Astral Polytechnik Ltd - HBJ Capital's 10in3 Stock for April'11

HBJ Capital, IndiaWeb: www.hbjcapital.comMail: [email protected] Call: +91 98867 36791

Astral Polytechnik Ltd. (BSE: 532830)

“10in3" – Small Cap Multibagger for April 2011

Astral Polytechnik Limited is the first licensee of Lubrizol of USA and has equity joint venture with Specialty Process LLC of USA (manufacturing CPVC plumbing system since 25 years) to manufacture and market the most advanced CPVC plumbing system for the first time in India.

Best Buying Price…

Multi - Phase Buying Strategies Suggested [Always buy with SIP]

1st Phase : Buy at the price range Rs 160 - 170 [40% of investment]

Subsequent Phase : Buy at the price range of Rs 135-150 [60% of investment]

>>>Expect at least 7/8 times returns in next 3-4 years time frame!!!

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Table of Contents From the desk of CEO, HBJ Capital Plastic Industry – Page# 06 Astral Polytechnik Ltd (Snapshot) – Page# 19 Advantages CPVC – Page# 25 Product Range – Page# 30 Growth Drivers – Page# 34 Financial Statements – Page# 35 Management – Page# 38 Best Buy Strategy - Page# 41 Challenges / Risks involved - Page# 43

From the desk of CEO, HBJ Capital Plastic Industry – Page# 06 Astral Polytechnik Ltd (Snapshot) – Page# 19 Advantages CPVC – Page# 25 Product Range – Page# 30 Growth Drivers – Page# 34 Financial Statements – Page# 35 Management – Page# 38 Best Buy Strategy - Page# 41 Challenges / Risks involved - Page# 43

From the desk of CEO, HBJ CapitalFrom the desk of CEO, HBJ Capital

While making investment look for

companies being ignored by everyone

else because you may end up finding a

hidden gem and once you find one, invest in it and relax. You have done your job and just

follow the performance of the company. Wealth

creation will happen automatically.

While making investment look for

companies being ignored by everyone

else because you may end up finding a

hidden gem and once you find one, invest in it and relax. You have done your job and just

follow the performance of the company. Wealth

creation will happen automatically.

Dear Investors,

It is time to explain rational behind our bullishness on plastic-

“per capita plastic consumption in India is among the lowest in world, and ~30% of world average. This comparison alone doesn’t lead us to predict high growth in per capita consumption. It is the inflexion in per capita income achieved during FY11, which leads us to this stance. Other economies (like China) also grew at a sustained-higher rate beyond this inflexion point.”

Indian Plastics Industry is expanding at a phenomenal pace. Major international companies from various sectors such as automobiles, electronics, telecommunications, food processing, packing, healthcare etc. have set-up large manufacturing bases in India. Therefore, demand for plastics is rapidly increasing and soon India will emerge as one of the fastest growing markets in the world.          

The next two decades are expected to offer unprecedented opportunities for the plastic industry in India. This would necessitate industry initiatives to foster investments, grow the market, upgrade quality standards, enhance global participation, encourage Indian industry, to adopt and adapt to world class technology and manufacturing practices.

Happy Investing!

Kumar Harendra, CEO, HBJ Capital Services Pvt. Ltd www.hbjcapital.com , www.multibaggerpennystocks.com #912, 1st F Main Road, Girinagar 2nd Phase, BSK 3rd Stage, Bangalore 85; Call : 098867 36791 or 080 65681134, E-Mail : [email protected]

Indian Plastic Industry - Structure

Polymer Manufacturers

Equipment Manufacturers

Recycling Industry

Plastic Processors

End User Industry

AgricultureInfrastructure

PackagingAutomobilesElectronics

High Capital IntensityOrganized 10-15

Major Players

Medium Capital IntensityOrganized 150-200

Major Players

Low Capital IntensityLargely UnorganizedUpto 30000 of Players

Low Capital IntensityPrimarily Unorganized

Upto 10000 Players

Polymer Sector – Key Observations

India has a strong base in polymer manufacturing with the presence of large organized players. And large amount of imports despite self sufficiency, keeps domestic polymer prices under check and thus an advantage for Plastic Processors.

