A Rundown on Prince Pipes & Fittings
(Disclaimer: This is just for information purposes only; this is not an investment recommendation. Prospective investors should consult their investment advisors before making any trades.)
Prince Pipes And Fittings Limited is a 35-year-old company engaged in the manufacture of plumbing pipes and fittings using four polymers, namely, UPVC, CPVC, PPR and HDPE. The company's products are used in plumbing, underground drainage systems, water sanitation, irrigation and hot- and cold-water systems.
The company's stock was listed on BSE and NSE at the end of December 2019 and its stock market history is relatively low. Its issue price during the stock market listing was Rs 170.
It is one of the top five players in pipes and fittings industry in India. Its market share is around six per cent. It's a Fortune India 500 company.
Promoters and Shareholding Pattern
The main promoters are Jayant Chheda, Vipul J. Chheda, Parag J. Chheda and Tarla J. Chheda. The promoters' stake in the company is about 63 per cent. Foreign investors hold four per cent and domestic institutions hold 14 per cent stake.
Pledge of Shares by Promoters
The promoters have not pledged any of their shares.
Business Model
The company's products are used in plumbing, irrigation and soil, waste and rain water (SWR) management.
Two-thirds of company's sales come from plumbing, sewerage and water sanitation; and the remaining from irrigation segment.
The company has well known pipe brands, namely, Prince and Trubore--in addition to other smaller brands. Despite the adverse business conditions following the COVID-19 Pandemic, the company has been able to generate sustained revenue growth in its products. It has 7,200-plus SKUs under its product portfolio.
It has recently diversified into storage water tanks with a brand called 'StoreFit.' It has forayed into doubled walled corrugated or DWC pipes (brand Corfit) in the underground drainage category.
The company's exports are negligible.
Capacity Addition
The company had recently spent around Rs 195 crore for increasing the capacity at its Telangana plant. The new capital expenditure (capex) the company needs for 2022-23 and the next year is not yet known. The company may throw some light on the capex plan during the declaration of Jan-Mar2022 quarterly results.
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Growth Drivers for the Company
Growth in commercial and residential real estate is a positive for the sales growth of the company. Commercial real estate growth is driven by sectors such as, information technology, hospitality, healthcare, e-commerce and modern retail.
New investments in irrigation (agriculture sector), water supply and sanitation are going to be key revenue drivers for the company.
Government initiatives in low-cost housing, water and sanitation are likely to help the company's products in the near future.
It has got a diversified product portfolio catering to the needs of different segments. The promoters have wide experience in the industry. They have presence in most of the geographies. And they have augmented their position in South India with the plant expansion in Telangana.
Over the years, metal pipes have been replaced by plastic pipes leading to the decent growth of plastic pipe industry in India. Continued and rapid urbanisation in Indian cities will further help the industry.
CPVC pipes will be a growing category for the company in future. These pipes resist corrosion, smoke and flame. They are suitable for carrying drinking water. They are light-weight and ideal for home plumbing.
Risks associated with the company
Prince Pipes And Fittings faces intense competition in its industry. Its capacity utilisation is moderate. It is vulnerable to volatile raw material prices. Its key raw material is PVC, which is a crude oil derivative.
As such, the company is vulnerable to volatile crude oil prices and dollar-rupee exchange rate. However, this can be mitigated if the company is able to pass on the higher raw material costs to end consumers.
Almost all of the company's sales come from retail segment, with very little coming from institutions.
The company provides channel financing to the distributors of its products, with a view to encouraging them to enhance sales of company's products. The channel financing allows the distributors to get easy access to working capital. Any deterioration in the credit profile of the distributors is likely to impact the company negatively.
Pipes and fittings industry is traditionally unorganised in India, as such organised players face pricing pressure from the unorganised sector. However, with the advent of GST in 2017, the share of organised sector has grown considerably.
Company Clients
Most of its clients are from the retail segment across India.
Cash Flow
During the first half of FY 2021-22 (Apr-Sep2021), the company's operating cash flow is minus Rs 54 crore due to steep increase in inventories. As the operating profit for the first half is higher, the operating cash flow should turn positive for the second half of FY 2021-22 given the company's positive operating cycle--which will be known once the fourth quarter results are out.
The company's free cash flow remains volatile year to year, as the company has been spending money on capacity expansion.
Credit Rating
The company has a credit rating of A+/Stable for its long term credit facilities (Rs 668 crore) and its short term rating is A1+, as per Crisil Ratings Ltd's report of 05Jan2022.
