Astral Poly Technik Ltd.(NSE: ASTRAL; BSE: 532830; Bloomberg Ticker: ASTRA:IN) Equity Research Presentation Target Price: Rs. 281 by Dec 2012 Originally Prepared on Jan 3rd 2011 Quote: Rs. 158Updated on Sep 21st 2011 Quote: Rs.182 (Century.Partners03@gmail.com)
Astral Poly Technik Ltd. (BSE: 532830) Target Price: Rs. 281 by Dec 2012; Prepared by: M NOriginally Prepared: Jan 3rd 2011, Quote Rs. 158; Original Rating: Strong Buy;Updated Sep 21st 2011; New Rating: BuyIntrinsic Value (from DCF Analysis): Rs. 281; Margin of Safety: 55%Current Price: Rs. 182 ($1 = Rs.47); 52 Week Range: Rs.116 - Rs.206Shares: 2.24 Cr (1Cr = 10 million, 1 Lakh = 100,000)Market Capitalization: Rs. 407 Cr; ($86.6million as Rs. 1 Cr = $212,700)Book Value/Share: Rs. 66; P/E: 12, P/B: 2.9, P/S: 2.25EPS: Rs. 15, D/E: 0.27, ROE: 24%Sales 5Yr. Growth Rate: 51%, EBITD 5Yr. Avg.: 15%Div & Yield: Rs. 1.13 (0.6%); Risk: LowCurrent Ratio: 1.5, Quick Ratio: 0.90Promoters/Management Holdings: 64%; Headquarters: Ahmedabad, Gujrat, IndiaRating: BUY (Sep 21st 2011) Changed from Strong Buy (Jan 03rd 2011)Recommendation: BUY Target Price: Rs. 281 by Dec 2012 ● Considering the Margin Of Safety of 55%, present price per share of this company at Rs. 182 (Sep 21st, 2011) seems undervalued by a considerable margin to its Intrinsic Value of Rs. 281. ● Historic CAGR of the company shows lot of potential in the future prospects of this company. ● Sound and able management will lead the company through good and adverse scenario as proven by last year record sales and profit increase. ● Future plans to grow constructively without taking too much debt is in line with shareholders interest to maximize returns on invested capital. ● Long term growth prospects for CPVC over Galvanized (GI) pipes is guaranteed as CPVC pipes are less expensive, lighter, easy to carry/install, and have longer life span. Astral is well positioned to take advantage of this opportunity. ● Astral has a diversified client base in India, East Africa, Maldives etc. ● Strategic tie-ups with Lubrizol and Speciality Process Ltd. helps in creating a wide moat creating barriers to entry for the competitors. ● Along with ISI certification, Astral’s products are approved by NSF, a US health and safety institution. ● Conservative approach of Management towards leverage and low cost operations will lead the business towards constructive growth and maintain profit margins in the upcoming inflationary environment. ● Good rating from CRISIL and brand name of Astral Poly Technik makes it easy to raise capital at lower cost of equity. In both good and bad circumstance Astral Poly Technik is poised to do fairly well.
ASTRAL POLY TECHNIK’S BUSINESS AND PRODUCTSAstral Poly Technik Ltd. (BSE: 532830) is a leading PVC and CPVC plumbing systems manufacturer withfacilities in Gujarat and Himachal Pradesh (receives tax subsidy in HP). The company was incorporated in 1996and have presence in different segments of construction and infrastructure industry such as housing,commercial construction, airports, hotel, malls etc. The company has technical associations with Lubrizol andSpeciality Process LLC of USA. Astral’s product line includes Astral FlowGuard CPVC, FlowGuard Bendable,Astral Aquarius uPVC, Astral Ultradrain, Astral AquaSAFE, Astral DWV, Wavin, Astral Foam Core, Astral UnderGround, Astral Blazemaster, Astral Corzan CPCV and Astral Aquatek System. Astral enjoy’s a 60%+ marketshare in it’s segment due to it’s technical prowess and know-how gained by strategic alliances with UScompanies. Capacity of the company has gone up by five times in last 5 years and is still on continuous rise tomeet the ever expanding demand. Top management includes Sandeep Engineer, K.R. Shenoy, Hiranand A.Savlani. RISKS ● Astral Poly Technik imports CPVC resins from Lubrizol, USA, so if Indian currency depreciates significantly against dollars then operating profit margins will get affected adversely.
