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. 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.

Furthermore, operating profitability will also 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.

An analysis of 15 PVC pipes and fittings manufacturers rated by Crisil Ratings, representing about 35% of the organised domestic PVC pipes industry, indicates as much.

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.

Says Tanvi Shah, Associate Director, Crisil Ratings Ltd, “We see the annual expenditure of organised PVC pipes and fitting makers rising to Rs 1,400 crore in this and next fiscals compared with ~Rs 1,000 crore historically. This would be to meet healthy demand, expand footprint — specifically to the under-penetrated eastern India — and gain market share from unorganised players. Funding will be primarily from healthy cash accruals, which, along with prudent working capital management and well-managed balance sheets, will keep credit profiles ‘stable’. Debt-to-Ebitda ratio is expected to sustain below ~0.2 times in the next two fiscals vs 0.15 times last fiscal, despite moderation in operating profitability.”

Volatility in PVC resin prices and the extent of disruption wrought by the third wave of the pandemic will bear watching.