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Stock Recommendation | FINOLEX INDUSTRIES LTD – BUY – Target Price : 635
Publish date: FEBRUARY 12, 2019
Finolex Industries Q3Y19 results was ahead of our estimates due to strong margins in the pipes segment while PVC pipes volume disappoints due to weak demand in its major markets.
■ The company reported 4.7% yoy growth in net sales at Rs 7.6 bn driven by strong realization in pipes and resin segment. But the volume in both pipes and resin segment declined by 3.8% and 6% on yoy respectively due to weak demand in agri segment in its major markets. The improvement in realization is led by better product mix, higher PVC price and reduced discount in the pipes segment.
■ EBITDA margin at 16.5%, improved by 80 bps yoy and, was ahead of our estimates due to higher realization.
■ FIL has maintained positive demand outlook in the longer run in PVC pipes business and aims to grow its volume at double digit rate. However in FY19E, the company is expected to report single digit volume growth due to weak volume in Q3FY19.
We have marginally revised our estimates for FY20E based on higher realization in PVC pipes segment and lower spread in PVC resin segment. The stock is presently trading at PE of 16.7x and 15.8x based on FY19E and FY20E revised EPS of Rs 30 and Rs 31.8 per share, respectively. We maintain our BUY rating on the stock with revised target price of Rs 635 (Vs Rs 642), valuing the stock at 20x.
Net Revenue for the quarter grew by 4.7% yoy to Rs 7.6 bn (below our estimates of Rs 7.9 bn) driven by 1) volume decline of 3.8% yoy and 6.0% in PVC pipes segment and resin segment respectively and 2) realization growth of 15.4% yoy and 12% yoy in PVC pipes segment and resin segment respectively. The volume declined in the quarter is due to weak demand from its large markets like Maharashtra and Karnataka. The delay in payment to the sugarcane farmers have impacted demand of agri pipes. As per management, the weakness in agri pipes demand in these markets is expected to improve in near future. The demand from housing and plumbing sector remained as per expectation with double digit volume growth.
Better product mix, higher PVC prices and reduced discount resulted in higher realization for PVC pipes in the quarter. The company has been reducing discounts on qoq for the past few quarters. Fittings volume in the quarter grew by 4.2% yoy to 4869 tonnes on growth in plumbing segment. The company reported 2300 tonne of CPVC volume, up 53% yoy with revenue of Rs 610 mn up 60% yoy.
EBITDA for the quarter grew by 10.3% yoy to Rs 1.25 bn (Vs estimates of Rs 900 mn) with EBITDA margins at 16.5% (Vs estimates of 11.4%) on strong margins in PVC pipes segment. The EBITDA margins for the quarter was driven by higher realization and better product mix. The company has taken price hikes to cover the price correction taken by it in the last year (in order to push volume growth aggressively post GST). The company reported 230 bps improvement in EBIT margin of PVC pipes segment.
EBIT margins in PVC resin business declined by 230 bps yoy and came in at 16.2% in the quarter. Hardening EDC price has resulted in lower PVC/EDC delta. This coupled with lower volume has reduced the margin in PVC segment on yoy basis. PVC-EDC spread in the quarter was at ~ USD 535 per tonne as against USD 733 per tonne yoy and US$641 per tonne on qoq and declined sharply. PAT for the quarter grew by 13.1% yoy to Rs 787 mn Vs estimates of Rs 539 mn.
FIL has maintained positive demand outlook for long term in PVC pipes business and aims to grow its volume at double digit rate in the longer run. However in FY19E, the company is expected to report single digit volume growth due to weak volume in Q3FY19. As per management the volume in Q4FY19 should improve on expected improvement in demand in its major markets like Maharashtra and Karnataka. Further, the company is expected to take capacity of pipes and fitting business to 370,000 tonne per annum (tpa) by FY19E end (vs 330,000 tpa in FY18 end) and would support its revenue growth. The company intends to add 10-15% capacity through internal accruals in the next 2 years.
■ The price of PVC pipes have been volatile in recent time as the company has taken one price hike and two price cut in the month of December 2018.
■ The company would incur Rs 1.5 bn capex in FY19E and Rs 1-1.5 bn in FY20E in order to ramp up capacity and increase product ranges.
■ The company is operating at 70% capacity utilization in the pipes business.
We believe that, FIL would be a major beneficiary from government’s focus on irrigation and improvement in rural consumption in the long term. We believe that the demand of PVC pipes from rural segment is expected to revive in coming quarters. We expect the margins in PVC pipes and fittings segment to remain at current level. But resin business is expected to face challenge in terms of maintaining high margins as average PVC-EDC spread has come down to USD 550 per tonne as against highs of over USD 700 per tonne in 2018. We have marginally revised our estimates for FY20E based on higher realization in PVC pipes segment and lower spread in PVC resin segment. The stock is presently trading at PE of 16.7x and 15.8x based on FY19E and FY20E revised EPS of Rs 30 and Rs 31.8 per share, respectively. We maintain our BUY rating on the stock with revised target price of Rs635 (Vs642), valuing the stock at 20x.
Finolex Industries Ltd (formerly Finolex Pipes Ltd), was incorporated in 1981, and is a leading brand in Indian PVC pipes and fittings market. The company manufactures and sells PVC pipes, fittings and PVC resin. 82% of its revenue is contributed by PVC pipes and fittings and balance 18% is contributed by PVC resins. The company began its journey as a PVC pipes player and further diversified in manufacturing of PVC resin in 1994 as part of its backward integration strategy. Further, it commissioned 43 MW thermal power plant at Ratnagiri in 2009-10 to reduce its dependency on the grid for its power requirements. Presently, FIL is the largest player in terms of market share in agriculture pipes segment and is a leading player in PVC resin business (after RIL and Chemplast) in India. FIL has three pipes manufacturing plants located in Pune (Maharashtra), Ratnagiri (Maharashtra) and Masar (near Vadodara, Gujarat) with installed capacity of 330000 tonne per annum. FIL has strong distribution network with over 700 dealers and 18,000+ retail touch points across country.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ADD - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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