Friday 11 January 2019

Finolex Industries Ltd - Value Pick

Image result for finolex pipes

Finolex Industries Ltd.
CMP 530 (ACE Equities clients at 500)
Market Cap: 6650 crores
Book Value: 216
52 Week High/Low: 713/463
FY18: Sales 2738 Crores, Net Profit 299 Crores, EPS 24.06.

Half yearly FY19 EPS for Finolex is at 14.48 for Sept 18 v/s 8.71 Sept 17. (66% bottom line growth)
The margins growth latest quarter was backed by good growth in their PVC Resin segment (Which is not going to be around for a long time)
Since the company is converting from B2B to B2C, Most of their PVC Resins will be utilized in their PVC Pipes manufacturing itself.

Even though numbers look very rosy the annual eps projections for FY19 are pegged between 27 to 29 v/s 24 of FY18.
At an EPS of 27, current P/E for Finolex is at around 17.
If we look at the five year average P/E that Finolex has commanded it has been around 17.
The peak P/E was 79 (though erratic) lowest p/e was 9.65.
If we look at the P/E it had at all time high of 760+ in 2017, It was at a P/E of 27.

- The company is changing from B2B to B2C with total focus now on Pipes segment.
- 70% of pipe sales are Agriculture driven.
- Is increasing focus in plumbing pipes, their total capacity is 3,70,000 MT for Pipes & Fittings.
- Has entered the higher margin Cpvc Pipes business (Astral's core area)
- In 2017, Co. signed agreement with Lubrizol the inventor and largest manufacturer of CPVC compound in the world.
- Has a capacity of 6000 MT for CPVC, did sales of 5900 MT in FY18 at 147 crores. 
- Is going to increase the CPVC Capacity to 15000 by FY20.
- We are seeing a total shift in demand from construction sector in favour of Plastic Pipes v/s DI Pipes and Iron Pipes.
- Old buildings, socieities also witnessing repairs in rusted pipelines leading to demand for Plastic Pipes.
- We believe the market can grow at a pretty aggresive growth rate soon and branded players like Finolex which has great distribution reach should be able to tap it to their benefits.
- Company holds stake worth 1000 crores in family owned Finolex Cables (Though bothers within the families have been at loggerheads) 

Key Risk: CRUDE price volatility, It is widely known that the company will witness inventory losses because of sharp crash in crude (PVC Resin segment)
However, with migration towards B2C, tapping margin accretive category such as CPVC we expect the company to negate some of the risks.

At annual EPS of 27 the stock is at a P/E of 18, and at a MCAP/Sales of 2.19.
cPVC Pipes player Astral Poly trades at a P/E of 61 and a Mcap/Sales of 5.32.

Stock has remain muted due to volatility in Crude prices, it will be very interesting to see how the management has managed the crude risk in next two quarter results.
Considering the future outlook, discounting short-term hiccups due to crude volatility throwing the spread for a toss, lower crude price is a long-term positive for Finolex Industries.
Once the business becomes totally B2C focussed, and builds on the brand value and makes a mark in the cpvc segment, will not be surprised if it is given a rating similar to Astral which trades like the Paint Sector.

Hence we have a LONG TERM buy rating on Finolex with recent lows of 430 expected to be a potential bottom for the mid/long term.

NOTE: When we bought Finolex Industries, we anticipated that the company will suffer an inventory loss due to crude fall and erosion in the value of pvc reisins, like last time when crude fell. However, This time despite the crude price correction, PVC Reisin has seen a price increase, Which means there should not be any inventory loss. 

Finolex Website
Latest Investor Presentation
Screener of Finolex

Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Finolex Industries Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

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