on the company. As and when things happen we will come up with appropriate announcements, at the right time. If something does not happen, then also we have to make the appropriate announcement!

One appeal to long-term investors in Astral. Don’t listen to market rumours. People will say all kinds of things. If you have any questions or want to understand anything about the company, please approach us directly. Talk to us, we will be happy to provide you all the details that we can share.


Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;
: ; ;
: ; ;
: ; ;

Astral Poly Technik Managament Q&A: May, 2011

Management Q&A

Astral Poly Technik Stock Story will leave you impressed. It has made some rapid strides in the last few years. It’s a leader in its niche CPVC Pipes & Fittings industry segment. It continues to grow robustly with compounded annual growth of over 50% in Sales over last 5 years!

With its excellent fundamentals, Astral Poly Technik made it easily to our shortlist of promising small-cap stocks – that our in-depth process for hand-picked stock-picks throws up.

There are a few questions that came up during our detailed analysis on Astral Poly Technik, its prospects, and risks as we see it. (of course that is entirely based on published sources and without the benefit of a meeting/interview with Management).

We put forward these questions to Astral’s Management with a request for a meeting/visit to its premises. We visited and talked with CFO Hiranand Savlani for over 2 hours, who patiently answered all that we posed.


1.     ASTRAL HAS HAD A BLAZING RUN OVER THE LAST DECADE. SALES AND PROFITS HAVE GROWN AT OVER 40% CAGR. APL WILL PROBABLY DO OVER 400 CR IN FY11. THAT’S A SUPER ACHIEVEMENT. CONGRATULATIONS!

What are the future plans? Where does the company see itself in the next few years? We have heard the company talking of maintaining a 30%+ growth rate and a 1000 Cr turnover goal – Kindly explain what it will take to achieve this and what are the important milestones in this journey?

The market is huge and there is enough space for more players. we see us growing at 30-35% CAGR for the next few years. If we execute well, a Rs. 1000 Cr turnover is achievable within the next 3 years. New innovative product introductions and maintaining the quality of our distribution network and strengthening it will be key factors.

We ask all our shareholders to be long-term investors, and stay invested for the next 5 years. It will be a rewarding journey for all of us stakeholders in the company.

2.     CPVC RESIN SEEMS AVAILABLE FROM MULTIPLE SOURCES; CPVC COMPOUND AVAILABLE FROM NOVEON USA & AKREMA, FRANCE. NOVEON PATENTS ARE SET TO BE EXPIRING/EXPIRED

Please demystify this market for us. What is really patent protected, and for how long? Apart from Noveon and Akrema are there other licensors of CPVC compound? Are people able to make CPVC pipes with CPVC resin and indigenous compound knowhow??

Patents have expired. But the availability of the compound is a key constraint. Apart from Lubrizol, there are some 3 other known manufacturers. Akrema of France, Kaneka and Sekisui of Japan.

There some 20 CPVC pipe manufacturers in India today. Most of the non-Lubrizol licensee capacities are at a nascent stage and in 100s of tonnes. The largest may be some 3000 tonnes. The availability of the CPVC compound (other than Lubrizol) is a key constraint. Many are experimenting with in-house compounds, but are not able to scale up majorly without a guaranteed RM source.

3.     GI PIPES & STEEL PIPES ARE STILL THE MAINSTAY OF PLUMBING AND FITTINGS MARKET IN INDIA. SOME STUDIES ESTIMATE GI PIPES CONTINUE TO HOLD OVER 50% MARKET SHARE, WHILE THE PVC/CPVC MARKET IS STILL SOMETHING LIKE 5% OF THE MARKET.

Kindly give us your estimate of the current Indian market for plumbing & fittings. How do you see CPVC/PVC market growing in the next 5 years? Is CPVC likely to replace PVC totally or both will continue to co-exist.

This is difficult to put an exact figure on. By all accounts this is a huge market. The GI market itself a Rs 7,000 Cr market as on today. SWR pipes (PVC based) is reportedly a Rs.3000 cr market today. One Mumbai distributor alone is doing a Rs 50 Cr business just from SWR. Then there is Underground drainage systems which is big. There is Blazemaster potential market of atleast 700 Cr. In all, the total market for pipes and fittings in India is by some accounts a Rs. 20,000 Cr market, today.

GI Pipes days are over. The organised construction players have already switched. End users are aware, depending on the location and corrosiveness/water properties the life varies form 7-10 to 12 years for GI. Whereas CPVC has no such problems.

