Astral Ltd Management Discussions.

GLOBAL ECONOMY

The global economy experienced erratic trends during the year gone by. After the initial COVID-19 wave, economic activity rebounded strongly in 2021, aided by pent-up demand and unprecedented policy support. However, two successive waves of COVID-19, prolonged labour market issues, and ongoing global supply chain bottlenecks have diminished the likelihood of widespread economic recovery. Moreover, geopolitical tensions rose significantly in the fiscal years final quarter, followed by widespread sanctions and logistical difficulties.

In CY22 and CY23, global growth is anticipated to be 3.6%. Investment should significantly contribute to global economic expansion, particularly in mature economies. However, the Russia-Ukraine conflicts have hampered global growth prospects and exerted inflationary pressure, as they account for a significant portion of global energy exports and a wide variety of metals, food staples, and agricultural inputs. Assuming inflation expectations remain stable, inflation should steadily decline as supply-demand imbalances diminish, and monetary policy in the worlds leading nations responds. As long-term asset purchases are anticipated to slow, monetary policy is anticipated to tighten in advanced countries progressively. In emerging market and developing economies (EMDEs), monetary policy assistance is anticipated to be withdrawn more rapidly. Additional fiscal support in developed nations and the continued rapid adoption of digital technology could aid in sustaining a more robust global economic recovery than anticipated.

INDIAN ECONOMY

India was able to contain the effects of the third wave of COVID-19 while simultaneously pursuing the target of economic recovery because of government support and a rapid immunisation effort. Since then, indicators such as the mobility index, direct tax receipts, and power demand have increased, indicating economic expansion. As a result India is anticipated to be one of the key economies with the fastest growth rate. The Reserve Bank of India (RBI) forecasts that Indias GDP will increase by 9.2% in FY22 anc 7.8% in FY23.

The Indian economy is anticipated to continue expanding in the coming years. However, the recent geopolitical events are hurting the stock indices and increasing the volatility of crude oil prices and exchange rates. India is a net importer of crude oil, natural gas, and other items, therefore an increase in inflation and a rise in the current account deficit are factors that must be monitored, especially amidst geopolitical environment changes. In addition, the future expansion of the Indian economy is jeopardised by the uncertainties surrounding the fourth wave of the COVID-19 outbreak and the virus mutations.

COMPANY OVERVIEW

Astral is a leading manufacturer of Chlorinated Poly Vinyl Chloride (CPVC) and Poly Vinyl Chloride (PVC) plumbing systems for residential and industrial use. The Company has a commanding market share in the domestic CPVC and PVC pipe industry. In addition to being a leader in the piping segment, it has also expanded into the adhesives and sealants segment, infrastructure products, and water tanks. The Company intends to make strong inroads into the paints, faucets and sanitaryware segments this year, transforming itself into a comprehensive home building material player.

The Company has its pipe manufacturing facilities at Santej and Dholka (Gujarat), Hosur (Tamil Nadu), Ghiloth (Rajasthan), Sangli (Maharashtra), Sitarganj (Uttarakhand), Aurangabad (Maharashtra) and Bhubaneswar (Odisha) for manufacturing of plumbing systems, drainage systems, agricultural pipes, industrial pipes, fire protection pipes, electrical conduit pipes and Infrastructure products.

In addition the Company also manufactures water tanks at its facilities in Santej, Ghiloth, Hosur, Aurangabad and Bhubaneswar.

The Company has its adhesive and sealant manufacturing facilities at Santej (Gujarat), Rania and Unnao (U.P.), Elland (U.K.) and Stanford (USA).

Strengths

• Established brand in plumbing and other building materials industry.

• Strategically located warehouses and manufacturing facilities (West/South/North and Shortly in East) with extensive distribution channel.

• Strong track record of growth and financial performance.

• Continues to introduce new CPVC and PVC products.

• Pursues growth through selective acquisition opportunities in India and internationally.

• Introduced many new products first time in India.

• Highest Quality certifications in piping industry.

• Most popular and recognised piping brand in India.

Plastic Pipes

Demand for building materials such as paint, sanitaryware and faucets, ceramic, plywood, and laminates is correlated to the real estate markets recovery. In contrast, a significant portion of pipe demand comes from irrigation, urban infrastructure, and sanitation projects, allowing for faster growth than in other building material sectors. Because of increased end-use sector investments such as irrigation and WSS, the plastic pipes industry has historically grown faster than the GDP. In addition, increased awareness, adoption, and replacement of metal pipes with plastic pipes have also aided growth.