Polymer capacities on rise, would keep abreast with rising plastic demand

There exists an inverted import duty structure between crude oil and naptha

Feedstock prices have risen significantly which has resulted in polymer prices increasing consistently.

Some of the major players are – RIL, IOCL, HPCL.

Plastic Processing

India does not enjoy economies of scale.

Small Scale Industries (SSI) Policy has resulted in fragmentation and small capacities in processing segment. The policy has reserved ~16% of plastic value added products for SSI.

Unorganized sector accounts for 70% of industry turnover.

India has among the lowest per capita consumption of polymers at 8kg, whereas, global average is 27kg and Chinese at 24kg.

Negligible share in world processed plastic trade, at 1%.

There is tremendous scope for innovative technological up gradations, cost rationalization, and economies of scale.

Organized players with established brands command a premium for their products.

Polymer Usage Scenario in India

India holds immense potential for use of plastic in Agriculture and Infrastructure

Polymer Usage – Vision 2012

The excess 6% CAGR growth in polymer usage is coming from higher application growth rate in Packaging (22%), Plasticulture (59%), and Plastic in Infrastructure (19%).

Our focus here is Plasticulture, and Infrastructure – Plastic pipes, and Irrigation

All Figures in MMT

Status Quo Vision 2012

PlasticulturePlasticulture is the use of plastics in agriculture, horticulture, water-management, food grains storage and related areas. A variety of plastics materials and end products are deployed in plasticulture applications - for water conservation, irrigation efficiency, crop and environment protection, as well as end product storage and transportation.

Plasticulture applications are one of the most useful indirect agricultural inputs which, hold the promise to transform Indian agriculture and bring in the “Second Green Revolution”.

Applications (relevant ones highlighted) –

Pond & Reservoir LiningDrip IrrigationPlastic pipes in water distribution networkPolyethylene Greenhouse & Low tunnelsPolyethylene farm mulchingSub - surface drainage using plastics corrugated pipesPlasticulture in packagingOther applications  Green House, Shade HousePressurized Irrigation

Growth Drivers

India has an ambitious growth target of 4.1% in Agriculture, which translates to 1,50,000 crore increase in Agriculture GDP.

It requires both demand and supply side interventions. And Plasticulture alone can provide 50% of the indented increase.

Plasticulture Can Overcome These Obstacles

Plasticulture – Irrigation

Initial cost of establishing a Micro Irrigation System is high, hence out of reach of resource poor farmer – Task Force on Micro Irrigation

Plasticulture

This will directly impact Agri-GDP by increased farm income.

All Figures in crores

Infrastructure – Plastic Pipes

Chemical Degradation is not observed in PVC pipes – offer a projected life span of > 100 years without any loss in strength.

PVC pipes are lighter and therefore easier and cheaper to install –• Light weight reduces transportation cost• Heavy machinery requirements and onsite handling requirements are reduced

Plastic a Preferred Material for Pipes

London and Shanghai are modifying their existing water distribution system with Plastic pipes.

Pipe breakage is the biggest cost for water distribution utilities.

As per estimates, US would need to invest $138 billion to repair water infrastructure.

China has encouraged use of plastic pipes.

Plastic Pipes – Growth Drivers

Despite the successful implementation of plastics in piping internationally, there is low usage of plastic pipes in India.

The government has targeted to provide access to piped water to 87% India’s urban population by 2017 –

• This will involve investment of 87000 crore• Use of plastics in achieving this target can reduce the upfront investment

requirement by 20%

Housing – Growth Drivers

It has been estimated that the Indian middle class population would increase from 50 million in 2007 to 583 million by2025.

