26 FEBRUARY 2016
SECTOR: PLASTIC PRODUCTS
Finolex Industries Ltd.
BSE SENSEX
22993
S&P CNX
6974
(INR CRORES)
CMP: INR306 TP: INR400 (+31%)
Buy
Y/E MARCH
Net sales
EBITDA
RPAT
BV/Share (Rs.)
Adj. EPS (Rs.)
EPS growth (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div yld (%)
ROE (%)
RoCE (%)
FY15A
2,476
199
48
63.4
2.6
(77)
118.2
4.8
22.3
2.6
4
9
FY16E
2,687
406
216
70.6
15.2
484
20.2
4.3
10.5
2.8
23
23
FY17E
2,866
421
237
78.3
19.1
26
16.1
3.9
9.7
3.1
26
25
We recommend to BUY Finolex Industries for a TP of INR400
(21xFY17E EPS) - a 31% upside.
Government irrigation focus to boost PVC pipe demand:
More
than 50% of India's 157.35 mn hectare agricultural land is un-irrigated
and depends upon rainfall. Government's focus on raising productivity
and reducing dependenc e on rainfall through the INR50000cr PMKSY
scheme will boost demand for PVC pipes from agriculture. Finolex
Industries derives nearly 70% of its pipes business from agriculture.
Pipes to grow at double digits:
PVC in the form of CPVC is replacing
galvanised steel pipes in housing and borewell applications. This coupled
with the demand from agriculture are expected to drive demand for
PVC pipes in double digits. Pipes and fitting demand for 9mFY16 has
grown at ~10% and we are likely to end FY16 with a 12% growth,
with a 15% growth likely for the next two years atl east.
Fitting & CPVC to add to margins:
Fittings stood at INR170cr for
9mFY16 - 10% of overall revenues and 14% of pipes revenues vs 6-
7% in FY13 and 20-25% for competitors. This product is growing at
25% and there is scope to grow at this rate for the next few years
atleast. CPVC is currently less than 1% of revenues and we see scope
for this product to grow at 25%+ atleast. As contribution from these
value-added products rise, we expect margins to improve further.
Internal consumption of PVC to reduce volatility in earnings:
The PVC resin segment has significant volatility in margins (-23% to
+42% range for the last 6 years). This was a backward integration
initiative to be self sufficient in raw material requirement for the pipes
business. Pipes is expected to take up ~70-75% of the PVC production
by FY18 and this will reduce volatility in overall earnings.
Debt free by FY19:
Finolex plans to repay INR150-200cr of debt in
FY16 out of INR621cr at FY15 end. Given Operating Cash Flows of
INR650cr+ over FY17-FY18E and less than INR100cr of capex over
FY16-FY18E, we see scope for a debt free status by FY19E.
Valuations & View:
We expect revenue to grow at 7% CAGR on
subdued commodity prices and higher internal usage of PVC. Earnings
should see a sharp jump in FY16 (300%+) followed by lower double
digit growth in FY16 and FY17E. Reduced volatility in earnings and
improvement in ROE to 27% in FY18 from 5-year average of 14%
leaves scope for rerating. We value Finolex Industries at current TTM
valuation of 21x and recommend to BUY for a TP of INR400.
KEY FINANCIALS
Shares Outstanding (cr)
Market Cap. (Rs cr)
Market Cap. (US$ m)
Past 3 yrs Sales Growth (%)
Past 3 yrs NP Growth (%)
12.4
3795
553
6%
-14%
STOCK DATA
52-W High/Low Range (INR)
Major Shareholders (as of Dec 2016)
Promoter
Institutions
Public & Others
Average Daily Turnover(6 months)
Volume
Value (Rs cr)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
334/246
52.5
11.6
35.9
43448
1.86
9/12/6
15/28/27
Maximum Buy Price :INR310
Ravi Shenoy
(ravi.shenoy@MotilalOswal.com); Tel: +91 22 30896865
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.