When Dabangg Gave A Stock Pick ??

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NIFTY 10Y Benchmark G-Sec Index: 2,167 (0%)

Founder’s Recap

The Most Preferred Investment Destination ????

Many global investors have been betting big on emerging markets again.

Looking at the shape of developed markets, and the multiple opportunities in emerging markets, many are expecting emerging markets to not only outperform, but also get a higher share of allocation over the next decade.

According to Goldman Sachs, the share of emerging markets is likely to go up from 26% right now, to 35% by 2030. And India’s market cap is projected to go from 3% of global market cap right now to 5% by 2030.

India is increasingly becoming the most favoured emerging economy, led by several factors:

• A steady government since the last decade
• Fiscal policy with a long term growth orientation
• Policy initiatives have been aggressive in the areas of infrastructure, manufacturing, and digitisation
• Demographics in the form of a large and young population ensure both availability of a workforce, and fuel for growth in consumption
• Geopolitical advantages with the world fighting it out with China, and finding a viable and scalable alternative in India

The preference differential emerges not only from India’s advantages, but also from the worries elsewhere. China has an ageing population and is engaged in trade wars with the West, South Korea will soon stop being called emerging and will classify as developed, Taiwan has its own issues with China, and we all know what Russia did.

Taiwan and South Korea are still emerging as strong contenders. However, investments there have a heavy sector skew - technology and semiconductors in the case of Taiwan, and entertainment and cosmetics in the case of South Korea. India being a more well-rounded play scores points over these two.

With potential for sustained economic growth of 7% over the next decade, India is likely to emerge as the fastest growing large economy in the world. And if the economy grows at 7%, corporate earnings have the potential to deliver 2x that growth. No wonder India’s valuations are at a steep premium to developed markets and other emerging markets.

The next time someone tells you India’s valuations are stretched, think about how there is potential for valuations to remain high for both emerging markets, and especially India, given sustained long term high growth.

Market Stories

Astral - Pipe Dream Gone Right ??

What do Salman Khan, Ranveer Singh, Allu Arjun, and the IPL have in common? Pipes!

No, this is not innuendo or a cheap shot at the rich, but the story of a pipe company that has been a trendsetter in the industry and quite the investor favourite in the recent past - Astral Pipes.

Up almost 4x in the past 5 years, this pipe company went from being a newbie that was shunned by the pipe industry to being among the fastest-growing companies in the pack.

What has been the company’s driving force and what else do they have in store for the coming years? Let’s “pipe down” and get right to it!

What Has Resulted in Astral’s Rise?

From the way we have hyped the company, you may have assumed it is the leading player in pipes and might have a long-standing history that pre-dates all its peers - but neither of those things are true.

In fact, the company stands in 3rd place with about a 9% market share in the overall pipe industry and is a fairly new company, having been around for only 25 years compared to its peers that have been around for probably double the amount of time!

What is so special about Astral that a multitude of investors have placed their faith in the company? The company managed to ride the wave of a few trends - some that Astral pioneered!

1. Metal Pipes to Polymer Pipes

• In the late 90s, metal pipes were the dominant and only option in piping solutions, whether it was for irrigation (45% of demand), plumbing (38% of demand) or sewerage (12% of demand)
• It wasn’t until Astral set up the first CPVC pipe plant in 1998 and fought its way into the market till 2003 that it was accepted as an alternative, regardless of its obvious benefits - it is lighter, easier to cut, cheaper to make, and doesn’t corrode over time with water
• Post that, the polymer-based pipes segment grew at a CAGR north of 12% over the next 2 decades, making India the fastest-growing pipe market in the world
• CPVC pipes especially became a star attraction due to being more flexible than other polymer-based pipes, having higher margins and its application in residential and commercial plumbing
• Astral kept its expertise and product portfolio concentration towards CPVC pipes (25% market share in this segment, making it a market leader), which benefitted it greatly with industry-high EBITDA margins that kept competitors away by 100-200 bps at all times

2. Unorganised to Organised Sector

• With there being choices available for pipes now, consumers started looking more closely into what pipes they use for their homes or farms, making quality, brand and pricing of utmost importance - something that was previously ambiguous and subjective in a heavily unorganised market (60-70% market share in around 2003)
• This shift in thinking and usage resulted in organised players gaining incremental market share YoY and now making up more than 67% of the industry now, with the top 4 companies making up more than 30% of the market share themselves!

