The Pipe sector is expected to report healthy growth in profit in Q3 FY21. Government’s strong focus is to improve piped water coverage (from 33% in 2020 to 100% by 2024) and double farm income by 2022 to boost the demand of both plumbing and agri pipe in future. Forthcoming, Budget 2021 announcements will definitely focus on improving piped water coverage in various villages in rural areas according to Management of many listed companies in pipes sector and Analysts monitoring those sectors.
Government’s target to double farm income by 2022 may bolster agri pipe demand. The government has set the target of doubling farmers’ income by 2022. For this, the government revised the minimum support price formulae by fixing them at 150% of all India weighted average cost of production in FY19 Budget. The government has also recently introduced the new farm bill, which gives the right to farmers to sell their produce outside of APMC (which would fetch them higher realization for their produce). Haitong Securities believe the government thrust to improve farm income and increase irrigation coverage is likely to drive the demand for agri pipe over the medium-term.
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The Nal se Jal scheme is going to be a major driver of plumbing pipe demand over medium-term In India. The plastic pipe sector is also likely to see a good demand from the current government flagship project of ‘Nal Se Jal’, where the government targets to improve piped water coverage from 17% in 2019 to 100% in 2024 (currently at 33%). The total outlay for the program is estimated at Rs 3600 bn, of which Rs 2800 bn will come from the central government and the remaining Rs 800 bn from the state government.
For FY21, the central government has allocated a very small amount of Rs 115 bn for the project as it initially targeted to provide piped water supply to about 54% villages where infrastructure is mostly ready along with sustainable water source and only piped connectivity is needed. Going ahead, the government targets to substantially increase budgetary allocation towards this project to speed up the pace of execution over the next 2-3 years, which is likely to boost demand for plastic pipes in future says Haitong Securities.
While the pipe sector has a better business risk profile with better growth prospects, Haitong Securities observe that most pipe companies (except Astra Pipes) trades at lower valuations.
Going ahead, Haitong Securities would prefer to BUY companies which are:
a) aggressively expanding distribution network and adding manufacturing locations in newer geographies (as they are likely to gain the most in case of recovery in economic cycle)
b) trades at reasonable valuations