The market for plastic pipes is valued at approximately f 300 billion, with organised players accounting for approximately 65% of the market. 50-55% of the industrys demand is accounted for by plumbing pipes used in residential and commercial real estate, 35% by agriculture, and 5-10% by infrastructure and industrial projects.

THE MARKET FOR PLASTIC PIPES

(IN %)

Due to the governments emphasis on cleanliness and sanitation, affordable home building, and replacement and substitution demand, the domestic plastic pipes market grew at a CAGR of 10 to 12% between FY15 and FY20. Demand is anticipated to expand at a CAGR of 12 to 14% between FY21 and FY25, driven by increased investment in WSS projects, the substitution of metal pipes with polymer pipes, and replacement demand.

Plastic pipes have become a crucial infrastructure component for transporting and distributing water, oil, gas and other commodities. As a result, plastic pipes are being rapidly installed in a vast array of applications, such as irrigation, domestic plumbing, sewerage, and industrial applications. Depending on the application, plastic pipes, galvanised iron pipes, cement pipes, ERW pipes, and other materials are utilised. However, plastic pipes are gaining popularity and have become the material of choice due to the easy availability of raw materials, ease of use, lightweight, ease of installation, longer shelf life, and lower cost.

UPVC PIPES:

UPVC pipes are used in agriculture and plumbing for potable water supply and sewerage. In the past, continuous replacement of galvanised iron pipes with UPVC pipes has driven robust demand growth. In addition, affordability and longer life spans compared to metal pipes have aided the growth of this segment. According to a CRISIL report, the market for UPVC pipes is expected to grow at 11-12% CAGR until 2024.

CPVC PIPES

CPVC pipes are used in plumbing applications for hot and cold potable water distribution systems, and the demand growth for this segment has been the highest among all other plastic pipes over the past few years. CPVC pipes in India are still at a nascent stage, however, they have an enormous growth potential due to favourable characteristics such as, longevity, corrosion resistance, fire resistance, being lead-free and the ability to withstand high temperatures. According to a CRISIL report, the share of CPVC pipes in the overall plastic pipes market will increase and surpass the estimated 20% growth by 2024.

HDPE PIPES

HDPE pipes are used in irrigation, sewerage and drainage, city gas distribution, and chemical and processing industries. It accounts for a good 6-8% of the overall plastic pipes industry. When compared to other traditional metal and cement pipes, these pipes are increasingly gaining popularity due to its superior build and quality. According to a CRISIL report, the HDPE pipes market is expected to grow at a CAGR of 12-13% until 2024.

PPR PIPES

PPR pipes, used for various industrial purposes, account for 3-5% of the total plastic pipe demand. However, due to its relatively higher costing in comparison to other plastic pipes, it is used much more restrictively. According to a CRISIL report, the market for PPR pipes is expected to grow at 6-7% CAGR until 2024.

Tanks

With unorganised regional firms servicing 70% of the industry, water storage tanks in India is a f 45-50 billion market opportunity growing at a 5-6% CAGR. The rationale for regional players domination in this category is the products voluminous nature, which adds high freight costs during transit. However, the major Indian pipes businesses expanding their manufacturing base, which has resulted in pan-India presence with overlapping effective distribution networks, bodes well for the prominent pipe players. With increasing building activity, growing concerns about water conservation, a spike in population, increased government regulation on wastewater, and ageing water infrastructure, demand for plastic storage tanks is expected to remain healthy. Furthermore, the tank distribution network overlaps with the pipe distribution network, making it a logical extension for any pipe player.

DEMAND DRIVERS

Value Migration

One of the most significant shifts in the pipes business over the last decade has been the large-scale migration from metals to polymer-based pipes in most applications, which is especially true in the case of building industrys plumbing and pipe applications. With the introduction of polymers such as CPVC for hot and cold-water plumbing, firefighting, and industrial fluid transportation, this progression has enabled for more research and development in specialised products by organised companies for specific applications.

The CPVC industry, which presents a technological barrier to entry, is providing an opportunity for branded competitors to further enhance their market share.

Low per capita consumption of PVC

Compared to the global average of 6 kg, Indias PVC consumption per capita is roughly 2.4 kg. However, Indias consumption per capita is further expected to increase and approach the world average, driving growth in product consumption.

Substitution and replacement demand

Plastic pipes have several advantages over metal pipes. Plastic pipes have hastened the replacement of metal pipes due to their superior qualities and inexpensive pricing. In addition, the increase in the availability of raw materials (PVC, PE and PPR) following the commissioning of new petrochemical facilities in India is expected to further support the plastic-pipes industry going forward. The other factor which is expected to drive long-term demand is the replacement of older pipes with plastic pipes.