FINANCIAL HIGHLIGHTS AND FEATURES● Revenue (2010-11) : 436 Cr; Operating Expenditure: 355 Cr● EBITD: 57.5 Cr; Reported Net Profit: 33.6 Cr● Return on Average Net Worth: 23%● Earnings have been on consistent continuous rise and future growth is expected to rise.● With a D/E of 0.27, company is not debt laden and capital structure is stable.● Sales of the company is growing at a CAGR of 50%+ and profit margins are improving.1. Astral Poly Technik due to it’s technical know how achieved with strategic collaborations with US companies has developed a unique economic moat, which makes it hard for it’s competitors to take it’s market share.2. Astral’s exclusive tie-ups with Lubrizol helps in company getting patented resins which leads to better quality products. Competitor’s have major deterrent in entering the CPVC segment where Astral operates heavily.3. Book value of the company has been growing at a consistent pace.4. Sales of this company has gone up over four times in last 5 years. This company has avoided the recent down turn in the market and continuously growing and creating alliances with US companies.5. Astral has an established strong 5000 dealers and 350 distributors network which can help in placing it’s products through the country.6. Demand for Astral’s product segment is on continuous rise in the rapidly growing Indian economy.
ECONOMIC MOATS● Astral Poly Technik has constructive growth, increased ROIC, ROE and it’s economic moat was maintained even during the current downturn and reflects lot of future potential.● Astral Poly Technik has strategic collaborations with US companies who provide resins on exclusive basis which makes it very tough for the competitors to match the quality of Astral’s products. MANAGEMENT EFFECTIVENESS AND CORPORATE GOVERNANCE● Experienced and highly educated managers run this company. Fair dealings is key with this group. Management is very conservative and easy going on leverage and debt.● Professional culture and good academic background of its managers and over 20 years of experience faced the downturn effectively.● Low dividend policies are suitable seeing the higher future growth prospects.● Management is focused on transparency while operating and keep investors interest first.● Management is very particular about research and development and conducts lot of research before launching it’s new products. INDIAN URBAN SECTOR GROWTH SCENARIO AND CONSTRUCTION INDUSTRY OUTLOOK● Construction and Infrastructure sector is expected to grow at a healthy rate in India where GDP (PPP) of the country is going to surpass Japan in 2011.● In 2011, India’s GDP is expected to grow close to double digits and is going to grow at that pace for the next 5 years, that will lead to a strong demand in infrastructure related industries.● Urban population is set to add 250 million people in the next 15 years, four times growth compared to last 3 decades.● To keep up pace with urbanisation Indian Government and companies plans to invest significantly in the construction and infrastructure sector.
ASTRAL POLY TECHNIK’S VALUATION● For this study, 2-Stage aggregate free cash flow model has been used, which is growing well over 50%, even if we take a conservative growth rate of 25% for the next 5 years and 20% for the 5 years thereafter, our intrinsic value calculation of Rs. 281 shows a MOS of 55%.● Taking a range gives us a valuation of Rs. 240 to Rs. 288 market value for multiple of 15X and 18X respectively. The multiples used are reasonable given the excellent growth rate the company exemplifies.● DCF Model approach value of Rs. 281 lies in between this Earnings Multiple range of Rs. 240 - Rs. 288.● The main reason for the low valuation of Astral is a small company and doesnt get much analysts coverage, so it is a hidden gem. So if one is looking to invest for a long term they may get better than market returns.● Company has significantly outperformed the market index over a period of many years.● Comparing the present P/E and P/B ratio to it’s historic average/its competitors figures, tells us that the company is trading at a lower multiple.● Company is not debt ridden and doesn’t plan to take excessive debt in near future.● Debt to equity = 0.27 (overall stable capital structure)● Credit Rating and Information Services of India Limited (CRISIL) has provided good rating to Astral Poly Technik.