One estimate places the current short fall in dwelling units in the country at 25 million underlining a huge demand for housing in India.

Investment in residential and commercial construction in the country has increased phenomenally from US $ 12 Billion in 2005 to US $ 60 Billion in 2010. It is further expected to increase to US $ 90 Billion in 2015. These figures clearly reflect the market potential available in the Housing and Commercial segments.

As India's growth story unfolds with the GDP growth hovering between 8.5 – 9 % during the next 2 to 3 years(the GDP growth for 2010-2011 is estimated at 8.5%), the plumbing segment is expected to grow at 20% p.a. during this period.

The market is catered primarily by GI pipes. But growing awareness about better products, and their availability in India is shifting the demand in favor of Plastic Pipes.

Of the total market share of plumbing in India, CPVC share stood at 5.35% (12000 tons of the total 168000 tons market). Galvanized (GI) pipes stood at 52% while steel is expected to be around 47%. So the potential to tap the markets of GI and steel is huge.

According to the management (of APL), CPVC industry will grow from 12000 tons to 25000 tons market within 3 years.

Astral Polytechnik Ltd. - Overview

Astral Poly Technik – Snapshot (April 29th 2011)

CMP – Rs. 165 (The stock is trading at 11.5 times its TTM EPS, which is not expensive, compared to its peers in plastic pipe business.)

MCap – 371 crore (The company trades at attractive P/S ratio ~1. Given, that its products are value added and command a premium in market.)

EPS – Rs. 14.37 (TTM Basis, adjusted for stock split)

52 Week High / Low – 194 / 95

Promoter’s holding – 63.82%

Book Value – Rs 104 (FY10)

Debt to Equity Ratio – 0.3 (The company has always kept low debt, and is consistent with their business risk – dependency on imports, and licensees for global brands)

Total # of shares – 2.2476 crore shares

Liquidity – Low

Face Value – Rs. 5

FII Holdings: 1.09%

Foreign Promoter: 25.62%

Website: http://www.astralcpvc.com/home.aspx

Astral Polytechnik Ltd.

Astral Polytechnik Limited is the first licensee of Lubrizol of USA (Now a Berkshire Hathaway Company, picked recently by legendary investor Warren Buffet) and has an equity joint venture with Specialty Process LLC of USA (manufacturing CPVC plumbing system since 25 years, and hold 14% equity in the company) to manufacture and market the most advanced CPVC plumbing system for the first time in India.

Astral Polytechnik Limited was established in 1999 with a single minded purpose to manufacture absolutely the best plumbing system in India.

Astral today manufactures CPVC plumbing systems for both residential and industrial applications, and also ASTM solvent weld lead free PVC plumbing system. And is a leader in this segment of business.

Currently, APL manufactures 50-60 varieties of pipes and about 250-300 kinds of fittings. Broadly the sales of the company can be divided as 70% from CPVC pipes, 29% from PVC pipes and 1% from others.

It enjoys monopoly status in higher end products Corzan & Blazemaster in Indian markets as of now.

Astral Polytechnik Ltd.APL grew its sales at 41% CAGR for the last 4 years.

The trend continues this year also. For the nine months ended December 2010, net sales increased 43% to Rs 269.56 crore. The capacity utilization was at 18,328 MT (capacity of ~30000 MT), a growth of 39%.

PBT before forex effect increased by 40% to Rs 26.94 crore. There was a forex loss due to changes in foreign exchange rates of Rs 1.07 crore against gain of Rs 36 lakh. Thus PBT after forex loss grew 32% to Rs 25.87 crore. Tax outgo has increased by 59% to Rs 5.30 crore. Finally, net profit increased 26% to Rs 20.57 crore.

The strong top line growth for Astral Polytechnik is coming due to new products, strong distribution and dealership model that the company follows.

Almost all the products of the company are doing well. Astral Sewerage and Waste water pipes, Underground pipes, Chambers in particular are doing great.

