Demergers are usually cheered by the markets, but Astral's wasn't. Its stock fell over 8% on Monday after the company announced plans to hive off its chemicals business—adhesives and paints—into a separately listed entity, Astral Chemie. Astral will become a pure-play plumbing and building materials company, with shareholders receiving one Astral Chemie share for every Astral share.
The demerger does not answer the question weighing on investors' minds: can Astral's premium valuation be justified despite the persistent strain in its chemicals business? Despite falling 11% over the past five years, the stock still trades at 52 times its estimated FY27 earnings, per Bloomberg consensus.
Plumbing contributed 71% of FY26 revenue and 83% of Ebitda. In contrast, the chemicals business was weighed down by loss-making paints and weak overseas operations. Paints posted ₹240 crore in revenue with an Ebitda loss of ₹14 crore, while the UK chemicals business earned just ₹15 crore of Ebitda on ₹385 crore revenue. Overall, chemicals revenue stood at ₹1,900 crore with Ebitda margin less than 10% versus 20% for plumbing.
Broker divide
JP Morgan downgraded Astral from 'Overweight' to 'Neutral', arguing that while the demerger allows the mature plumbing business to pursue a more aggressive growth strategy, the chemicals business could struggle without the financial backing of the plumbing segment.
CLSA also believes the demerger alone is unlikely to rerate the stock unless the chemicals business demonstrates sustained growth and margin expansion.
That said, some brokerages remain optimistic that the separation will enable greater strategic focus on chemicals. Motilal Oswal raised its target price by 15% to ₹1,710, while Elara Securities and JM Financial have maintained their 'accumulate' stance.
Growth guidance
The newly acquired specialty chemicals business through Differentiated and Sustainable Solutions (DSS) will also be housed under Astral Chemie. DSS is expected to generate ₹150 crore in revenue at an Ebitda margin of 20-25% by FY28, while also supporting backward integration in adhesives.
With the Dahej plant nearing completion and no major capital expenditure planned, management expects the adhesives segment's ROCE to reach 20% over three to four years.
It also expects the paints business to turn Ebitda profitable in FY27.
Overall, it is targeting ₹4,500-5,000 crore in revenue from the chemicals business over the next four to five years, while expanding Ebitda margins to 14-15%.
If achieved, Astral Chemie could emerge as India's second-largest listed pure-play chemicals company after Pidilite Industries.