Revenue of polyvinyl chloride (PVC) pipes and fittings manufacturers will surge 35% this fiscal, riding on higher realisations and a modest volume growth this fiscal, says a research report by CRISIL. Next fiscal, sustained healthy demand from government initiatives in water sanitation, and improving real estate demand will see the sector revenue grow another 7-10% despite the high base.
Further, CRISISL expects the operating profitability to be healthy, despite some moderation from the peak logged last fiscal due to a surge in input prices. Healthy cash accruals and strong balance sheets will keep credit profiles stable, notwithstanding an expected increase in capital expenditure (capex) over the current and next fiscals.
Says Nitesh Jain, Director, CRISIL Ratings Ltd, “The realisation for PVC pipe players is seen rising 30% this fiscal as healthy demand will allow producers to pass on the rising cost of PVC resin, which forms 80% of the total cost. Next fiscal, though realisations could see some moderation as PVC resin prices are likely to moderate, volume growth will be better. The volume growth will be backed by government’s focus on water supply and sanitation through projects such as National Jal Jeevan Mission, and uptick in real estate and construction activity. Net-net, therefore, we expect 7-10% revenue growth next fiscal.”
This fiscal, operating profitability is expected to moderate to 16-17% from the peak of last fiscal, mainly due to higher PVC resin prices, which are being passed on with a lag, and higher freight costs (see annexure for profitability trend). Next fiscal, operating profitability may moderate further to pre-pandemic levels of 15-16%, due to an expected correction in PVC prices, which have high correlation with crude oil prices. Meanwhile, better operating leverage and continuing healthy growth prospects has necessitated investment in capex.
Besides, organised players are also adding capacity to benefit from the central government order of mandatory implementation of the quality norms to produce only pipes marked ISI (Indian Standard Institute; now Bureau of Indian Standards) from April 2022 (deadline extended from October 2021), which may result in market share gains from unorganized players.