3. Unorthodox Advertising

• Since consumer attachment to the decision-making process in pipe selection became an increasing trend, advertising had to be shifted in that manner as well, although it was previously an untapped opportunity
• Astral pioneered this as well, by being the first pipe company to use Bollywood as a medium of advertising - and Dabangg 2 was its choice of medium! With the khaki-clad Salman Khan breaking bones with unbreakable Astral pipes, the consumer was humoured and reminded of the brand
• This led to pipe companies going onto spending 3-4% of their turnovers on advertising their products
• Astral continues to work on this, being a sponsor to multiple IPL teams, and gaining Ranveer Singh and Allu Arjun to appease the mainstream Bollywood and South-Indian consumers

4. Policy Support

• There is immense policy support via the Jal Jeevan Mission (creating demand for potable water supply systems in rural areas) and PM Awas Yojna (creating demand for residential plumbing)
• Jal Jeevan Mission has already brought the total number of rural households to receive water supply to more than 12 crore (making this a 65% penetration of total rural households of India under the scheme from less than 20% in 2019), and aims to reach the goal of 100% penetration in the next 2 years
• Under the PMAY, almost 2 crore houses have been built and are in the process of being delivered, with an additional 1 crore houses yet to be constructed by this time next year
• Both of these have received Rs. 70,000-Rs. 80,000 crore in budgetary allocation (as of FY23) via the Central Government, the pipe industry, in general, has seen a great 5-year span lately

5. High Potential Diversification

• While other players in the industry might be venturing into other plastic-centric products like furniture or plastic mouldings, Astral intends to maintain its sanctity and expertise within the plumbing industry but not just stay “behind the walls” anymore
• With its foray into faucets, sanitary ware, adhesives and water tanks, it intends to be a complete water solutions player
• Having invested about Rs. 1,000 crore in capex over the last 5 years to cumulatively grow its business (20% of FY23 revenues), the management expects Rs. 1,500 worth of revenues to come in from these new businesses incrementally over the next few years (which will make up 13-15% of revenues by FY28)

Astral’s Financial Supremacy

Tailwinds for the entire industry in the form of government-driven buying and movement from unorganised to organised, coupled with Astral’s prowess in plastic pipes, advertising and diversification have resulted in industry-leading revenue growth for Astral over the last 5 years.

It has also scored best on profitability and profitability growth thanks to:

• Higher pricing - By cultivating the brand, Astral commands a 5% premium on its polymer pipes, a price that consumers have been willing to pay in exchange for superior quality and durability
• Product mix - As mentioned earlier as well, CPVC pipes being a higher margin product, and with Astral being among the pioneers for it, CPVC is an integral part of the mix that they retain as their expertise in residential and commercial plumbing, thereby not letting any other product dilute margins
• Improving utilisation/efficiency - Until FY20, Astral was underutilising its pipe manufacturing capacity, ranging around 50-52% while the rest of the industry operated at around 60%. This shifted in the span of 3 years, with utilisation getting back to peer averages, and return ratios rising from an ROCE of 19% to 25-26%, at par with the industry leader Supreme

But Wait, There Might Be A Catch

While Astral may have depicted the best financials among the 4-pack above, valuations might be painting a different picture:

Over the last one year, all the pipe companies have seen a rally, thanks to common growth factors.

However, Astral’s valuations seem a tad bit high, not just compared to its peers but compared to its own historical averages.

Taking into consideration the new growth prospects, rising residential real estate demand, policy support from the government and overall piping industry growth, it seems like the current Rs. 1,842 (as of June 6, 2023) has priced in most of this growth (yes, the FOMO is immense).

That doesn’t mean the market won’t provide opportunities to buy into the company at better valuations! If this story interests you, keeping a look out for the company that fulfilled its “pipe dream” might serve you well.

We’ve discussed this and more on the latest episode of Common Cents by Rupeeting so do check it out:

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