The pandemic led to accelerated consolidation in the pipe sector. The struggle of small and regional companies to meet their excessive needs for working capital is said to have put many out of business. This has resulted in market share gains for listed pipe manufacturers.
Analysts assume that the pace of consolidation in this particular sector will be further boosted by the stricter implementation of the Bureau of Indian Standards (BIS) license. Investors assume that in an official gazette issued in March, the government commissioned all pipe manufacturers to obtain a BIS license by September 30th. In addition, the government has also established rules for gradually reducing the use of lead stabilizers in the manufacture of polyvinyl chloride (PVC) pipes.
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The potential hit
While the organized companies, which make up about 60% of the sector, are BIS licensed and have minimal use of lead stabilizers, most unorganized PVC pipe manufacturers will see the effects of this notification, analysts at JM Financial Institutional Securities Ltd. said. Disorganized businesses will have to make significant investments to meet the guidelines, eroding the price differential, the domestic brokerage house said in a September 16 report.
The report further added that this would also bolster the ongoing consolidation momentum.
With many publicly traded companies in the home decor sector expected to benefit from the Covid-led consolidation, share prices have reacted accordingly. Over the past year, stocks in mid-cap companies like Prince Pipes & Fittings Ltd, Finolex Industries and Astral Ltd have seen steep rallies, well outperforming the Nifty500 index.
While this is sentimentally positive for pipe stocks, it is unlikely that this factor alone will result in incremental earnings increases.
“A short-term increase in profits would be led by higher PVC prices and inventory gains,” said Sneha Talreja, vice president, institutional stocks, Edelweiss Securities Ltd.
“A sharp rise in raw material prices – mainly PVC and availability issues – led to an accelerated shift towards the organized segment over the course of the year. For the future, we expect that the market share pendulum will shift decisively in favor of large, organized companies in view of the worsening financial situation of small, fragmented companies. All currently built-in profit estimates assume falling PVC prices and inventory losses in FY22. While this was the case in Q1FY22, the trend has reversed and PVC prices are at their peak. That implies a sharp increase in earnings driven by higher PVC prices and inventory increases in the second quarter of fiscal 22, “she said.
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