The plumbing community is a big pusher towards CPVC. Their productivity has gone up as the handling/fitting is much easier (Just an adhesive glue, rather than threading and refitting and the like). If they could construct  one GI bathroom a day, they are able to finish 3 bathrooms today in the same time. They also find the product, fittings & installation hassleless and are the biggest promoters for CPVC pipes & fittings.

4.     EXPORT MARKET POTENTIAL. 30% IN KENYA JV. LUBRIZOL LICENSING POLICIES

Exports are a very small market for Astral today. Are there any ambitions to scale up this segment? Tell us more about the Kenya JV, Is there any strategic intent, and why Kenya? What is Lubrizol licensing policy for markets other than India? Do you have any leeway for south asian and middle-east markets or are they subject to separate licensing?

The Kenya market license is with Astral Poly Technik and we have extended it to the JV. It is Lubrizol which asked us to look at that market and we preferred to set it up jointly with another entity where the risks are spread. As you might have seen we have increased the stake, and have the rights/mechanism to increase the stake in proportion to market development.

We have a very big domestic market to take care of, first.

5.     OTHER NOVEON LICENSEES IN INDIA INCLUDE AJAY INDUSTRIAL CORP AND ASHIRVAD PIPES PVT LTD. ASHIRVAD PIPES HAS OVER 50,000 MT CAPACITY AND A 2008 RECIPIENT OFNATIONAL AWARD FOR OUTSTANDING ENTREPRENEURSHIP IN MEDIUM ENTERPRISES. AJAY INDUSTRIAL CORP HAS OUTSTANDING GROUP COMPANIES LIKE PRECISION PIPES (LARGEST SUPPLIER OF AUTOMOTIVE EXTRUDED PARTS) AND AJAY POLY (LARGEST SUPPLIER OF EXTRUDED REFRIGERATION SEALING SYSTEMS)

These are pedigree companies. How serious is the competition? Is it head-to-head in Flowguard Sales, or do you/they have an edge in some segments within Flowguard range. If you have any competitive advantage over these two, what would those be? Does your/competition distribution network play a significant role? Are there any regional markets that you/competition dominate?

These are also big players in this market and there is room for all to grow. Both are unlisted players and we are not aware of much details on their dedicated CPVC capacities. We have strong presence in West and South markets and now turning the focus to North and East.

6.     CPVC LICENSING AND MANUFACTURING.

Kindly explain the role that Lubrizol & Specialty process LLC plays. What is the kind of relationship that you enjoy with them, and are you deriving any competitive advantage from the strength of these relationships today? Why aren’t say established PVC/GI players moving fast in CPVC? What prevents them from approaching Lubrizol with bigger plans than yours? What about manufacturers setting up plants in say Nepal and target Indian markets?

Lubrizol has policies that are licensee-friendly and protects the licensees that take the initial market risk with them. In a market like US, they have appointed only 4 licensees over the last 42 years. That speaks a lot for their policies.

When we take initial market risk for a product and are the first licensee, usually we are assured of a 5yr exclusivity. I am not just taking the license, I am spending money and effort in UL certifications (where they stress the product in test conditions for over 18 months) and other market development activities. Lubrizol has an equal stake in making us succeed -those who take the early risk.

Q: So, did you get an exclusivity on Flowguard license?

Yes, The others have the license only since the last 6 years. We have had that for the last 11 years.

For the Indian market Lubrizol had first approached the established bigger players like Supreme and Finolex in 1998-99. However when they did not take up on that offer, an unknown entity like Astral Poly Technik came forward and took on that initial market risk.

Like for any other market, Lubrizol understands the peculiarities of the Indian market. We have taken the early risks and have developed the market from scratch and we have had their constant support. We have a strong relationship. It is unlikely to jeopardise a relationship that goes back so many years, especially when we are giving them high growth. Peculiarities of the sub-continent are not unknown to them! Anyone getting a license for manufacturing in Nepal or other such places is probably remote.

7.     BLAZEMASTER FIRE SPRINKLER SYSTEM – YOU HAVE THE LUBRIZOL LICENSE SINCE 2008. DESPITE HAVING THE NSF & UL CERTIFICATION, LOCAL BIS CERTIFICATION IS YET TO BE RECEIVED, FOR WHICH APL HAS BEEN DOING THE GROUNDWORK FOR LAST 2 YEARS.

