Pipe shares gain popularity as consolidation gathers pace1 min read . Updated: 03 Dec 2020, 09:54 PM IST
The ongoing price increase of key input raw material PVC resin is adding to the pressure for small manufacturers
For large manufacturers in the highly fragmented pipes industry, the gathering pace of consolidation is a key positive. Channel checks show that the pandemic has left smaller and regional companies starving for cash. Their stretched working capital needs amid recovering demand has translated into market share gains for peers with stronger balance sheets. The share of unorganized players in this sector is estimated to be around 65-70%.
According to JM Financial Institutional Securities Ltd, the plastic pipe industry volumes were expected to decline by around 20-25% in H1FY21. However, leading firms saw a lower decline, indicating market share gains. So, stocks of Supreme Industries Ltd and Finolex Industries Ltd, among others, have clocked fresh 52-week highs in November.
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Further, the ongoing price increase of key input raw material polyvinyl chloride (PVC) resin is adding to the financial pressure for smaller manufacturers.
“PVC price uptrend continues with another hike of ₹4/kilogram (kg), or 3.7%, w.e.f. 1 December. This is the fifth price hike in PVC in Q3FY21 (+22%) after an increase of 18.9%, in Q2FY21. Now at ₹111.3/kg, PVC prices have risen 69.8% since 1 May," analysts at ICICI Securities Ltd said in a report on 1 December.
On the other hand, companies with sound financials are better off to withstand this pressure. With rising input cost, expectations are that the final product prices will also rise eventually.
An analysis by Edelweiss Securities Ltd showed that the plastic pipes category outperformed other home décor segments in Q2FY21 with revenue/Ebitda/profit growth of 7%/42%/21% year-on-year. Ebitda stands for earnings before interest, taxes, depreciation and amortization. This was led by a strong volume recovery, benefit of inventory gains, cost-cutting measures and rising operating leverage, it said in a report on 20 November.
The management commentary indicates that companies expect better volume growth in the second half of the fiscal year. This would be aided by a demand uptick in real estate and better rural demand buoyed by the upcoming rabi season.
Apart from these factors, the sector is also benefiting from improving investor sentiment towards mid-cap stocks, said analysts.