Prince Pipes and Fittings - Long-term CPVC resin supply security on cards - ICICI Securities

Grasim Industries has entered into a definitive agreement with Lubrizol Advanced Materials (LAM) to manufacture and supply CPVC resin in India with 1st phase of production expected to start in late CY22. We understand LAM's current supplies of CPVC compound to its existing two licensees (PPF and Ashirvad) is likely to exceed 55,000 tonnes in FY21. Hence, we do not see commoditisation of CPVC resin in India (with this move) as the first phase of operations would barely suffice the sourcing requirements of its exiting two licensees while the freed-up capacity in Thai/US/Belgium plants could be realigned towards other geographies. Also, in the long run, there could be a case for potential easing of cost structure for PPF/Ashirvad as Lubrizol may pass on some of the cost arbitrage benefits (from this new facility) in the quest to absorb its incremental capacities once the 2nd phase commences operations. Maintain BUY with a TP of Rs295.

- Major global CPVC resin suppliers currently operating at near to optimum capacity utilisation. Post the initiation of anti-dumping duty (ADD) on Chinese/Korean imports of CPVC resin/compound into India, market share gains by Japanese and US CPVC resin/compound suppliers have resulted in these players currently operating at higher capacity utilisation. With LAM expected to commission its greenfield facility in India in CY23, the current licensees of LAM (PPF and Ashirvad) are likely to enjoy long-term supply security for CPVC compound. On the other hand, Japanese resin/compound suppliers who are already witnessing surge in their supplies to India may face supply bottlenecks in medium to long term in the absence of any capacity enhancements which remains a key monitorable.

- Commoditisation of CPVC resin unlikely until FY24. The 1st phase of this plant may witness 50,000t of capacity coming on stream by CY22/FY23. LAM's current supplies of CPVC compound to its existing licensees (PPF and Ashirvad) may exceed 55,000t in FY21. Hence, we do not see commoditisation of CPVC resin in India (with this move) as the 1st phase of operations would barely suffice the sourcing requirements of its exiting licensees while the freed-up capacity in Thai/US/Belgium plants could be realigned towards other geographies which also remain a monitorable. However, any major capacity announcement by other CPVC resin suppliers in India may lead to commoditisation of this category in the long run.

- Potential cost structure for PPF may ease in long run: LAM's pricing of CPVC resin/compound to its licensees has been at a sizeable premium compared to its Japanese counterparts. In the long run, there could be a case for potential easing of cost structure for PPF/Ashirvad as Lubrizol may pass on some of the cost arbitrage benefits (from this new facility) in the quest to absorb its incremental capacities once the 2nd phase commences operations.

- PPF launches Prince CPVC FlowGuard Plus in Mid-Oct'20. Post its tie-up with LAM for the supply of CPVC compound in Aug'20, the company's first batch of production of Prince CPVC FlowGuard Plus has been dispatched to the trade. The company, which has already taken a price increase of 3% in CPVC pipes on 1st Nov'20, can witness a strong traction in CPVC pipe volumes driven by its seamless entry into projects and cross-selling opportunity along with its PVC pipe offerings.

Source : Equity Bulls

Keywords