Prince Pipes and Fittings - Seamless execution; volumes surprise positively - ICICI Securities

Prince Pipes and Fittings (PPF) has delivered an impressive beat on all counts: a) 18% YoY volume growth (I-Sec: 8%); b) 18.8% EBITDA margin (I-Sec: 16%) driven by operating leverage, superior product mix and inventory gains; and c) impressive FCF driven by stricter working capital discipline (down to 28 days). Key highlights of the quarter: 1) PPF's Q3 volume growth was the best amongst its peers; 2) it achieved ~16% adjusted EBITDA margins (adjusted for inventory gains and incremental brand spend) despite additional input cost pressures in CPVC pipe segment due to recent shift in sourcing vs 12-14% margins reported in last four years. With further margin levers up its sleeve and demand tailwinds likely to sustain, we expect PPF's earnings momentum to gain further traction going forward. At current levels, PPF remains our top pick in the plastic piping space.

- Valuation and outlook: Factoring-in the impressive Q3FY21 outperformance, we increase our revenue and PAT estimates by -0.8%/0.7%/0.7% and 10.6%/16.7%/11.5% for FY21E/FY22E/FY23E respectively. We now expect the company to report revenue and PAT CAGRs of 12.7% and 25.5% respectively, over FY20-FY23E. We maintain BUY on the stock with a revised target price of Rs505 (earlier: Rs450), valuing it at 25x FY23E earnings.

- Market share gains in PVC pipes and growth traction in CPVC pipes drive impressive 18% YoY volume growth: PPF posted an impressive Q3FY21 volume growth of 18% (vs Supreme Industries: 9% YoY, Astral Poly Technik: 15% YoY, and Finolex: 5% YoY) led by market share gains in PVC pipe segment, network expansion post Lubrizol tie-up, and growth traction in CPVC pipe segment. It reported 38.7% YoY growth in revenues to Rs5.5bn driven by 17.6% YoY increase in realisation. With the company expected to witness strong growth traction in its CPVC pipe segment coupled with cross-selling opportunities and the recent product launches, we expect PPF to report 11.6%/12.7% volume/revenue CAGRs over FY20-FY23E.

- EBIDTA margin surprises positively at 18.8% (I-Sec: 16%): PPF reported a sharp beat in EBITDA margin at 18.8%, up 530bps YoY. The beat was driven by inventory gains in its PVC pipe segment, sustained brand monetisation in PVC pipes, operating leverage and superior product mix. Going forward, we expect PPF's EBITDA margin to further improve driven by superior product mix, likely price hikes in CPVC pipes and manufacturing footprint expansion over the next two years.

- Cash conversion cycle further improves: Sharp curtailment in receivables and inventories in 9MFY21 has led to significant improvement in cash conversion cycle for PPF. Going forward, despite large Telangana capex, we expect PPF to remain a net cash company over FY21E-FY23E. Consequently, we expect its RoCE to improve to 21.7% by FY23E.

Source : Equity Bulls

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