Why Astral stock price is falling
Stock markets would be a better place for businesses to survive if they operated in isolation. No impact from the external environment or the economy would make businesses easier to understand.
But unfortunately, this is not the case. Businesses are affected by a variety of factors such as inflation, geopolitical tensions, holiday seasons, weather, etc.
A small factor among the long list of factors affecting the company could become the main reason for its downfall.
In today’s market environment, I can relate to Astral – a plastic products company.
Astral share price performed well on the stock exchanges after Indian markets rallied in June 2022. On September 9, 2022, it reached its lifetime high of Rs 2,593.1.
However, the company’s share price began to decline after hitting this new high.
Right now, Astral is trading 21% below its lifetime high, which is a pretty big drop for a fundamentally strong stock.
#1 Decline in PVC prices
The most important raw material for companies like Astral is polyvinyl chloride (PVC). The cost of PVC resins accounts for nearly 60-70% of a pipe manufacturer’s turnover.
Therefore, one can imagine that any change in the price of PVC will have a huge impact on their finances.
Between June and August, Asian PVC prices fell by around 30%.
Rising inflation, rising interest rates and lockdowns in China have worsened the housing crisis in the UK, US and China. As a result, PVC resins are dumped in India. So there is an excess supply of PVC in India.
Now the problem with falling PVC prices is that companies will have to sell the existing level of inventory (which was made at high PVC prices) at lower prices because market participants would demand the benefits of the fall prices.
Since PVC is a large part of the cost, selling at a low price would reduce the company’s profit margins.
Plastic makers had a high level of inventory at the end of the quarter ended March 2022 due to expected supply chain disruptions.
Therefore, these companies have huge inventory losses. And as the price of PVC falls further, the margin should tighten further.
At the same time, even sales volumes are expected to fall.
#2 FII Sale
Interest rates are rising in developed markets like the United States. This makes emerging markets less attractive to FIIs as the risk-free rate of return declines.
Therefore, FIIs sell their holdings in companies operating in emerging markets like India to get back to the safety of dollars. The same thing happened with Astral.
The FIIs have been divesting their stake in Astral since September 2021. FII’s stake was 21.3% in the quarter ending September 2021. The stake was reduced to 16.1% at the end of the June quarter 2022.
In addition to FIIs, even mutual funds sold some shares of Astral in the June 2022 quarter.
For more details, see Astral’s latest shareholding plan.
The business of plastic pipes is cyclical. Business is doing well in the 1st and 4th quarters.
However, it should be noted that since PVC prices are low, the current manufacturing cost is quite low for enterprises. Thus, as the price of PVC increases, Astral will be able to sell pipes manufactured at lower prices at higher prices.
Therefore, future margins may improve.
Additionally, India has had a good monsoon season. The demand for plastic pipes was high around the monsoon, which is expected to boost the finances of plastic pipe companies.
In June 2022, the company announced its diversification plans. It went into paints, sanitary ware and faucets. It also launched new products like valves and drainage products.
These products are expected to contribute 15 billion rupees to sales over the next five years.
As part of its diversification strategy, in May 2022 itself acquired a 51% stake in Gem Paints, which has a strong presence in southern India.
As a result, the company’s profit margins may be under pressure right now, but it expects a big revenue boost in the future due to diversification.
Originally incorporated as Astral Poly Teknik, Astral has been a manufacturer and supplier of CPVC piping and plumbing systems in India since 1999.
The company is the first licensee of Noveon USA (formerly known as the specialty chemicals division of BF Goodrich USA) to manufacture and market CPVC piping and plumbing systems in India.
Its production facilities are present in Gujarat and Himachal Pradesh to manufacture plumbing systems from ½” to 8″ in diameter.
Its products include CPVC pipe and fittings for hot and cold water plumbing systems, CPVC industrial piping systems for the transportation of hazardous and highly corrosive chemicals and lead-free PVC systems for industrial applications. ‘Cold water.
For the financial year ending 2022, Astral declared a dividend of Rs 1.8. The company last declared a bonus in February 2021, at a ratio of 1:3.
Disclaimer: This article is for information only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)