Recommendation From Plastic Products Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

FINOLEX INDUSTRIES 

REAPING A RICH HARVEST FROM PLASTIC PIPES

BSE Code: 500940
CMP: Rs.603
FV: Rs 10. 
BSE Volume:3300 

HERE IS WHY Expanding production capacity Shifting from B2B to B2C Favourable macroeconomic factors

Finolex Industries Limited is one of the top manufacturers of PVC pipes and fittings and the third largest PVC resin manufacturer in the country. Finolex Industries has its production facilities located in Pune and Ratnagiri in Maharashtra and Masar in Gujarat. The company operates through two key business segments, viz. PVC pipes and fittings.

In PVC pipes, the company manufactures a wide range of products which cater to the agriculture and non-agriculture sectors. The company is the only PVC pipe manufacturing company in India which enjoys backward integration with its own PVC resins manufacturing unit. It also sells PVC resin in the open market. Further, the company has a captive power plant which ensures a steady power supply and reduces the manufacturing costs. The company mainly caters to agricultural sector and 70 per cent revenue is derived from this sector.

In terms of financial performance, the company's revenue during the first quarter of FY19 was largely flat at Rs.827.9 crore as against Rs. 824.3 in the corresponding quarter of last year. Its EBITDA for the first quarter of FY19 was at Rs.194 crore as against Rs.130.6 crore in the corresponding quarter of the last fiscal, which represents growth of almost 48 per cent YoY. The EBITDA margin for the quarter stood at approx. 23.4 per cent as against ~16.14 per cent in the corresponding quarter of last year. The net profit for the quarter surged almost 30 per cent YoY to Rs.103.3 crore

In terms of valuation, the stock of Finolex Industries is currently available at P/E multiple of 23.2x on TTM earnings, which is five-year median P/E. Also, its price-to-book ratio of 2.6x is far below the five-year median P/B of 3.7x. As on FY18, the company's RoCE stood at 14.8 per cent.

The company will incur a capex of around Rs.100 crore to expand capacity to 370,000 MT by the end of FY19. Further, by FY21, the company aims to increase its total production capacity from the present 330,000 million tonnes to 450,000 million tonnes. The key industry that consumes almost 45 per cent plastic pipes is irrigation sector. In India, overall 14.2 crore hectares of land is cultivated, of which only around 50 per cent is irrigated. Thus, this situation provides immense opportunity for players like Finolex Industries to grow in this space.

Besides, the real estate industry is also a major end-user of plastic pipes and the government's initiative such as 'Housing for All' is expected to further aid the demand growth. Additionally, on the back of strong macro factors such as favourable monsoon, pick-up in housing and construction segment, Finolex Industries is expected to witness strong traction in the coming years.

Remarkably, the company's continued focus on increasing value-added offerings such as CPVC and fittings is likely to boost its bottomline in the years to come. The company is shifting its business model from B2B to B2C, which would further aid in margin growth going forward. Owing to all these factors, we urge our reader-investors to BUY this stock.