Finolex Industries Ltd - Quarter Marred by One-Offs; Result Update Q2FY15:: Edelweiss

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Finolex Industries Ltd. (FIL) Q2FY15 sales and PAT of INR 386 cr and INR 14 cr belied our estimates of INR 429 cr and INR 38 cr respectively, primarily owing to inventory loss, prolonged plant shutdown and lower investment income. Key positives were: 1) healthy volume growth in PVC pipes business at 7% YoY 2) stable EBIT margins in PVC pipes (adjusted for inventory loss) and 3) strong volumes in CPVC pipes and fittings. Key negatives were: 1) inventory loss of INR 20 cr on account of declining PVC prices 2) increase of INR 10 cr in power and other operating expenses due to prolonged shutdown of plants for maintenance and 3) 21% YoY drop in consolidated EBITDA at INR 39 cr and 260bps fall in EBITDA margins to 10% YoY vs 16.3% in Q1FY15 (due to higher raw material costs as spread between EDC and PVC prices narrowed). We continue to believe that the long-term outlook for PVC pipes remains pretty buoyant on the back of robust demand from the irrigation space as well as from the replacement of GI pipes. Further, GST implementation in future would accelerate the company’s growth trajectory, as the domestic plastic industry is still dominated by the unorganised players. We expect FIL to sustain its historical growth trajectory with PAT CAGR of ~15% and RoE/RoCE of 20%-plus over FY14-16E.

Results belied expectations; PVC pipes volume growth steady

FIL posted a weak Q2FY15, with revenue flat YoY at INR 386 cr, led by lower EDC - PVC spreads due to fall in PVC prices. PVC pipes & fittings business reported a volume growth of 7% YoY for Q2FY15. PVC pipe revenues remained flat YoY at INR 278 cr, with PVC pipes’ average realizations declining by 7% YoY on the back of lower PVC prices. PVC pipes’ EBIT margins remained stable at 8.5%, adjusted for inventory loss. Going forward, we expect volumes to pick up due to strong underlying demand from the irrigation sector. Management expects PVC pipes & fittings volumes to grow by 10-15% for the full year FY15.

Gearing up for next phase of growth

Management highlighted that new product launch across geographies in the business of water management is scheduled going forward. Also, increased focus on high-margin products like PVC fittings (8% of revenues), CPVC pipes & fittings (1% of FY14 revenues) and Column Pipes will drive the next leg of growth. The company expects to double revenues from all these products over the next two years.  

Balance sheet consolidation on track

FIL has reduced its Buyers’ Credit from 360 days to 90 days, which has resulted in debt reduction of INR 126 cr. The company remains on track to cut debt, as it will generate high free cash flows going forward due to lack of major capex. As a result of the reduced Buyers Credit and improved margins, FIL’s ROCE has improved from 12% in FY13 to 21% in FY16E. We expect that as the company continues balance sheet consolidation, the ROCE will improve further going forward.

LINK

https://www.edelweiss.in/research/Finolex-Industries-Ltd--Quarter-Marred-by-One-Offs;-Result-Update-Q2FY15/10005189.html