Investments in end user segments

Among factors that will boost the demand, increased spending by state governments and municipal corporations to improve accessibility of water for a burgeoning population is the most critical one. Further, the heightened government thrust on irrigation, urban infrastructure and real estate, is the second most critical factor for demand growth. The Central government has launched various schemes to support these three sectors, which include:

• Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) in the irrigation sector

• Jawaharlal Nehru National Urban Renewal Mission (JNNURM), AMRUT, Swachh Bharat Mission in urban infrastructure development sector

• Housing for All scheme in the real estate sector

In addition to these factors, rise in private sector investments, particularly in the real estate sector, is also expected to boost demand. As construction in metros, tier- II, and tier-III cities accelerates, the demand for plumbing pipes and fittings is expected to increase multifold.

IRRIGATION

The irrigation industry is a major end-user segment for plastic pipes. Less than half of Indias 160 million hectares (ha) of cultivated land is irrigated. Investment in the sector is expected to rise over the next five years as state governments push to increase irrigation penetration. Irrigation construction spending is expected to rise to f 3.7 lakh crore between FY21 to FY25. Earlier the irrigation construction spending stood at from f 3.1 lakh crore between 2016 to 2020.

URBAN INFRASTRUCTURE

The pandemic resulted in lower spending due to a loss of man-days during the lockdown, diversion of state funds to meet social and healthcare spending, and labour migration in FY21. FY22 witnessed the start of deferred projects from FY21, as the government focused on schemes such as the Swachh Bharat Mission, Jal Jeevan Mission, AMRUT, and metro projects, majority of which are currently being implemented. While these projects are long-term engagements, it is expected to drive demand for pipes drastically.

Urban infrastructure spending is expected to reach f 2.9 lakh crore from FY21 to FY25, a 1.35x increase over the previous five fiscal years. Half of the money is expected to go towards WSS projects, which will primarily be led by state governments and funded by the central government through initiatives such as the Jal Jeevan Mission, AMRUT and Swachh Bharat Mission.

Following WSS, metro construction will attract the most investment in urban infrastructure development. Several projects announced and implemented by various state governments will drive the piping sectors medium-term growth.

REAL ESTATE

In India, real estate is a major end-use sector for PVC pipes. Demand for real estate has been sluggish in recent years, however, the government passed the Real Estate (Regulation and Development) Act which established a regulatory system for the sector to boost customer confidence. Furthermore, over the last three fiscal years, the Pradhan Mantri Awas Yojana-Urban (PMAY-U), a scheme under the Housing for All by 2022 programme, has seen healthy construction activity. Post the pandemic, Indian real estate markets have picked up once again, which will drive back the growth in the pipes segment as well.

Adhesives

The f 134 - 136 billion (FY21) domestic adhesives and sealants market is segmented as follows:

1) Industrial adhesives and sealants; and

2) Consumer and bazaar adhesives.

The industrial division serves B2B industries such as packaging, footwear, paints, and automotive, among others. The retail section serves industries including furniture/woodworking, building construction, arts and crafts, and electrical fittings, among others.

The f 53-55 billion (FY21) consumer adhesives market grew at a CAGR of 8-10% between 2015 and 2020, propelled by the rapidly expanding furniture business and rising income levels, which led to a rise in interiors demand. In addition, enhanced building construction investment also contributed to the growth. However, due to the pandemic-induced decline in construction activity, the market did contract in FY21. However, the decline was mitigated by increasing demand from the furniture market due to work from home, which increased demand for home furnishings.

Based on technology, the consumer adhesive market can be divided into water-borne, solvent-borne, reactive, and hot melt adhesives. Due to its increasing use in the woodworking and furniture industries, PVA (poly vinyl acetate), a water-based adhesive, dominates the market (26 to 28 % of revenue).

PVC solvent cement is a solvent-based adhesive used in the irrigation and building construction industries to join PVC pipes.

SBR (styrene butadiene rubber) is used in foam and mattress applications as a sprayable adhesive. Chloroprene rubber is used in a variety of applications ranging from woodworking to leather to foam applications, accounting for 12-14 percent of the market.

Epoxy adhesives dominate among reactive adhesives (1517% ). These are also utilised in the furniture, woodworking, and tiling sectors due to their resilience to water and fire, as well as their durability. Cyanoacrylates are used to connect polymers, metals, and rubbers. Silicone sealants account for 12 to 14% of the consumer adhesives market. Due to their water-resistance, they are commonly used for basic domestic repairs particularly around sinks and pipes.