Kindly explain the importance of Blazemaster to product plans and future growth of the company. Realistically when do you see a pan-India launch? While this will give you an edge over other Noveon licensed CPVC manufacturers, how long do you expect to sustain this first-mover advantage? All your groundwork in getting local approvals actually works to the advantage of the guy moving in next after you! Lubrizol must be aware of the situation – what kind of guarantees do you have from them for protecting you on this front for the Indian market.

Blazemaster Fire Sprinkler system has very big potential and it has ready acceptance from the corporate segment. We are hopeful of an early launch. There is a review slotted in May/June by the standardisation body. It may or may not come through this time. But we are almost there, all the groundwork is done.

Blazemaster should also enjoy a 5yr exclusivity.

8.     NEW PRODUCTS SWR PIPES, UNDERGROUND DRAINAGE PIPES, FOAM CORE PIPES, MANHOLES AND INSPECTION CHAMBERS.

Kindly explain the process of new product introductions in the Indian market. Do you require to take specific BIS/ISI approvals for each of these products. What is the status on pan India launch for all these products? Currently what is the revenue contribution from new products?

Blazemaster is the only product for which BIS approval is required as Fire Sprinkler is a category that needs to go through the standardisation process. None of the other products require such approvals.

Pan India launch and availability is a long slow process. It usually takes from 3-4 years. Most of the new products are finding good acceptance and growing very strongly. SWR Pipes is doing very well. It will be some time though, before we have significant revenue contributions from new products.

9.     PRODUCT SEGMENTS, GEOGRAPHICAL SEGMENTS, REPLACEMENT MARKETS

Kindly give us an idea of the revenue contribution & margins from major product segments, also rural and urban markets, and replacement market. Which segments are expected to drive growth in next 2-3 years, where is the company’s focus and why? How much do the brands Flowguard and Corzan contribute today to revenues and going forward what’s the scenario? How big is the lead free PVC segment?

CPVC Pipes & fittings contribute 65% of the Sales mix. PVC products bring up the balance 35%. Pipes contribute 55-60%, while fittings contribute 35-40%, rest is from others. Traded goods constitute roughly 10% of Sales -mostly Solvent Adhesives and some fittings where the volumes do not justify manufacturing. We are manufacturing some 700 varieties of fittings ourselves, today.

10. CUSTOMER SEGMENTS –TOP CUSTOMERS & REPEAT BUSINESS

What is the revenue split between residential and commercial projects currently, and how is it expected going forward? Does this business lend itself to deeper relationships with reputed builders/contractors? Who are your top customers in FY11

Our sales are distributor driven and is difficult to give any breakups. Most of the revenues come from the residential segment and if were to put a figure it could be around 60-65%. This year we have started focusing on the replacement market too. Usually big builders have repeated us in subsequent projects.

11. COMPETITION STRATEGIES

Sooner or later bigger players with stronger brands (like Finolex, Supreme) will move into the CPVC market. It’s quite possible that these brands will have much stronger customer acceptance & pull than first-mover Astral. Kindly explain the company’s current thinking, brand building exercises undertaken and future plans.

As mentioned before, there are some 20 CPVC manufacturers in the country today. And all of them are playing a role in expanding the market as today everyone has good things to say about CPVC. In the earlier days the bigger PVC players were not so generous. We are happy about that.

Most of the non-Lubrizol licensee capacities are at a nascent stage and in 100s of tonnes. The largest may be some 3000 tonnes. The availability of the CPVC compound (other than Lubrizol) is a key constraint. Many are experimenting with in-house compounds. Also they have not been able to meet Lubrizol’s price point, and in a price-conscious market like India, that is often the bottomline!

12. CAPITAL EXPENDITURE. TO GROW SALES, ASTRAL NEEDS TO CONTINUALLY INVEST IN CAPACITY EXPANSION. WE HAVE HEARD CAPACITY EXPANSION PLANS TO 60000 MT FOR FY12.

What kind of capital expenditure will be required for this latest expansion. Some of the private players like Ashirvad Pipes Pvt Ltd. reportedly have expanded capacities to 70000 MT. How strong is the demand position? Is there a likelihood of overcapacity in the short to medium term?

Ashirvad Pipes is also a strong player. How much capacity is dedicated to CPVC I am unable to comment. There is enough demand for all of us to grow strongly in this market. We are looking to expand to 70,000 MT by this year end.

