BackBIS licence implementation to benefit listed pipe makers
The struggle to meet working capital needs has pushed many small and regional companies out of business
PremiumThe pandemic led to an acceleration of consolidation in the pipes sector. The struggle of small and regional companies to meet their stretched working capital needs is said to have pushed many out of business. This has resulted in market share gains for listed pipe makers.
Analysts say the pace of consolidation in this particular sector is expected to get a further boost from the stricter implementation of the Bureau of Indian Standards (BIS) licence. Investors would reckon that the government, in an official gazette issued in March, mandated all pipe manufacturers to get a BIS licence by 30 September. Further, the government has also laid down rules for phased abatement of the use of lead stabilizers in polyvinyl chloride (PVC) pipe manufacturing.
While the organized companies, which form about 60% of the sector, have the BIS licence and make minimal use of lead stabilizers, most of the unorganized PVC pipe makers will see an impact of this notification, said analysts at JM Financial Institutional Securities Ltd. Unorganized companies will have to incur significant capital expenditure to meet the guidelines, resulting in erosion of price differential, said the domestic brokerage house in a report dated 16 September.
The report further added that this would also provide a boost to the ongoing consolidation momentum.
Since many listed companies in the home décor sector were expected to benefit from covid-led consolidation, the stock prices have reacted accordingly. In the past year, shares of mid-cap companies such as Prince Pipes & Fittings Ltd, Finolex Industries and Astral Ltd have seen steep rallies, comfortably beating the Nifty500 index.
While this is sentimentally positive for pipe stocks, this factor alone is unlikely to drive incremental earnings upgrades.
“Earnings upgrade in the near term would be led by higher PVC prices and inventory gains," said Sneha Talreja, assistant vice-president, institutional equities, Edelweiss Securities Ltd.
“A sharp rise in raw material prices – mainly PVC and availability challenges led to accelerated shift towards organised segment during the year. Going ahead, we anticipate the market share pendulum to shift decisively in favour of large organized players given worsening financial position of small fragmented players. All the earnings estimates currently built in are assuming declining PVC prices and inventory losses in FY22. While it was true in Q1FY22, the trend has reversed, and PVC prices are at their peak. This implies strong earnings upgrade led by higher PVC prices and inventory gains in Q2FY22," she said.
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