DEMAND DRIVERS

Rising demand for wooden furniture

The furniture industry in India uses a variety of adhesives, such as PVA, SBR, chloroprene rubber, cyanoacrylates and epoxy. The market is anticipated to be driven by a number of variables, including increasing urbanisation, a growing preference for more modular and compact furniture, and a rising need for durable and hybrid furniture. In the near future, all of these variables are anticipated to contribute to the growth of the furniture industry, and by extension, the consumer adhesives sector as well. According to a CRISIL report, the demand for wooden furniture is expected to grow at a CAGR of 10-12% between fiscal 2021 and 2026.

Increasing demand for non-hazardous, green and sustainable adhesives

As consumers become increasingly conscious of the negative impacts of petroleum-based products, the demand for bio-based / eco-friendly adhesives such as starch and lignin is rapidly increasing. Consequently, manufacturers are heavily investing in the research and development of such adhesives. As green and sustainable alternatives to solvent-based adhesives, hybrid adhesives are widely being used by adhesive end-user sectors. This growth is expected to further rise, as more consumers become aware of environmental degradation.

Increased spending on building construction

Adhesives and sealants are used in a variety of applications in the construction sector, including flooring and carpets, tile insulation, resilient flooring, wall covering, prefinished panels, door perimeters, drywall, lamination and fixed window frames, among others. In a renewed push to the sector, under the Atmanirbhar Bharat programme, the government has introduced multiple policies to boost the National Infrastructure Pipeline (NIP) and the Affordable Rental Housing Complex (ARHC) schemes, which also includes Housing for All and other investments in the industrial segment. As a result , the investments in the construction sector are expected to grow at a CAGR of 4-6% over the medium term.

Increasing demand for electronics

Adhesives are used in a variety of applications in the electronics sector, including conformal coatings, terminal electrode protection and surface mount device bonding, among others. According to the Ministry of Electronics and IT, the electronics industry is one of the fastest-growing in India, with a market value of f 4,950-5,000 billion in FY21. The industry is expected to grow at a robust pace of 19-24% over the medium term.

OUTLOOK

The consumer adhesives market in India is expected to grow at a 9-10% CAGR between FY21 and FY26, owing to economic recovery and growth in end-user sectors. Demand, in particular, is likely to recover as the Indian economy recovers from the pandemics impact. Overall, the consumer adhesives business is estimated to grow at an 8% CAGR between FY22 and FY26.

CONSUMER ADHESIVES MARKET ON GROWTH PATH

(H IN BN)

?BUSINESS PERFORMANCE & FINANCIAL HIGHLIGHTS

The pipes business fared remarkably well through the year, generating sales of f 34,433 million. The EBITDA for the year was f 6,624 million with an EBITDA margin of 19.20%. The strong result was driven by a combination of volume, realisation growth, and geographically diverse demand. The adhesives business grew its revenue by 37.39% in FY22, from f 7,345 million in FY21 to f 10,091 million in FY22. EBITDA for the year was f 1,287 million, with an EBITDA margin of 12.80%. The Company also performed well in its water storage tank business. Although the tanks contribution to the total business pie is minimal, it will continue to grow fast in the medium term on a low base. This segment can become a sizeable avenue of growth once it matures in a few years.

On a consolidated basis, the Company recorded strong growth in our business and closed the year with a revenue of f 43,940 million up by 38.34% as compared to f 31,763 million in FY21. EBITDA grew by 18.97% to f 7,883 million in FY22 from f 6,626 million in FY21. PAT stood at f 4,904 million in FY22 as compared to PAT of f 4,082 million in FY21.

DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS (CONSOLIDATED)

PARTICULARS FY22 FY21 CHANGE
Debtors turnover 22 32 10 days
Inventory turnover 61 54 (7) days
Interest coverage 107.31 46.95 128.57%
Current ratio 1.85 1.84 0.60%
Debt equity ratio 0.02 0.03 33.33%
Operating margin 17.94 20.86 (292) bps
Net profit margin 11.16 12.85 (169) bps
Return on equity 22.92 23.77 (85) bps

• INTERNAL CONTROL SYSTEMS AND THEIR APPROPRIATENESS

Astral has institutionalised a system of internal controls, with documented procedures covering all corporate functions. Internal controls provide reasonable assurance regarding the effectiveness and efficiency of operations, the reliability of financial controls, and compliance with applicable laws and regulations.

