The company is acquiring assets of Shree Prabhu Petrochemicals Private Limited, for no more than Rs 51 crore and will be investing Rs 24 crore towards capacity addition
India’s second-largest plastic pipe maker Astral Poly Technik’s foray into plastic storage tanks was taken positively by investors. Its stock jumped 3.2 per cent to close at Rs 1,498.40 on Thursday, even as markets
were choppy before ending 1 per cent higher.
The company is acquiring assets of Shree Prabhu Petrochemicals (SPPL) for Rs 51 crore and will be investing Rs 24 crore towards capacity addition. The acquisition, while being minuscule, offers significant growth opportunity for Astral, besides having vast synergies.
Astral is acquiring tank capacity of 500 million litres (rotomolding and blow molding), leverage SPPL’s brand Sarita, its network of 550 dealers, and 4,500 metric tonnes per annum of pipe capacity in high-density polyethylene/drip irrigation segment — a category it hitherto does not have presence in.
The plastic water tank industry is worth over Rs 5,000 crore, growing at 13-15 per cent annually. With nearly 70 per cent share controlled by unorganised players, it provides notable opportunity for organised players like Astral.
In the past, too, Astral had successfully added new product lines and geographies at a faster pace by acquiring businesses at reasonable valuations. One of them was high-margin and high-growth adhesives, which now accounts for a fourth of Astral’s revenue.
Analysts are bullish on its ability to scale up this new segment. “Many of its dealers and distributors are already into this (tanks) business. This launch could act as a logical product extension for Astral’s mix across its entrenched network and ability to leverage on its existing pan-Indian manufacturing since logistics is a critical aspect for success of water tanks business,” said Jefferies.
Estimates indicate logistics costs range between 10 per cent and 15 per cent of product value.
The business has the potential to generate revenue of Rs 250 crore annually in the next three to four years, with an estimated consolidated earnings before interest, tax, depreciation, and amortisation margin of 13-15 per cent, estimates Nehal Shah, research analyst, ICICI Securities. Shah says this will result in faster payback of just over two years and potential accretion of Rs 1,100 crore (5 per cent of the current market capitalisation).
Analysts at Investec, too, see potential addition of over Rs 300 crore in net revenue (15 per cent of Astral’s 2019-20 revenue) and earnings per share accretion of over Rs 1.8 by 2022-23/24.
Earlier this month, Astral’s July-September quarter results had beaten estimates. Its largest business of plastic pipes reported 4.1 per cent year-on-year growth in revenue, led by increase of 2 per cent each in volume and realisation. This was led by pick-up in construction activity after unlocking of the economy. Astral expects the momentum to continue, supported by recovery in metros.
On the flip side, Astral’s key raw materials are crude oil-based. If oil prices rise sharply, it may impact its margins. Moreover, a part of the expected business recovery is priced in. With 30 per cent gains in the past one month, Astral’s shares are among the top BSE 200 gainers.