Implementation of the BIS license for the benefit of listed pipe manufacturers
The pandemic has led to an acceleration of consolidation in the pipeline sector. The struggle of small and regional businesses to meet their strained working capital needs has reportedly driven many businesses out of business. This has translated into market share gains for publicly traded pipe manufacturers.
Analysts say the pace of consolidation in this particular industry should be further boosted by the stricter enforcement of the Bureau of Indian Standards (BIS) license. Investors will estimate that the government, in an official journal published in March, mandated all pipe manufacturers to obtain a BIS license by September 30. In addition, the government has also established rules for the phasing out of the use of lead stabilizers in the manufacture of polyvinyl chloride (PVC) pipes.
While organized companies, which make up around 60% of the industry, are BIS licensed and use few lead stabilizers, most unorganized PVC pipe manufacturers will see an impact from this notification, JM analysts said. Financial Institutional Securities Ltd. Unorganized businesses will have to incur significant capital outlays to comply with the guidelines, leading to an erosion of the price differential, the national brokerage said in a report dated Sept. 16.
The report added that this would also give a boost to the ongoing consolidation momentum.
As many listed companies in the home decor industry were expected to benefit from virus-led consolidation, stock prices reacted accordingly. Over the past year, shares of mid-cap companies such as Prince Pipes & Fittings Ltd, Finolex Industries and Astral Ltd have posted strong gains, comfortably beating the Nifty500 index.
While this is sentimentally positive for pipe stocks, this factor alone is unlikely to lead to further improvements in earnings.
“The higher short-term earnings would be driven by higher PVC prices and inventory gains,” said Sneha Talreja, assistant vice president, institutional equities, Edelweiss Securities Ltd.
“A sharp rise in the prices of raw materials – mainly PVC and availability issues resulted in an acceleration of the transition to the organized segment during the year. Going forward, we expect the market share pendulum to shift decisively in favor of large organized players given the deteriorating financial position of small, fragmented players. All currently integrated profit estimates assume a decline in PVC prices and inventory losses in FY22. While this was true in Q1FY22, the trend has reversed and PVC prices are at their peak. maximum. This implies a strong profit upgrade driven by higher PVC prices and inventory gains in the second quarter of fiscal 22, ”she said.
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