Various products launched by the Company in the recent past, such as SWR Pipes, Underground Drainage Pipes, Foam Core Pipes etc. are getting very good response from the local markets. The company is planning to launch these products on PAN INDIA. Further the company also launched Manholes and Inspection Chambers in the Indian Market. APL expects a good market for these new products. As of now, Astral is the only Company in the Indian market whose CPVC products are approved by the National Sanitation Foundation (NSF, USA), signifying the commitment of the company to maintain the superior quality of its products and its unique brand image.

Till date, the company has dealer network of about 5500. There are still about 10000 dealers, which are untapped by the company and who do not sell company’s products. During next couple of years, the company plans to add about 3000 dealers. The growth is coming from all geographies and predominately from the retail segment. Southern market however is so far the best performing market during FY’11 and the response is very strong. Sales in Kenya to get a boost from commercial production started this fiscal.

In FY’12, the company plans to spend Rs 25 crore for green field expansion at new locations namely Dolka in Gujarat and Hosur in South India with total capacity of about 15000 tons. The land in Dolka is already acquired and that part of capex is done. Hosur will initially be on lease facility.

Credit Rating – Stands Good as on Date

Advantages CPVC

Advantages CPVC

Advantages CPVC

Advantages CPVC

Advantages CPVC

Product RangeAstral FlowGuard PVC - is the right choice for today's hot and cold water distribution systems. Stringent product quality testing in independent laboratories ensures that Astral CPVC products are of the highest international standards. Combining performance, durability, reliability, safety and cost savings, Astral pipe is the logical choice over copper, galvanized and alternative plastic systems.

Astral Corzan CPVC - is a high heat, corrosion resistant chlorinated polyvinyl chloride (CPVC) material. Because of its excellent corrosion resistance at elevated temperatures, it is ideally suited for self-supporting constructions where high temperatures are a concern. It can be used (depending on chemistry) up to 180º F. Corzan CPVC is manufactured without fillers or plasticizers. It exhibits excellent fire properties UL-94V-0 and flame spread less than 20 per ASTM E-84. It is primarily used in transportation of highly corrosive industrial chemicals.

Astral Aquarius – PVC plumbing system for outer loop lines. PVC's abrasion resistance, light weight, good mechanical strength and toughness are key technical advantages for its use in building and construction applications.

Astral BlazeMaster® - pipe and fittings are designed specifically for fire sprinklers systems. They are made from a specialty thermoplastic known chemically as CPVC. The pipe and fittings provide unique advantages in sprinkler installations including superior hydraulics, ease of joining, increased hanger spacing in comparison to other thermoplastics, and ease of assembly. They are also based on a technology with a continuous and proven service history, of more than 40 years. ASTRAL's BlazeMaster®'s smooth interior surface offers lower friction loss than metal systems, enables to use smaller pipe diameters and save on material costs.

Astral ULTRADRAIN uPVC - pipes and fittings are cost effective, easy to install and are made for life time trouble free service. Astral ULTRADRAIN pipes and fittings are available in range of 75 mm and 110 mm. The entire range is manufactured as per internationally accepted quality standards and specifications.

Astral FlowGuard® Bendable - composite pipe combines the corrosion-resistant benefits of CPVC with the flexibility and strength of aluminum in this one-of-a-kind, multi-layer pipe. Assembly of the pipe incorporates an internal bushing and the standard Astral CPVC fitting, along with the use of one step solvent cement. This kink-resistant system allows for long runs of potable water pipe to be bent and protrude through concrete with all joints made above grade. Its excellent combination of flexibility and rigidity keeps the pipe workable, yet it stays in place. This unique combination results in reduced installation time which translates into a lower installed cost compared to other piping options.

Product - Applications

Corzan CPVC - Applications

Product Range

Astral “Foamcore” uPVC pipes are suitable for residential and commercial drain, waste & vent piping systems for both underground and above ground applications with top quality raw materials and state-of-the art processing technology, Astral Foamcore pipes meet all industrial standards in addition to our own rigorous quality control standards.

