Relaxing PVC prices to boost volume growth for piping players
Plastic piping companies are expected to witness a demand revival amid a sharp fall in PVC prices from their recent peak.
Polyvinyl chloride (PVC), a key raw material for the plastic piping industry, has witnessed a sharp fall in prices by ~24% from its average Q1FY23 price supported by easing supply from China and recent fall in crude oil prices. We believe this is likely to give a fillip to plastic piping companies in terms of a revival in rural demand, which had almost dried up due to a sharp price rise over the last one year.
Plastic piping companies have witnessed muted volume offtake in the last two years ( -4.5% and 6% for Supreme Industries and Astral Ltd, respectively) on lower rural demand for pipes owing to a significant run up in PVC prices. A softening of PVC prices (down 24% from average Q1FY23 prices) and strong housing demand is expected to drive volume growth for Supreme and Astral. Government sponsored schemes such as Nal Se Jal Mission, Swatch Bharat Abhiyan, sanitation and affordable housing are expected to give an additional thrust to volume growth, going forward. We model volume CAGR of ~19% for both Supreme and Astral over FY22-24E. We believe EBITDA margins of both companies will be better than their pre-Covid level margins supported by subsiding raw material prices on the back of easing supply concerns, better operating leverage and improved product mix. We like Supreme Industries, for its market leadership position in the PVC piping industry (~15% value market share) and rising contribution of its value added product in the topline (value added products command an EBITDA margin of ~17%+ compared to the company level margin of 15%).
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