We recommend ‘BUY’ on FINOLEX INDUSTRIES LTD for a target of INR 643 – valuing the company at P/E 17.0x of FY21E Earning.

CMP:                  INR 506

Target Price:     INR 643

Investment Rationale:

  • Finolex Industries is India’s only company that makes both PVC resin and pipes.
  • Policy, capacity and improving margins all flowing through
  • EXPANDING FOOTPRINT – network in all geographies with higher focus in the northern and eastern regions
  • CAPACITY EXPANSION -Increase installed capacities of PVC pipes and fittings in order to capture expected increase in demand.
  • CASH-N-CARR -Follow Cash-n-carry model to keep the balance sheet light.
  • BRANDING –Among leading brand and promoting quality consciousness amongst consumer.
  • Constant addition of products to its range would lead to strong sales growth.

Valuations And View:

Finolex Industries is available at a steep discount to its close competitor Supreme, despite a similar growth profile and stronger balance sheet, mainly due to margin volatility. We expect the discount to close as PVC resin fundamentals is expected to improve and the weighting of the more stable pipes business increases – making the company’s margins less volatile overall. We value the business at 17x FY21E EPS and recommend a BUY rating on the stock with a target price of INR 643 per share.

Risk & Concerns

  • Industry and Market: Economic slowdown may impact the top line of the business.
  • Business Structure: concerns about a possible corporate restructuring, given family-related disputes.
  • Competition: The Pipes Market competitive landscape has become much more dynamic

Company Background

Finolex Industries Limited (FIL) started in 1981 as a pipe manufacturing company headquartered in Pune. It is the only PVC pipes company to have an integrated set up for production of PVC resin.

Finolex Industries Limited is India’s leading manufacturer of PVC-U Pipes and Fittings and the second largest manufacturer of PVC Resin. It has state-of-the-art manufacturing plants in Pune that serves as its headquarter, Ratnagiri in Maharashtra and Masar in Gujarat. It also carry out distribution from its warehouses in Chinchwad, Cuttack, Delhi, and Indore.

Finolex Industries not only makes the pipes and fittings that are going into modernisation and acceleration of India’s agricultural and construction sectors, it also produces the polyvinyl chloride (PVC) resin that those pipes and fittings are made from. This means that, unlike its peers – Supreme and Astral – it is a ‘backward integrated’ company and the only one in the market. The company is also expected to increase its consumer-focussed pipes and fittings capacity by a CAGR of 10% over the next five years.

Businesses

  • PVC resin business (generates 70% of its earnings)
  • Agri Pipes and Fittings, Column Pipes, ASTM Pipes and Fittings, CPVC Pipes and Fittings, Sewerage Pipe
  • Solvent Cement

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Products

  • PVC resin business (generates 70% of its earnings)
  • Agri Pipes and Fittings, Column Pipes, ASTM Pipes and Fittings, CPVC Pipes and Fittings, Sewerage Pipe
  • Solvent Cement

Industry Overview

Agriculture: India has grown from an agricultural importer to be a surplus producer of food grains, through a favourable interplay of infrastructure, technology and policy support. Central Statistics Office (CSO)’s 2017-18 third advance estimates place total food grain production at 279.51 million tonnes, at par with the record-breaking production of 275.11 million tonnes in FY 2016-17. The agricultural sector employs more than half of the nation’s total workforce and contributes to 17-18% of the GDP. However, policymakers recognise that with increasing scarcity of natural resources, progress in agriculture, today, can only be achieved through an increase in productivity.

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India’s PVC demand has grown at a CAGR of 10% for the last decade – the highest globally – and it is expected to drive 20% of global demand from 2019-23e. India is the largest importer of PVC resins in the world – sourcing more than 50% of its needs overseas. We believe that its dependence on imports should only increase going forward.

The demand for PVC in India is huge and has been increasing at an annual rate of 7.25% from fiscal year 2011-12 to 2016-17,
whereas production trails demand. In India, the PVC resin market has largely been dominated by imports as domestic capacity is only 45% of the demand. About 73 per cent of the total demand for PVC in India comes from pipes segment which are widely used in the agriculture and construction sector. The remaining 27 percent of demand comes from other applications where PVC is used to manufacture, profiles, insulation etc.

India’s PVC market is grossly underpenetrated, with a per capita consumption at about 2.2 kg. which is ~3-4x higher in countries such as Brazil, Malaysia and Thailand. With rapid urbanization and rising farm irrigation spends, the market can grow at 12-15% CAGR to ~H 35,000 Crore over the next 3 years.



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