Foamcore pipes are basically multilayer pipes having outer and inner layers of conventional PVC and middle layer of foamed PVC. Outer and inner layers are designed to take the load and middle layer of foamed PVC gives rigidity and maintains the shape of the pipe under load. It reduces total weight of pipe and makes it light when compared to solid wall PVC pipes.

Astral Foamcore pipes are manufactured as per European and International standards published under structure wall pipes for drainage and sewerage and are mainly based on stiffness classes. These specifications are very well adopted at global levels and are in used for more than 25 years.

Growth DriversHuge shortages in housing persist in the economy and government is supporting in a big way affordable housing. There is also considerable emphasis on infrastructure spending. The growth in commercial construction, malls and SEZ throughout the country offer great opportunity for development of ASL’s business.

The increased awareness of CPVC products both within and outside the country gives a boost to the replacement demand for various products of your Company. In many old constructions where metallic pipes need to be replaced because of the problems of corrosion, scaling and rusting, CPVC pipes and fittings are used.

The increasing brand consciousness amongst the builders, architects, plumbers and consumers will help the Company to perform better in the years ahead supported by its concerted and continued efforts in brand promotional activities.

The company is enjoying its presence in different segments of construction and infrastructure industry such as housing, commercial construction, airports, hotels, malls, hospitals etc. With a diversified demand base the company expects to turn out robust results in the coming years when the economy is expected to grow at the rate of 9 – 10 % p.a.

Roughly the company’s sales can be divided into rural and urban (Tier 1, 2 & 3 cities) in range of 25% and 75% respectively. Going forward, one of the growth drivers will be supplies to rural projects specially the municipality supplies. Astral today has portfolio of higher and lower range of pipes and fittings which is suitable for value markets and premium markets as well.

The company continues its endeavors to increase its operational efficiency and its innovativeness by bringing out new value added products in the market thereby building sustainable competitive edge over others.

The main thrust is on product innovation and diversification. All efforts are made to reduce cost of production, to make the products more competitive in the market.

Its strategic alliance with Speciality Process LLC, USA, continues to play a significant role in its growth.

Exports to the neighboring countries such as Nepal, Bangladesh and Sri Lanka and to the JV partner in Kenya are steadily increasing.

Financial Statements

Income Statement – 9M Results

Unique and Niche products – CPVC, have enabled the company to maintain its growth rate. And it is continuing unabated due to low market penetration of CPVC pipes in India, and increasing awareness.

Company enjoys low effective tax, having established manufacturing in priority area – HP.

Extra-ordinary items arise on back of forex gain/loss. And would be a regular feature going forward – import of CPVC compounds, and consolidation of subsidiary in Kenya.

Balance SheetThe company has attained very good momentum without high leverage. It is operating at low leverage despite very good credit rating from CRISIL, and is thus in a position to raise funds for aggressive growth opportunities – the company has land in Gujarat and is contemplating Greenfield expansion.

It is in a strong position to absorb any adverse movement in crude price and economy as a whole – high provisions. And is better able to pass on increase in raw material to customer because of niche product profile.

The company gets around 120 days credit from the supplier i.e. Lubrizol for the raw materials. It gives around 45 days credit to its distributors. The conversion time from raw material to pipes/fitting is just around an hour so the inventory days are mainly a function of transit period. Whatsoever working capital the company requires is mainly to fund its PVC business.

The company doesn’t indulge in any spurious related party transactions or investments.

No equity dilution since listing. Stable dividend policy.

Management

ManagementMr. K. R. Shenoy – Chairman (Independent Director)

Aged 67 years, is an M.Sc. (Statistics) from Mumbai University. He possesses experience of 37 years in the banking sector. He was the Chairman and CEO of the Lakshmi Vilas Bank Limited, Karur, Tamil Nadu till 2002. He has also served in various positions and retired as an Executive Director of Corporation Bank in 1997. He has also served in the RBI during the period 1965-1973 as a Statistical Assistant (3 Years) andStaff Officer Grade-A (5 Years). Presently he is a Director of an NGO in Bangalore and a member of Executive Committee of Bhartiya Vidya Bhavan, Mangalore.

