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Astral Poly Technik - Scalability to further improve with storage tanks foray - ICICI Securities

Posted On: 2020-11-26 00:23:40 (Time Zone: Arizona, USA)

Astral Poly Technik's (ASTRA) has made a big-bang entry into plastic storage tanks segment through acquisition of certain assets of Shree Prabhu Petrochemicals Pvt Ltd (SPPL) for Rs510mn. Besides access to SPPL's water tank capacity of 500mn ltrs and pipe capacity of 4,500te p.a., the acquisition would allow ASTRA to leverage SPPL's brand 'SARITA' and its existing dealer network. The acquisition seems very lucrative considering the high RoCE potential of the asset and payback period of just over two years. Key synergies: 1) leveraging of ASTRA's existing dealer network, 2) multi-location manufacturing footprint as water tanks are highly freight-sensitive products, 3) ready access to SPPL's technology, knowhow and dealer network for fast ramp-up.

- Valuation and outlook. Considering the potential revenue and profitability generation from the said acquisition, we increase our FY22E revenue and PAT estimates by 2% and 1.5% respectively. While rolling over our valuations to FY23E, we expect ASTRA to report overall revenue and PAT CAGRs of 18.5% and 31.7%, respectively, over FY20-FY23E. With the recent spurt in stock price, we downgrade ASTRA to ADD from Buy with a revised SoTP-based target price of Rs1,530 (earlier: Rs1,345), implying a P/E multiple of 45x Sep'22E earnings.

- Foray into water storage tanks to aid further scalability to company's strong model: ASTRA's acquisition of SPPL assets (including its brand 'SARITA', ready-made facility at Aurangabad and extensive network of 550 dealers) marks its seamless entry (without any gestation period) into the fast growing water storage tank segment. Its existing capacity of 500mn ltrs p.a. in tanks and 4,500te in plastic pipes has potential to generate revenue of Rs2.5bn in next 3-4 years with an estimated consolidated EBITDA margin of 13-15%. This would result into faster payback of just over two years and a potential accretion of Rs11bn (5% of current market cap) to its existing market cap over the next 3-4 years.

- Existing synergies and decentralisation benefits to aid scale-up of both its tank and existing pipe businesses: SPPL acquisition is expected to offer synergies, viz. 1) many ASTRA dealers are already into water tank business, 2) ASTRA already has multi-location plant advantage as water tanks are logistically heavy products, 3) ASTRA would be able to take advantage of SPPL's technology, ready-made capacity of 500mn ltrs p.a., knowhow (only player to manufacture storage tanks up to 5,000 ltrs) and dealership network, and 4) scale up its pipe business in the Maharashtra region by aggressively adding capacity and range of piping products at its acquired facility in Aurangabad.

- Water storage tank business offers decent scalability to ASTRA's existing model. Water storage tank market is worth Rs50bn and has been growing at 13-15% CAGR over the last five years. A large unorganised segment (70% of the current market) and weakening competitive intensity present a decent opportunity for branded players like ASTRA.

Shares of ASTRAL POLY TECHNIK LTD. was last trading in BSE at Rs.1451 as compared to the previous close of Rs. 1407.6. The total number of shares traded during the day was 13811 in over 1905 trades.

The stock hit an intraday high of Rs. 1460 and intraday low of 1408.65. The net turnover during the day was Rs. 19884341.

Source: Equity Bulls

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