VALUATION METHODMethod used here is 2 Stage Discount cash flow valuation with an aim to find the intrinsic value of Astral PolyTechnik based on the present cash flow, growth and risk. Assuming the life of the assets, here 20 years, toestimate Free cash flows, and Discount rate (r) to apply to get the present value.Free cash flow = Cash from operating activities – Capital ExpenditureFuture Free cash flow growth based on past revenue growth rate of Astral Poly Technik from 2008- 09 (Rs.2.19 Cr) to 20010 - 11 (Rs. 10.15 Cr) ~ 116%.Taking a conservative approach due to rising lending rates and expecting a modest free cash flow growthof: Year 1- 5, growth rate – 25%, Year 6-10, growth rate – 20%.Perpetuity value (Year 11- 20) = FCFn+1/(r-gn), FCFn+1 = FCFn * (1+ gn )/(r- gn), where n = 10 years.Perpetuity Growth (gn) = growth of Indian economy in future (Historic avg. of Indian economy last decade:8%) Cost of Equity (COE) = r = Risk free rate + Beta* Risk premium Astral Poly Technik has good credit rating from CRISIL, so enjoys lower credit cost. Risk free rate = 7.5 % (Average Indian Government Bond Yield for 10 Year Notes Rate)Beta = 0.75 for Astral Poly Technik;Risk premium = 7.5% (Average Indian Historic implied equity risk premium)Therefore COE (r) = 7.5% + 0.75 *7.5% ~ 13%Free cash flow (year 1-20) = Free cash flow (year 1- 5) at 25% + Free cash flow (year 6- 10) at 20% +Perpetuity value (Year 11- 20). All the three values discounted at COE.Net value = DCF Estimate (Rs. 295) +Present (Cash-Debt) (Rs. -14) Using the above values and steps Astral Poly Technik’s Per share value is coming out to be Rs. 281 This value is based on discounted free cash flow analysis. Present value of Rs. 182 (as of Sep 21st, 2011) shows a margin of safety of 55%.
VALUATION CRITERION SCREEN ● Valuation of a company primarily involves earnings, growth rate and cost of capital ● Price = Earnings/(Cost of capital - growth rate) (Rs. 15*100/(13.2-8.0) = Rs. 288) ● Sales & Earnings Growth (last 5yrs) > 15%, Low PEG Ratio, High Earnings/PBV Ratio ● Return on Retained Earnings > 15%; Initial Rate of Return > 20% ● Market Capital close to Book value, Return On Equity > 20%, Return On Asset > 15%, ● Return On Invested Capital > 15%, Earnings Yield > 15%, Current Ratio > 2, Debt/Equity < 1 ● Present P/E < 0.75 * Historical P/E (Average of last 5 years) ● Inventory turnover, Insider share buy backAstral Poly Technik qualifies well on the above mentioned criterion.It also qualifies the Hurdle Rate > 2 * Long Term Govt. bond yield (7.5%) of 15% as the expected value fromDCF of Rs. 281 in 2 years provides us a ROR of 30%+. Book Value of Astral Poly Technik is on continuous risewhich will ensure that the intrinsic value of Rs. 281 should be reached soon. FINAL CHECKLIST ● Business: Understandable, Economic moat, Growth potential, No Catastrophic Risk. ● Customers: Stickiness to the company, Loyalty. ● Suppliers: Relationship with the company. ● Management: Integrity, Efficiency, Ownership. ● Board of Directors: Background of the members. ● Financial: ROE, ROIC and other ratios, Capital Structure. ● Value: Earnings vs. Value, Margin Of Safety.Astral Poly Technik does fairly well on all of the above mentioned Valuation and Final Checklist Criterias, Hencewe issue a BUY Rating on Astral Poly Technik.Disclaimer: This Report is for information purpose only and express our views about the company, not an offer to buy or sell. Risksinvolved in investing is not suitable for all kinds of investors. Seek professional advice if this research is suitable for you.