Sandeep P. Engineer – Managing Director

Has been Managing Director of Astral Poly Technik Limited since April 1, 2006. Mr. Engineer started his career as Project Engineer in Cadila Laboratories Limited. After gaining an experience for around a year, he decided to promote M/s Shree Chemicals, a proprietorship concern, in the year 1986, which was operational for about 10 years.

Thereafter, in the year 1992, Mr. Engineer promoted Kairav Chemicals Private Limited, a pharmaceutical venture for the manufacture of bulk drugs. Inspired by the success achieved in this venture, he diversified into the business of plastic-pipe industry by collaborating with Specialty Process LLC, for further growth and development of Astral Poly Technik Limited, for introduction of CPVC in the Indian markets, thereby revolutionizing the Indian plastic-pipe industry by replacing the conventional metallic system with polymer products. Mr. Engineer has been an Executive Director of Astral Poly Technik Limited since September 29, 2006. He is the member of Executive Committee of the Indian Plumbing Association, and Chairman of the Gujarat Chapter of the association, and also a member of the World Plumbing Council. He is a Chemical Engineer by qualification.

Share Holding pattern

Promoters have been holding their stakes at this level since listing.

Absence of Institutional Investors, is made up by 14% holding of Specialty Process LLC. Also there doesn’t seem to be any agency problem with the company.

The stock was split in 2QFY11 from 10/- to 5/-. To improve liquidity in market.

The company doesn’t need any equity dilution as per present expansion plans. They can easily be funded through internal accruals and debt.

Buy Strategy

Buy Strategy

Crude price movements affect the sector to a large extent.

And it is therefore, advisable to

follow crude price movement while taking exposure in the company in a SIP manner.

The stock reacted sharply at peak of Middle East - African crisis. And may react again in future. So, good strategy would be to add it whenever crude spikes.

But this doesn’t mean that we don’t take initial exposure, it is

a must because stock is not expensive at the moment.

Challenges/Risks Involved

Challenges / Risks involvedFollowing are some of the key risks that could derail our estimates and expectations -

The increasing imports of CPVC raw material a derivative of crude and the fluctuations in the exchange rate of foreign currency could affect the profitability of the Company.

Volatility in crude prices will also affect the raw material cost of PVC/CPVC resin.

Termination (or extension to other players) of Licenses for CPVC and other brands - FlowGuard pipes, may adversely affect its product offering.

Rising Inflation and housing cost may affect growth rate in medium term.

The demand for plastic products is very price sensitive. The implementation of GST in the range of 12-20 per cent could affect demand in the medium term.

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The recommendation made herein does not constitute an offer to sell or solicitation to buy any of the securities mentioned. No representation can be made that recommendation contained herein will be profitable or that they will not result in loss. Information obtained is deemed to be reliable but do not guarantee its accuracy and completeness. Readers using the information contained herein are solely responsible for their action.

HBJ Capital, or its representative will not be liable for the recipient’s investment decision based on this report. HBJ Capital, officers, directors, employees or its affiliates may or may not hold positions in the companies /stocks mentioned herein.

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient only.

The recommendation made herein does not constitute an offer to sell or solicitation to buy any of the securities mentioned. No representation can be made that recommendation contained herein will be profitable or that they will not result in loss. Information obtained is deemed to be reliable but do not guarantee its accuracy and completeness. Readers using the information contained herein are solely responsible for their action.

HBJ Capital, or its representative will not be liable for the recipient’s investment decision based on this report. HBJ Capital, officers, directors, employees or its affiliates may or may not hold positions in the companies /stocks mentioned herein.

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