Finolex Industries Q2 Review - Low Pipes Volumes, Overall Weak Results In PVC-Resin Hurts: Systematix

Systematix Research Report

Finolex Industries Ltd.’s large revenue/profit after tax miss in Q2 was driven by volume miss in pipes (up 6% YoY versus 25% estimated) and PVC-resin (down 31% YoY; 40% miss), and weak PVC-resin Ebit (6.8%, Rs 5.4/kg).

Lower pipes volumes were driven by channel destocking in the price sensitive agri segment in anticipation of further reduction in PVC prices. Healthy demand in non-agri segment (40% versus 37% in Q2 FY23) sustained though. Superior product mix aided to healthy pipes Ebit (7.9% margin, Rs 10.7/kg).

Finolex Industries expects 15-20% volume growth in FY24E (H1: 18%) with Rs 10-12/kg Ebit (H1: Rs 12.5; aims Rs 14 in few years with rise in non-agri mix towards 50% from 30-35% currently).

PVC-resin volume/revenue in Q2 fell 31%/38% YoY (~40% miss) mainly due to raw materials supply disruption from Middle East. The current low spreads (PVC-EDC: $450/t; PVC-VCM: $95/tonne) suggest weak margins in H2.

We cut earnings estimates by 4% each for FY24E and FY25E mainly on lower than expected margins in PVC-resin segment. We now estimate 13%/63%/54% compound annual growth rate in Finolex Industries’ revenue/Ebitda/profit after tax over FY23-25E (FY18-23: 10%/-10%/-4% CAGR), as volume growth and margins in pipes segment likely normalise.

Given its low return on capital emplyoyed profile (~13% in FY25E) and ~23 times FY25E price/earning, we maintain 'Hold' rating on the stock, with a revised target price of Rs 210 (earlier Rs 214), based on ~22 times FY25E P/E (26 times/15 times FY25E P/E for pipes/PVC-resin).

High volatility in PVC resin margins could continue to supress Finolex Industries’ valuations versus peers. Higher-than-estimated margin would be a key upside risk to our call.

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