Astral Poly Technik - Valuation factor in positives; downgrading to Sell - BRICS

Astral's Q2FY13 results came in below expectations, due to lower EBITDA margin and forex losses booked during the quarter. The company's new product launches are mostly on track. We maintain our estimates, but raise target price by 23% to Rs316, as we rollover to Q2FY14 estimates and increase P/E multiple. We remain positive on Astral's growth prospects, but are downgrading the stock to SELL, as we believe the current valuations factors in all the positives.

Profit up 15% yoy on back of strong volumes

Astral reported a growth of 15% yoy in net profit to Rs102mn (vs. estimate of Rs151m), on the back of an increase of 47% yoy in sales to Rs2.01bn (vs. estimate of Rs1.86bn). Sales were largely driven by higher volumes - production was up 12% yoy to 10,997MT and there was liquidation of some inventory carried forward from Q1FY13. However, operating margin contracted marginally yoy to 12.1%, due to a delay in pass through of the increase in raw material prices towards the end of the quarter. Net profit growth was lower than the growth in operating profit on account of an exceptional item of Rs54mn towards forex hedging charges. Current debt stands atRs582mn, while acceptances, which are US$ denominated, amount to Rs800mn. As of Q2FY13, mark to market losses on ECBs and acceptances amounted to Rs1.90mn (Rs124mn in Q1FY13). The losses, if any, under this head will be taken in the P&L in Q4FY13, based on the prevailing exchange rates.

Production of bendable CPVC production begins; Blazemaster unlikely to be launched in FY13

According to management, the approval for production of Blazemaster is expected by the end of FY13 and hence, its production is likely to commence in FY14. This marks a slight delay over the company's original plans, but is unlikely to impact its volume growth, as the machinery used for manufacturing this product line is the same as that for its current product range. Astral has started production of bendable CPVC in October 2012 and will begin indigenous production of solvent cement in Q3FY13.

Raising target price; valuation remains rich; downgrade to SELL

Given Astral's expected volume growth led by new product launches, as well as its pricing power, we are raising our target P/E multiple to 10x from 9x, which is 26% higher than its 5-year average and implies a 15% discount to its larger peer, Supreme Industries. Our target price is now up by 23% to Rs316, on account of the increase in P/E multiple and rollover to Q2FY14 estimates. Currently, the stock trades at a 54% premium to its 5-year average P/E multiple and a 4% premium to its larger peer, Supreme Industries. We remain positive on Astral's growth prospects, though we find the stock's current valuations too rich and, therefore, downgrade it to SELL from Add.

Source : Equity Bulls

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