Astral Banks On New Initiatives To Bounce Back After Muted Q2 Results
Savlani argued that the industry as a whole had experienced a degrowth of around 5% and given this context, his company had performed relatively well.
Astral Ltd. Executive Director and Chief Financial Officer Hiranand Savlani expressed optimism of a strong recovery in the second half, driven by several new initiatives being planned for the upcoming quarters.
The building materials and equipment company has posted muted performance in the second quarter of the current financial year.
Net profit in the quarter under review slipped 17% year-on-year to Rs 108.70 crore. In comparison, in Q2 of the last fiscal, the Ahmedabad-based company had posted a profit of Rs 131.70 crore. Revenues remained flat at Rs 1,370.40 crore in the September quarter against Rs 1,363 crore in the year-ago period.
Referring to the muted numbers, Savlani argued that the industry as a whole had experienced a degrowth of around 5% and given this context, his company had performed relatively well.
“The top line was eroded mainly because the polymer prices went down. In this quarter alone, PVC prices went down by 13%. When the polymer prices go down, there are two effects. One is the inventory loss. Secondly, the topline will get eroded. The third thing is the dealer and distributor will do destocking,” he said.
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However, with the government’s anti-dumping duty initiative, restocking has started. Further, PVC prices have also increased by 4% in the last week, the top executive noted. On the back of these developments, Savlani expects demand to revive.
Earlier this week, the government had imposed anti-dumping duty on welded stainless steel pipes and tubes imported from Vietnam and Thailand.
“We don’t see any challenge from hereon. We are expecting the construction activity to boost and that should convert into numbers for Astral and the industry per se,” he explained.
Highlighting the company's several initiatives in the past six months, the Astral CFO suggested that they will help boost revenue.
Elaborating, he said, “The number one thing is that our Hyderabad plant has started commissioning. That will give us revenue in the southern region. Secondly, we started the launch of Astral brand paint in Karnataka and Gujarat. Last quarter we started in Maharashtra. This quarter, we are going to start in Rajasthan. That is going to give us revenue in the coming time.”
The company's bathware business has also picked up and is expected to boost revenues, he said. “First half, bathware performance was Rs 75 crore. The base is still very low and so our expectation graph is very high."
In the period ahead, he expects a very good response from the bathware business because, according to him, "once your brand is known in the market, then you can expect the top line to grow very fast”.
Expressing confidence that the company's rural foray will bear fruits, Savlani said, “We have taken an initiative of New Bharat in the adhesive segment. We are moving to rural India on the adhesive side. That is also going to give us the extra revenue.”
On the new products developed by Astral's UK subsidiary, he said, “The planned productions are going on and hopefully we will be able to bring the product to the market by December. And that product has a very high potential, and we are going to bring that product into India also, and that will be the first time in the country for this kind of adhesive. So that is also going to help us.”
The company has also started trial production of O-PVC (oriented polyvinyl chloride) and is expecting the Indian Standard Institute's approval next month.
Shares of Astral Ltd. closed 0.16% lower at Rs 1,787.55 against the benchmark Nifty 50's decline of 0.21% on Friday.
Watch The Conversation Here
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Here Are The Excerpts
Astral is in focus today, after the company came out with the second quarter numbers, wherein the numbers were below estimates. But can things change with polymer prices reviving and the government capex coming through? Hiranand Savlani spoke to us. Here is the slice of that conversation.
Hiranand Savlani: It was below the estimation, but at the same time, you have to understand how the industry is faring. If you see the industry has degrown by 5%, again that we are doing fairly well. Our first half performance is fantastic, looking at the industry I am telling you, it is 6.5% kind of volume growth and the top line was eroded, mainly because the polymer prices were downward.
In this quarter alone, if you see the PVC price was down by 13.5%. So now when the polymer price is on the downward side, there are two effects. One is the inventory losses. Secondly, the top line gets eroded and the third thing is, you in the initial remark said that the dealer and distributor will do the destocking.
We don't know if the street people are confident then why they will hold the inventory when the prices are continuously going down. So, because of that, also the demand pressure comes. Now with this initiation of the anti-dumping duty by the Government of India. This week, a 4% price rise took place within a one-week time. So now we are expecting there will be a rush to restore that thing. So we are expecting that the demand should come back. Otherwise, I don't see any challenge to this industry for growth.
Okay, let's split it between value and volume. What were volume numbers like? I mean, we also hear that the Government capex has been fairly soft in the first six months. Did all of that play on the volumes for the first half and the second quarter and has the festive demand started off on a positive note?
Hiranand Savlani: So, you rightly said that the infra spending of the government was low, so because of that the demand was very low. Secondly, the monsoon was extended this time, so many parts of the country were under the flood, so that also affected the demand. But I think all these things are now passed.
Now post Diwali, we don't see the next five and there is any challenge. So now, from here on, we are expecting the construction activity should boost up, and that is going to convert into the number of the industry and Astral, per se. So we are of the view that these kinds of things happen in the industry whenever things in a particular region get affected. But when you look at the number on a 12-month basis, I don't think of any challenge. The biggest achievement during these last six months was that Astral has done a lot of new initiatives that are really important for the future growth.
Whatever happened in the past, that was the history. But now, what in the last six months that Astral has done, which can give the extra revenue to Astral? Number one thing, our Hyderabad plant has started commissioning, so that is going to be on the extra revenue in the southern region. Secondly, we started the launch of Paints of Astral brand in the state of Karnataka and Gujarat. Then last quarter, we started in Maharashtra. This quarter, we are going to start in Rajasthan. So we are going to start with these four states initially. So that is going to give us revenue in the coming time.