These policies and procedures are periodically updated, and the Internal Auditor oversees the process. In addition, the organisation aligns all of its processes and controls with industry standards. The Board and the Audit Committee supervise internal controls adequacy by monitoring the implementation of internal audit recommendations via compliance reports. In addition, the independent auditors have concluded in their report that Astral has adequate internal controls over financial reporting.

HUMAN RESOURCES

The company continues to maintain a strong relationship with its employees, in order to improve their efficiency level at the workplace. The company places great value to its employees through their commitment, competence and effort that is shown in different aspects of the business. It also confirms its commitment towards the development of HR policies, which will help the company to fulfill its business needs. The main focus has been on providing fulfilment, stretch and opportunity for the development to its employees at all levels of the business. Apart from such development, the employees have also shown considerable skill and motivation in their work, due to which the company is able to deliver highest level of performance in the year under review. As on March 31, 2022, the Company had 6,000+ employees spread across different locations.

CAUTIONARY STATEMENT

Investors are cautioned that this discussion contains forward-looking statements that involve risks and uncertainties. When used in this discussion, words like will, shall, anticipate, believe, estimate, intend and expect and other similar expressions, as they relate to the Company or its business, are intended to identify such forward-looking statements.

The Company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, actual results, performances, or achievements could differ materially from those expressed or implied in such statements. Readers are cautioned not to place undue reliance on the forward-looking statements as they speak only as of their dates.

FINANCIALS PERFORMANCE

Key Highlights (Consolidated)

(? In Million except as stated otherwise)

Particulars 2017-18 2018-19 2019-20 2020-21 2021-22
Capacity (In M.T.) 2,37,555 2,91,041 3,25,547 3,50,122 3,70,802
Sales 21,019 25,013 25,714 31,699 43,839
Less : Excise Duty 329 - - - -
Net Sales 20,690 25,013 25,714 31,699 43,839
Other Income 166 214 186 315 450
Total Income 20,856 25,227 25,900 32,014 44,289
PBIDT 3,268 3,967 4,534 6,626 7,883
Interest 166 257 211 116 61
Profit Before Depreciation, Tax & Exceptional Items 3,102 3,710 4,323 6,510 7,822
Depreciation 571 814 1,079 1,165 1,269
Profit Before Tax & Exceptional Items 2,531 2,896 3,244 5,345 6,553
Exceptional Items (Exchange Gain/(Loss)) (50) (62) (183) (15) (68)
Profit Before Tax 2,481 2,834 3,061 5,330 6,485
Tax 724 861 565 1,248 1,581
Profit After Tax 1,757 1,973 2,496 4,082 4,904
Other Comprehensive Income (Net of tax) 34 (2) 3 28 6
Total Comprehensive Income 1,791 1,971 2,499 4,110 4,910
Paid Up Equity Capital 120 120 151 201 201
Reserve and Surplus 1 10,050 12,645 14,866 18,745 23,153
Shareholders Funds 10,170 12,765 15,017 18,946 23,354
Non-controlling Interests 135 150 168 212 278
Loans (Long term) 1,174 1,631 1,090 247 401
Deferred Tax Liability (Net) 330 533 429 400 398
Capital Employed 2 11,095 14,302 16,288 19,267 23,219
Gross Fixed Assets 3 7,557 10,335 12,888 14,657 17,723
Capital Work In Progress 731 808 444 566 1,232
Net Fixed Assets 4 6,065 8,103 9,646 10,287 12,169
Net Current Assets 2,517 2,842 3,482 5,807 8,042
Book Value Per Equity Share (in ?) 50.94 63.63 74.75 94.30 116.23
Earning Per Equity Share (in ?) 8.76 9.76 12.34 20.13 24.08
Cash Earning Per Equity Share (in ?)5 11.99 14.48 17.10 25.53 30.71
Debt : Equity ( Long Term Debt/Total Net Worth) 0.18 0.19 0.11 0.03 0.02

 

1. Excluding Revaluation Reserves and reducing miscellaneous expenditure

 

2 Excluding Revaluation Reserves, Miscellaneous Expenditure and Capital Work in Progress.

 

3. Excluding Goodwill, Brand and Capital Work in Progress.

 

4 Excluding Revaluation Reserves, Goodwill, Brand and Capital Work in Progress.

 

5. Cash profit considered for cash earning per share is Net Profit + Depreciation + Deferred tax + Exceptional item excluding foreign gain(loss).