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Recommendations India

Finolex Industries Q4FY14 results update

May 14, 2014, Wednesday, 05:31 GMT | 01:31 EST | 10:01 IST | 12:31 SGT
Contributed by Nirmal Bang

Finolex Industries Ltd (FIL) reported results below expectations on account of lower margin in the PVC business where raw material cost (EDC) witnessed increase during the quarter. PVC pipes and fitting business witnessed lower profitability on account of unseasonal rains and hailstorms.

- EBITDA margins witnessed decline both QoQ and YoY and stood at 12.2% in Q4FY14. For FY14, EBITDA margins stood at 16.2% vs 16.7% in FY13.

- PVC resin segment witnessed decline as prices of EDC shot up due to unexpected delay in new global EDC capacities. However, EDC prices have witnessed correction from the high of $500 per metric tonne to $400 per metric tonne in current quarter.

- Unseasonal monsoon and hailstorms impacted the PVC pipes segment and it witnessed volume de-growth of 2% YoY. Despite de growth in volumes, revenues increased 13.1% YoY as the realisations witnessed improvement due to delta impact.

- For FY15E volumes are expected to witness improvement from current levels. Management expects volume growth for PVC pipes and fittings to be in the range of 15-18%. We expect overall sales in the PVC pipe and fitting segment to witness CAGR growth of 19.6% over FY14-FY16E.

Going forward, we are positive on FIL owing to:

- Strong demand of PVC pipes driven by rural buoyancy. Management has already witnessed some uptick in volumes in the month of March, the full benefit of which will be witnessed in current quarter.

- Focus on increasing fittings contribution which is margin accretive segment

- Strong distribution network of dealers and distributors across the countryhas started warehouse at Bhubaneswar to cater to North Eastern regions.

- EDC prices have corrected 20% from peak levels. Additional capacity will lead to increase in availability of EDC and thus benefit FIL. Moreover, shale gas availability which also helps in production of ethylene will benefit FIL.

- FIL has signed forward contracts for EDC supply at the prices which will prevail in June, July as the jetty will be closed. Moreover, FIL has booked 30% of the inventory at $400 per metric tonne. All this is likely to impact the margins of the company positively.

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 10.7x FY15E and 9.3x FY16E Adj EPS and 7.2x FY15E and 6.3x FY16E EV/EBITDA; lower than the peer group primarily due to 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 (+47.0%) since our recommendation on 28th January 2014. We continue to believe that the stock still holds potential to further rerate from current levels and therefore recommend BUY for a target price of Rs 276 (SOTP based on FY16E estimates); indicating further upside of 24.7%.