Prince Pipes and Fittings - Major beneficiary of industry consolidation - ICICI Securities

We reiterate our positive stance on Prince Pipes & Fittings (PPF) given improving earnings expectations in the near to medium term on the back of: 1) ongoing industry consolidation in the PVC pipe segment, which would drive strong market share gains for PPF; 2) its increasing ability to raise CPVC pipe prices (than expected earlier) with higher probability of global CPVC majors taking a price hike in CPVC resin in the near term; 3) likely growth traction in the CPVC pipe segment driven by expected seamless entry into projects and bundling opportunities (post recent tie-up with Lubrizol); 4) structural improvement in EBITDA margin led by decentralisation of its manufacturing footprint (with the upcoming Telangana project), operating leverage and product mix improvement; and 4) sustained balance sheet improvement with higher FCF generation driving higher RoCEs over the next two years. Maintain BUY.

- Valuation and outlook. Considering the higher than expected revenue growth in H2FY21 led by accelerated industry consolidation and higher realisation due to sharp increase in PVC prices, we increase our earnings estimates for PPF by 51%/3% for FY21E/FY22E respectively. Rolling over our numbers to FY23, we now expect PPF to report revenue/PAT CAGRs of 12.5%/21% over FY20-FY23E respectively. We maintain our BUY rating on the stock with a revised target price of Rs400 (earlier: Rs334), valuing it at 25x Sep'22E earnings (30%/45% discount to the multiples assigned to SI/ASTRA respectively).

- Volume growth at inflection point. We expect PPF to report 11.3% / 12.5% volume /revenue CAGRs over FY20-FY23E led by: a) market share gains in PVC pipe segment on account of accelerated industry consolidation (driven by steep increase in PVC prices and tight availability of PVC resin) post Covid; b) likely growth traction in CPVC pipes driven by the company's expected seamless entry into projects (with the recent successful launch of CPVC FlowGuard pipes) and bundling opportunities; and c) recent foray into high-growth segments like DWC pipes and storage tanks.

- Expect structural improvement in EBITDA margin over the next 2-3 years. Decentralisation of its manufacturing footprint with the upcoming Telangana project, operating leverage and expected product mix improvement (driven by likely growth traction in CPVC pipe segment) are likely levers going forward for structural improvement in PPF's EBITDA margins. Hence, we expect the company to report overall EBITDA margin improvement from 14% in FY20 to 15.3% in FY23E. We expect PPF to exhibit a 15.8% EBITDA CAGR over FY20-FY23E.

- Sustained balance sheet improvement to drive higher RoCEs: Sharp curtailment in receivables and inventories in H1FY21 has led to significant improvement in the cash conversion cycle for PPF. Going forward, despite the large Telangana capex (likely to be commissioned by Q2FY22E), we expect PPF to generate impressive FCF from operations (company will also become 'net cash' post FY21E) driven by strict working capital discipline and strong traction in profitability. Consequently, we expect RoCE to improve to 20.7% by FY23E.

Source : Equity Bulls

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