As you know we have acquired land at Dholka, Gujarat and a leased facility is available in Hosur, Karnantaka. We also have another 75000 sq mt of land in Dahej under our subsidiary Astral Biochem. Land is a key constraint in expansion plans, we have enough land acquired to meet our expansion needs for the next 4-5 years.

The Dholka plant will be a 25000 MT expansion which will come up in FY12. Hosur facility may be taken up subsequently as we need more capacity. The existing plant which has 45000 MT capacity can accommodate another 15000 MT or so.

Capex is done in a phased manner. We usually try to create capacity that we will need for the next year, a year ahead. You may have noticed most of the capex happens in the last one or two quarters of the financial year. Funding is not an issue today as we have strong cash flows and strong balance sheet, that we can leverage judiciously.

13. BACKWARD INTEGRATION.  IN OCT 2010, APL BOUGHT 85% STAKE IN ADVANCED ADHESIVES PVT. LTD. THE SUBSIDIARY COMPANY WILL MANUFACTURE SOLVENT CEMENT IN INDIA.

What are the plans on this front? Is this only for captive use or for generating additional sales as well? What kind of capex will be required going forward?
How much was the expense incurred in Solvent cements RM as a percentage of Sales? Is it mainly used for pipe fittings? What will be the contribution towards margin expansion, if any, on account of this?

Solvent cements accounted for roughly 6% of Sales as an expense item. This will be used for captive use and also supply to local players.

14. MARGINS – SUSTAINABILITY. THERE HAS BEEN A SLIDE IN MARGINS EVERY QUARTER FOR THE LAST 4 QUARTERS. OPERATING MARGINS (EXCL OTHER INCOME) HAS ACTUALLY SLID FROM OVER 16% TO JUST OVER 11% IN Q3FY11 – A SIGNIFICANT CONTRACTION OF OVER 5%! (RAW MATERIAL/SALES HAS REMAINED BETWEEN 64%-66.5% ROUGHLY)

Kindly explain the circumstances leading to this. Is this a short-term scenario and have we seen a good reversal in Q4 given that historically this is your best quarter? What levels do you see margins sustaining in the next 2-3 years?

PVC market is a highly crowded space and the OPM levels are not more than 8-10%. It’s a sort of a commodity business now. With more acceptance of CPVC and competition coming in, would it happen for CPVC market also…if not why? Where do you see margins sustaining over the next 2-3 years?

What you are comparing is sequentially quarter on quarter basis. A better comparison would be comparing annual figures where there has been a smaller decline. We should be within the historical 13-15% range on annual basis.

Whenever we introduce new products in the market, we go aggressively after market share. FY10 and FY11 has seen many new product introductions and therefore there is a dip in margins. We believe that at the rate we are growing, we have to take some margin pressure along our stride, as long as we stay within the historical range. Eventually economies of scale will deliver.

15. RAW MATERIALS – CPVC COMPOUND, PVC RESIN. RISK MANAGEMENT

With a rising crude prices scenario, raw material pries must be a cause for strain. Kindly explain how the company manages raw material price volatility risks. Does it get any advantage from sourcing majority of RM from Lubrizol? How often does it revise prices? Are you able to pass on price increases? How often have you resorted to price increases in FY11? When crude had crossed $150 in 2008, were you able to raise prices? What is the outlook for FY12?

How much is CPVC compound as a percentage of total RM? Do you see any risks in being tied to a single supplier (Lubrizol) for majority of RM requirements? Where do you source your PVC requirements from – RIL?

We used to get 180 days credit from Lubrizol earlier. Now it is 120 days. They do not revise prices often. Earlier it used to be once a year. With the current volatility it is more like once in 6 months. It is unlike the PVC supplier quotes which react instantly on spot rates and updates are sent on SMS! About 60% of RM is on account of CPVC.

16. FOREIGN CURRENCY – IMPORTS & FCNR LOANS. RISK MANAGEMENT.                       APL HAD INCURRED A LOSS OF RS.13.44 CR ON EXPOSURE TO FOREX DERIVATIVE CONTRACTS. IN FY10, THE FCNR LOAN STOOD AT 23.5 CR AND IMPORTS AT 104 CR.

What is the current FCNR loan position? Have all forex derivative contracts expired in full? After the FY09 experience, can you confirm that forex risk management practices adopted by the company are more conservative now?

