PVC Pipes Emerging Proxy Play On Housing, Construction

Investors scouting for beneficiaries of the government’s push for housing and construction sectors are looking at makers of PVC pipes. While the crop season is expected to see strong demand from agriculture-related industries, these companies are expected to gain market share with increases in input prices making it tougher for unorganised players to survive. Astral, Supreme Industries, Finolex Industries, Prince Pipes & Fittings and Apollo Pipes are among the top beneficiaries, according to analysts. “We are positive on the PVC pipe sector led by multiple initiatives of the government such as housing for all by 2022, ‘Nal se Jal’ by 2024, project AMRUT and Swachh Bharat Mission,” said Arafat Saiyed, analyst, Reliance Securities. “While the organised players gained the market share in FY21, the demand outlook for non-agri pipes seems to be good for the next few quarters with major urban realty markets showing signs of sustainable recovery.” The sector is expected to clock a 10 per cent compounded annual growth till FY25 from Rs 30,000 crore to Rs 50,000 crore, according to analysts’ estimates. Supreme Industries, which enjoys a competitive advantage over its organised peers owing to its scale of operations, extensive distribution reach and healthy balance sheet, is the top pick. The debt-free company with a cash balance of Rs 432 crore as of December 31, 2020, is currently trading at 36 times its FY22 estimated earnings, a 55 per cent discount to Astral — the most expensively valued in the industry. Astral shares have risen 26 per cent so far this year and are trading at 80 times their FY22 estimated earnings. Analysts however expect its premium valuations to sustain driven by strong market share gain opportunity in the piping segment, stricter working capital management and strong free cash generation.