PVC Pipe - Sector Update - Strong Recovery; Growth Momentum on Track - Reliance Securities

Key Sectoral Tailwinds:

- Govt's thrust on agriculture, water distribution and real estate to boost demand of PVC pipes
- Higher realization supported by sharp rise in PVC prices
- New opportunities in water tanks business

We released our initiation report on the pipe sector in May'20 amid uncertainty over the sectoral outlook led by COVID-led disruptions. After muted 1HFY21, the sector witnessed strong recovery in 2HFY21 with healthy growth in revenue and margin by pent-up demand and general recovery in the economic activities. There is clear visibility for demand revival and positive sentiment coming back to the broader economy. Considering this, we are coming up with a detailed sectoral update on PVC pipe companies. Our interpretation of the current scenario, post series of interactions with the companies, sectoral experts and channel check suggests strong sustainable recovery and better earnings visibility. In light of the above, we increase our valuation multiple by 20%-65% and upwardly revise the Target Price of the stocks under our PVC pipe coverage universe by 90-208%.

Key Highlights:

We continue our positive stance on PVC pipe sector led by multiple initiatives of the Government of India (GoI). Despite the COVID-led challenges and supply chain issues, all the companies under our PVC pipes coverage universe reported strong growth in 3QFY21 led by higher realization and pent-up demand. Notably, the organized players gained the market share in 9MFY21.

The PVC Pipe industry witnessed higher realization supported by sharp rise in PVC prices. Uptrend in the PVC prices continues with strong ~90% gain since Mar'20. Currently, the PVC prices hover at Rs135/kg, led by supply crunch.

The PVC prices, which are at historic high of US$1,400/tonne, are likely to correct in the near-term, as sharp spike is unlikely to sustain for a longer period.

We continue to believe that the sector is set to clock 10% CAGR over FY20-25E to reach >Rs500bn from the current level of ~Rs300bn driven by government's initiatives like "Housing for All" by 2022, "Nal se Jal" by 2024, project AMRUT and Swachh Bharat Mission etc.

Top Picks: Finolex Industries and Prince Pipes

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Source : Equity Bulls

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