There are no outstanding long-term contracts. FY09 was a difficult year. Forex volatility Management is part of regular business, we do not foresee extreme impact like that experienced in FY09.

17. SALES DISTRIBUTION NETWORK. DISTRIBUTION POLICY. 250 DISTRIBUTORS, 5500 DEALERS. TYPICAL OTHER EXPENSE SPENDS ARE 12-15% OF SALES.

How strong is the dealer/distribution network today? How important is the distribution network to sales growth for Astral? How does the company support this distribution network? Typically what kind of budgets do you allocate for Sales & Marketing spends?

We have 350 distributors and 7000 dealers today and we are constantly looking at strengthening this network. We believe this loyal distribution network is a core strength. The direct sales force works to nurture this network, as all sales incl. project sales are also routed through this network. We help dealers penetrate new markets by sharing promotional costs. We have recently taken on Mudra as the Ad agency for a promotional campaign with a 1cr budget. There is no fixed budget allocation for Sales & marketing spends, but is decided based on the targets set for the year.

18. DIVIDENDS. DIVIDEND POLICY. PAYOUTS

The company has started distributing dividends since 2008, Dividend payouts as a percentage of net profits has been rising, but still pretty low at ~8%. Kindly elaborate on the dividend policy followed by the company.

As you know we are growing at a strong pace, and we need all the cash that we generate and more. There is no enunciated dividend policy as such, and dividends are likely to remain at similar levels for next 2-3 years.

19. WARREN BUFFETS TAKEOVER OF LUBRIZOL.

 Any likely impact on the relationship? Please comment.

Our relationship goes back 11 years. We have seen four changes in ownership in these many years. From BF Goodricke, to Noveon, to Lubrizol and now Berkshire Hathway. Our relationship and support from Lubrizol has been very strong. We expect the same policies to continue for our markets.

20. CHALLENGES BEFORE THE COMPANY

Kindly elaborate on the main challenges faced by the company in view of the huge opportunities that lie ahead. How confident are you of reaching the turnover of Rs 1000 Cr an by when?

As mentioned before we should do Rs. 1000 Cr within the next 3 years. There are several big application markets that we need to tap effectively. Blazemaster is one, Solar applications is another. Along with the results, we will announce a few new initiatives!

Results on 20th May 2011. Analyst Meet on 25th May, 4-6 PM, Trident, Mumbai. Please be there!

 


Disclosure(s)

Nagabrahma: No Holdings in the Company; Recent Entry;
Janak Merchant: No Holdings in the Company; ;
Donald Francis: Less than 5% of Portfolio in the Company; Recent Entry;
: ; ;

Astral Poly Technik Management Q&A: Aug, 2012

Management Q&A

  1. 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.

  1. 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%.

  1. 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.

CPVC

As you know we have 4 products licensed from Lubrizol. Flowguard, CORZAN, Blazemaster and Bendable. Ashirwad & Ajay have only the Flowguard license.

PVC

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!

SOLVENT CEMENT

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.

  1. NEW PRODUCTS

BENDABLE

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.

BLAZEMASTER

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.

  1. LUBRRIZOL RELATIONSHIP

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.

  1. 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.

FOREX MANAGEMENT

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.

Despite the 20% depreciation in currency and the M2M loss, the cost of Forex Loan over its full tenure will work out cheaper than our domestic rupee loans.

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.

M2M ACCOUNTING

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.

CAPACITY

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.

  1. 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!


Disclosure(s)

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;

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


Astral Poly Technik

Company Background

 

Astral Poly Technik (APL) has its production facilities at Gujarat and Himachal Pradesh to manufacture plumbing systems from ½” to 8” diameter. 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 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 15.xx% ownership in APL. APL claims to be the only Licensee of Lubrizol in India and neighbouring countries for the use of the trademarks ‘‘BlazeMaster” (since 2006), “FlowGuard” (1998) and “Corzan” (1998).

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 a larger diameter from Harvell Inc. (USA).

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 CPVC products are approved by Nations Sanitary foundation (NSF) USA. Astral recently received ISI approval for its CPVC products in the country.

APL’s manufacturing facility at Barotiwal-Solan District (H.P) 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.