Thirdly, the Bathware business started performing very well. We also launched a few new items into that also. So in the first half the bathware performance was Rs 75 crore. Of course, the base is still very low, so our expectation graph is very high. So, in the coming time, we are seeing a very good response from the bathware because once your brand will be known in the market, then only you can expect the topline to grow very fast. So, we are expecting that to grow very much.
The best part of the bathware is that so far, we have not received any complaint from any of the consumers. So that is giving us more confidence. Thirdly, we have taken a new initiative of New Bharat in Adhesive. So we are now moving into rural India, into the adhesive side, so that is also going to be worth the extra revenue. As far as our overseas operations are concerned, our UK subsidiary has developed a few products, which are successfully completed in the R&D.
Now, trial productions are going on, and hopefully we will be able to launch it commercially in the market by December. That product has a very high potential, and we are going to bring that product into India also, and that will be the first time in the country for this kind of adhesive. So that is also going to help us.
Last, but not least, the UPVC, we already started, I can say, the trial production. We have given the pipe for the ISI approval because ISI approval is a must in UPVC. We have already started the trial production of UPVC and are expecting by next month we should get the ISI. So by December end we will be able to launch so you'll see the revenue from Q4 onwards..
So, these are all steps we have taken in the last six months, though a little bit of demand was affected, that's fine but we are positive that because of all this in the coming period, we are going to deliver excellent numbers.
One is the capacities having been there. The other is demand. What gives you the confidence about demand, Mr. Savlani?
Hiranand Savlani: So demand, I think normally, whenever there is an extra monsoon, or maybe some spending curtails by the government, so that is going to affect the demand. But that cannot be permanent. If you see the government collecting the revenue from whether it's a GST number, whether it's a direct tax number, whether you can consider the other side, all are robust.
So, there is no reason that the government is not going to spend money in the coming time. Temporary reason, I don't know what is the reason, why it is a little bit slow, but it is going to come back. Ultimately they want to spend the money into the capex.
Okay. Now, Mr. Savlani, on the growth numbers, right? You've cut the growth guidance from 15% to a band of 10-15% but because your H1 volume growth was, I think about 6.5%, if my numbers are not wrong, that implies that you have to grow out about 15% over the next five months to hit or 13% over a six-month period to hit the lower end of the volume growth guidance.
Do you think that will happen and is that a volume and value mixed growth, or do you believe you believe you will be able to clock in about 13% volume growth itself?
Hiranand Savlani: So right now, we are considering we will hit the volume, value will be better, because now the polymers have started inching up just 4% price rise has taken place, and another we are expecting 4-6% yet to come in the coming time. So, value will also come back. The reason why we are saying that infra spending will come back. That is the assumption you have taken. We are of the view that the restocking will start from November onwards.
In the last couple of days, you will be surprised to know the kind of order flow we have got in the company, because now we are going to increase the price. So because of that, dealers and distributors are going to complete the inventory, whatever cash flow they have. So that is giving us the confidence that this will come back. There is no reason that these distributors will remain permanently with the lean inventory.
The reason why I am saying that now it's a seasonal one is going to start. If you see the coming season, the coming season normally starts from October to March will be the peak. But unfortunately, this time the festive season was there, monsoon was there. So October was not that great. But now from November onward, everybody has to keep going, otherwise they will be missing the business because now is the peak season. So these are the assumptions we have taken while considering this growth and we are of the view that we should not be wrong in our assessment.
Got it. Plus, destocking has happened. So, in some sense, some restocking might happen too. But so, you reckon 13%-odd volume growth to meet the lower end is distinctly possible. Can you do more? Is it possible that you hit a number for the whole year between 10 and 15% and therefore, could you actually do maybe 16-17% volume growth as well?
Hiranand Savlani: So it is possible, provided restocking takes place in a very aggressive manner. If the price rises to a 10% kind of level, then there is a high probability that the dealer and distributor will be overbought and in that case, we will be able to even hit more than 10% and even 15% also possible. Last year, also, if you see, we guided the street 15% volume growth, and then midway, we revised our guidance to 20% and we completed the year with the 25% kind of growth.
So if the demand will be there in the system, Astra is not going to be stacked back. We are ready. We have the capacity ready with us. We have infrastructure ready with us. Now, we have a new plant ready. So I think all this is going to definitely help the growth. Only thing is that we are waiting for the things to settle down, and in the last two, three days, we are seeing that the demand has already started picking up.
My final question is on Margins, Mr. Savlani. When do you expect margins to stabilise?
Hiranand Savlani: The best part of this half is that whatever we have guided, we have delivered in the margins. We have communicated that we will build between 16 to 18% kind of range in the coming within we have delivered that. We are close to about 18% so we are on the higher end. Now with the inventory gain and that can come in the second half, there is a probability that it can be even more also. So, on that side, we don't see any problem.
Our India Operation margins, we have guided 14-16% adhesive. We delivered 15-15.5%. So, we are very well within the range. The only little challenge which we have faced is in the Paints and the UK operation. There, I already explained to you that in both the businesses, we have taken the judicious call that we are going to expand the paints business. So that's why we have to take a temporary hit.
But that base is very low, so it's not going to affect the company overall. Similarly, in the UK, once, the queue for this new product launch will be there. Now in the U.S also, our 12 new product launches will be there. There's a high probability that we will be back to the double-digit market in the UK. Right now, minus 2%. So, we are forecasting a double-digit margin next year.
So, I am confident that with all this initiative which management has taken, little delay is there, but we are confident that now everything is done. So hopefully things will start coming up, and our overall margin guidance of 15-16% we are definitely going to deliver, and even today we are able to deliver.