Even though it has bank loan facilities, it does not fully use the credit lines (due to its better working capital cycle). The financial profile of the company has improved compared to the previous year though it's not a AAA-rated company.
Competition
The big competitors to the company are Supreme Industries, Finolex Industries, Astral Ltd and Jain Irrigation Systems.
The company in 2020 tied up with the US-based Lubrizol for marketing of its products. Lubrizol is a global leader in the manufacture of CPVC compounds. In addition, Prince Pipes has a tie up with Tooling Holland BV, a leading company in mould manufacturing.
These product / technical collaborations are likely to help the company in developing and marketing new products and mitigate market competition in future.
Latest
Quarterly Results
The company posted lacklustre results in Oct-Dec2021 quarter due to decline in sales volumes. The year-on-year sales growth in the quarter was 21 per cent (quarter-on-quarter, sales fell by 13 per cent). The y-o-y net profit growth is zero (q-o-q profit fell by 12 per cent). The operating profit margin is steady due to improvements in product mix and operational efficiency.
Profitability
The company maintains healthy operating profit margin (OPM) of between 15 and 17 per cent. The return on equity (ROE) and return on capital employed (ROCE) have been decent to robust in the past five years.
The company has demonstrated, till now, strong profitability due to higher sales growth and superior product mix. Though volumes were dented in Oct-Dec2021 quarter, the profitability is likely to be reasonable going forward.
Solvency
Its financial risk profile remains healthy overall. The operating cycle of the company is strong and its debt-equity ratio is low. Moreover, cash and cash equivalents are about Rs 120 crore, as on 30Sep2021, giving cushion to its financial profile.
Given the healthy financial profile, low utilisation of bank loan facilities and cash hoard, the company faces no problem in servicing its debt.
Valuation
Its current price-earnings ratio is 30; price-to-book-value ratio is 6.80 and price-to-sales ratio is about three. Market participants appear to be giving the company higher price multiples based on higher growth assumptions for the company's products and the industry in general.
Its dividend payout has been low in the past two years, which may be justified by its expansion plans and growth phase.
CMP and Market Cap
Its current market price is Rs 688 per share, with a market cap of Rs 7,600 crore. Its all-time-high is Rs 897 attained on 09Nov2021. The stock is now down 23 per cent from its 52-week high (also all-time-high).
It gave a phenomenal return of 400 per cent between its listing (Dec2019) and May2021--moving from Rs 150 to Rs 750. But the stock price has remained stagnant and been moving in a range between May2021 and now.
Stocks tend to move in phases. After a marathon run for 18 months, the stock seems to be catching a breath--a long one. This is not a bug but a feature of stock markets.
Summary
Prince Pipes And Fittings has been growing at spectacular clip in the past four to five years--which is reflected in its higher sales growth and strong profitability. Because of this growth, investors seem to be giving higher price multiples to the company's stock.
Its financial profile is healthy considering its past growth trajectory. Given the recent quarter results, the company may face some margin and volume pressure in the next two quarters.
Its stock market history is just a little more than two years (listed in Dec2019). Stocks take time to mature once they are listed on stock exchanges. The stock's real mettle and resilience are going to be tested with the length of its stock market history.
Recent treacherous volatility in global financial markets is likely to impact stocks in the mid- and small-cap category more than large-cap stocks. Concerns about surging bond yields, higher commodity prices and rising inflationary expectations may adversely affect stock prices in the next two quarters.
Given the market share of the company, I reckon the company has not developed any moats--that could ward off big competitors in the field, though it has got wide distribution network and a strong sales growth to boot. Personally speaking, I am not in favour of buying the stock now even though growth prospects for the plastic pipes sector appear to be rosy for the next three to four years.
My assumptions may prove to be incorrect in the next six to 12 months. This is a just a story giving my random thoughts on this company. Happy investing all of you!
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P.S.: By mistake, I removed a few portions of the blog after it was posted online--so, I rebuilt the blog in the next hour since the mistake.
Abbreviations used:
UPVC - Unplasticized Polyvinyl Chloride
CPVC - Chlorinated Polyvinyl Chloride
PPR - Polypropylene Random
HDPE - High-density Polyethylene
PVC - Polyvinyl Chloride
BSE - BSE Limited
NSE - National Stock Exchange of India Ltd
SKU - stock-keeping unit
GST - goods and services tax
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
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