Margins may choke for pipe makers as PVC prices melt, forecasts Jefferies

Jefferies expects Kajaria Ceramics to experience weaker margins due to three price hikes by Gujarat Gas from August to November

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Margins may choke for pipe companies such as Finolex Industries, Astral Ltd, and Supreme Industries after a significant drop in PVC prices, predicted Jefferies India. Stable copper prices and strong demand in housing and B2B sectors are likely to drive higher volumes and operational leverage for cable and wire firms like Polycab India, Havells India, Crompton Consumer, V Guard Industries, and Whirlpool of India.

Additionally, Jefferies expects Kajaria Ceramics to experience weaker margins due to three price hikes by Gujarat Gas from August to November. Conversely, Pidilite Industries might observe margin growth due to softer VAM prices year-over-year.

Plastic pipes rely heavily on PVC resin, accounting for 65 percent of sales. India’s PVC demand is 50 percent reliant on imports. October 2023 witnessed a significant 10 percent month-over-month decline, partly recovered by only 4 percent in November 2023. December 2023 has seen stable prices at $790 per tonne. The average PVC price in Q3FY24 is 4 percent lower year-over-year. Jefferies anticipates inventory losses due to a sharp fall in October, impacting the pipe margins.

Copper prices fell by 5 percent in September 2023, leading to a 3 percent price reduction in cables and wires (C&W). However, since then, copper prices have stabilised at $8,250 per tonne. Q3FY24 average prices show a +2 percent year-over-year and -3 percent quarter-over-quarter change. Jefferies does not foresee major inventory effects on C&W margins for Q3 due to steady copper trends. Healthy demand driven by public and private investments and housing is expected to bolster volume growth, supporting margins in the C&W sector.

Brent crude surged by 30 percent from July to September 2023. In August and September 2023, Gujarat Gas implemented consecutive 6 percent price hikes in natural gas, followed by an additional 5 percent hike in November 2023 to Rs 46/scm. This cumulative 13 percent hike could impact Kajaria Ceramic’s power and fuel costs, which constitute 20-25 percent of sales. Kajaria might offset this with increased use of cheaper biofuel (20-22 percent of overall energy costs) and reductions in product discounts.

VAM, a key raw material for Pidilite Industries, spiked by 14 percent month-over-month in October 2023 but has since decreased by 22 percent over November to December 2023, standing at $811 per tonne. The Q3 average VAM price is down by 17% year-over-year. As raw material costs account for 45-50 percent of Pidilite Industries’ net sales, the softer VAM prices might boost margins from FY24, as per Jefferies’ analysis.

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