PL Stock Report: Prince Pipes and Fittings (PRINCPIP IN) - Q1FY24 Result Update - Healthy volume growth despite internal issues - Accumulate

Prince Pipes and Fittings (PRINCPIP IN) - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs690 | TP: Rs816

Q1FY24 Result Update - Healthy volume growth despite internal issues

Quick Pointers:

♦ Despite challenges, achieved volume growth of ~19% YoY in Q1FY24.

♦ EBITDA/kg down to ~Rs 12.2/kg (vs Rs 14.0/Kg in Q1FY23).

Prince Pipes and Fittings (PRINCPIP) has maintained its healthy volume growth guidance of higher double digit in FY24 and expects 13-15% margin in the near term given 1) healthy volume growth, 2) product mix towards VAP and 3) business stabilization post ERP implementation. We have maintained our FY25E earnings and increased target multiple to 29x (at 5yrs avg. PE, earlier 25x) with TP of Rs 816 (earlier Rs 718). However, after factoring Q1FY24 numbers we downward revise our FY24 earnings estimate by 14.7%. PRINCPIP reported EBITDA/kg of Rs 12.2/kg, but after excluding inventory loss (Rs100mn) & one time bathware launch expenses of Rs 20mn, EBITDA/kg stood at Rs ~15.4/kg, which is still considered healthy despite performance being materially disrupted. We believe performance should further improve with focus on increasing capacity utilization, premiumisation and better FCF generation. We estimate FY23-25E Sales/EBITDA/PAT CAGR of 13.3%/41.6%/60.9%, with volume CAGR of 17.3% and EBITDA margin of 14.4% in FY25E. Maintain ‘Accumulate’.

Revenues decline of 8.4% YoY, PAT up by 22.4% YoY: PRINCPIP revenue came in at Rs 5.5bn (PLe: Rs5.0bn) in Q1FY24 with volume growth of ~19% YoY (PLe:-0.8%YoY), despite performance being materially disrupted, due to transitioning challenges arising from ERP implementation and decrease in realisation by ~23% YoY with correction in PVC resin prices by more than 40%. Gross margin expanded by 440 bps to 25.2% YoY, while EBITDA margin expanded by 90bps YoY to 8.2% in Q1FY24 (v/s PLe: 13.0% & cons. est. of 11.5%) due to unfavorable product mix and pipe-fitting ratio, given ERP issues relating to dispatch of fittings. Also, there was increase in agri pipe contribution on account of seasonality. PAT came at Rs 196mn (PLe: Rs 335mn & cons. est. Rs 272mn) in Q1FY24, with increase in other income and decline in interest cost. Working capital days stood at 59 days as of Jun’23 compared to 57 days in Mar’23 due to increase in inventory days from 57 to 73 days.

Con call highlights: 1) Operating results showed resilience, despite performance being materially disrupted, due to transitioning challenges arising from ERP implementation. 2) Advertisement expenses were Rs 120mn in Q1FY24; will be at 2% rev. in FY24. 3) EBITDA margin impacted in Q1FY24, which will normalize to 13-15% Q3FY24 onwards. 4) Planned to increase capacity by 20-30KMT in FY24 through brown field and by 40kMT in FY25 through Bihar facility. 5) Greenfield expansion in Bihar for ~40KMTAP capacity, operational by Q4FY25 with PVC/HDPE pipe. 6) East India contributes 15-20% revenue to PRINCPIP, which will improve with Bihar expansion. 7) Debtor days increased due to ERP disruption, which will normalize from Q2FY24. 8) Company has increased channel financing to 132 distributors from 70 and amount to Rs 1.05bn from Rs 700mn YoY. 9) Bathware segment started in Q1FY24, will take 12-18months to breakeven and 6-8 quarters to reach company level margin. 10) Bathware initially established its presence within B2B segment and is currently in the process of gradually expanding into B2C market, with investment in employee & advertisement.

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