 


Growth Snapshot

We can’t just look at a series of past growth rates and assume that they will predict the future – if investing were that easy, money managers would be paid much less, and this stock analysis would be much shorter. It’s critical to investigate the Sources of a company’s growth.
Variable FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 58.19 101.70 144.53 205.25 304.52
Sales Growth Year on Year 79.47 40.71 42.30 50.15
3yr Average Sales Growth 54.16 44.39
3yr Sales CAGR 58.91 41.50 46.17
5yr Average Sales growth 53.16
5yr Sales CAGR 52.41
Profit After Tax (PAT) (Rs. Cr.) 4.02 9.11 17.07 14.19 28.03
Adjusted EPS 1.79 4.05 7.59 6.31 12.47
EPS Growth Year on Year 126.62 87.38 -16.87 97.53
3yr Average EPS growth 65.71 56.01
3yr EPS CAGR 106.06 24.81 28.14
5yr Average EPS growth 73.66
5yr EPS CAGR 62.50

Edit This Section.


Profitability Snapshot

Profitability is the second, and in many ways, the most crucial, part of our Analysis framework. How much profit is the company generating relative to the amount of money invested in the business – the returns? This is the real key to separating a great company from average ones -the higher that return, the more attractive that business. Net profit Margins and comparing cash flow from operations to reported earnings per share are good ways to get a rough idea of the company’s profitability (because cash flow from Operations represents real profits!). But neither account for the amount of capital that’s tied up in the business, and that’s something we cant ignore. We need to know how much economic profit the company is able to generate per dollar/rupee of capital employed because it will have more excess profits to re-invest which will give it an advantage over less-efficient competitors.
Variable FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 13.76 14.10 15.23 11.54 14.45
Net Profit Margin 7.47 9.44 12.57 7.34 9.66
Fixed Asset Turnover 2.35 3.13 3.30 2.45 3.30
Asset Turnover 1.70 1.05 1.21 1.47 1.83
Return on Assets 12.68 9.90 15.24 10.77 17.68
Financial Leverage 2.29 1.36 1.40 1.42 1.34
Return on Equity 29.03 13.48 21.37 15.30 23.73
Return on Capital Employed 20.60 13.75 19.74 16.36 24.33
Debtor Days 64.54 76.92 88.42 77.96 84.82
Inventory Days 115.01 96.49 99.96 117.11 112.53
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 11.85 28.91 32.74 17.73
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.00 0.00 1.13 1.12 2.25
Dividend per share 0.00 0.00 0.50 0.50 1.00
Adjusted DPS 0.00 0.00 0.50 0.50 1.00
Dividend Growth Year on Year -0.88 100.89
3yr DPS CAGR 41.11
5yr DPS CAGR
Dividend Payout 0.00 0.00 6.62 7.89 8.03

Edit This Section.


Common size P&L Statement

Can we dig deeper to see what else we can understand about how this company makes money? A good way is to look at the common size profit and loss statement. Common size statements are great tools for evaluating companies because they put every line item in context by looking at each of them as a percentage of Sales.
Variable FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 58.70 72.79 67.41 75.46 73.34
Common Size Power & Fuel 1.92 1.97 2.04 2.41 2.44
Common Size Employee Cost 4.28 3.54 3.69 3.18 2.84
Common Size COGS 62.50 76.11 71.22 79.89 77.94
Gross Profit Margin 37.50 23.89 28.78 20.11 22.06
Common Size Depreciation 2.55 2.28 2.40 3.20 2.96
Common Size Interest Cost 2.34 1.95 1.98 2.75 1.67
Common Size SG&A 28.21 15.62 16.71 15.80 12.09
Operating Profit Margin 13.76 14.10 15.23 11.54 14.45

Edit This Section.


Financial Health Snapshot

Once we have figured out how fast (and why) a company has grown and how profitable it is, we need to look at its financial health. Even the most beautiful home needs a solid foundation, after all.
Variable FY06 FY07 FY08 FY09 FY10
Financial Leverage 2.29 1.36 1.40 1.42 1.34
Debt to Assets 0.51 0.27 0.29 0.30 0.25
Debt to Equity 1.18 0.36 0.40 0.42 0.34
Interest Coverage 4.93 6.73 8.22 4.06 7.97
Interest Cost to Total Debt 7.73 7.68 8.37 13.60 11.98
Current Ratio 2.11 3.42 3.74 2.09 1.96
Quick Ratio 1.15 2.59 2.63 1.16 1.14
Cash to Assets 3.91 39.86 23.11 1.66 2.38

Edit This Section.