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Recommendations India

Finolex Industries Q1FY15 results update

July 30, 2014, Wednesday, 07:29 GMT | 02:29 EST | 10:59 IST | 13:29 SGT
Contributed by Nirmal Bang

Finolex Industries Ltd (FIL) reported results above expectations on account of higher margin in both PVC and PVC pipes segment.

- EBITDA margins witnessed increase both QoQ and YoY and stood at 18.8%.

- PVC resin segment witnessed improvement as EDC prices witnessed correction. Towards the end of Q1FY15, the PVC/EDC spread widened to $610/MT from $530/MT in the end of Q4FY14, reflecting an improvement of 15%. With the new global EDC capacities expected to come on stream in the coming quarters, the spreads are expected to remain healthy.

- During the last quarter, unseasonal monsoon and hailstorms had impacted the volumes of PVC pipes segment and it witnessed de-growth of 2% YoY. However, Q1FY15 witnessed bounce back in demand and sales volumes for PVC pipes and fittings grew by 8.2% YoY to 58,239 MT. Revenues increased 25% YoY as the realisations witnessed improvement due to delta impact.

- For FY15E volumes are expected to witness strong along with increase in realisations. Management expects volume growth for PVC pipes and fittings to be ~15%. We expect overall sales in the PVC pipe and fitting segment to witness CAGR growth of 23.6% over FY14-FY16E.

Going forward, we are positive on FIL owing to:

- Strong demand of PVC pipes driven by rural buoyancy. Delayed monsoon has further improved demand for pipes. Management has witnessed strong growth in the month of July.

- Focus on increasing fittings contribution and column pipes which is margin accretive segment.

- FIL has a strong distribution network of dealers and distributors across the country- started warehouse at Cuttack (Odisha) to cater to Eastern regions. It is continuously focusing on increasing distribution across the country.

- EDC prices are expected to remain soft. Additional capacity will lead to increase in supply of EDC and thus improve PVC/EDC spread for FIL. Moreover, shale gas availability which also helps in production of ethylene will benefit FIL. Import Duty reduction on ethylene from 5% to 2.5% and anti dumping duty on PVC are also expected to benefit the company.

We believe that in the long term, FIL will be perceived as a PVC pipe company as compared to PVC (Commodity) company as it is consistently increasing share of PVC pipe in total revenues. At CMP, the stock is trading at 12.7x FY15E and 10.7x FY16E Adj EPS and 8.3x FY15E and 7.0x FY16E EV/EBITDA; which is lower than the peer group primarily due to comparatively lower return ratios, volatility in margins and considerable proportion of business coming from PVC resins. We have seen a sharp run up in the stock (+75%) since our recommendation dated 28th January 2014. We continue to believe that the stock still holds potential to further re-rate from current levels and therefore recommend BUY for a target price of Rs 353 (SOTP based on FY16E estimates); indicating further upside of 28.3%.