Finolex Industries Ltd. - Margins Spring A Positive Surprise; Result Update Q3FY16 ::Edelweiss

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Finolex Industries Ltd. (FIL) Q3FY16 revenue numbers were in line with our est but EBIDTA margins and PAT exceeded our est. FIL reported revenues at INR 547cr, (down 15% YoY) led by due to lower realization in the PVC pipes & fittings segment and marginally lower volume in PVC resin segment. However, EBITDA grew strongly to INR 84cr and margins expanded by 420bps to 15.4% (11.2% in Q2FY16, -6% in Q3FY15) due to lower raw material costs, as global EDC prices corrected during the quarter due to sharp correction in crude prices. PVC pipes volumes grew by 9% this quarter on YoY basis. 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 and RoE/RoCE of 20%-plus over FY17-18E.

Revenues inline; PVC pipes volumes and margins improve

FIL Q3FY16 revenues, at INR 547cr (declining 14% YoY) were in line with our est. PVC resin reported flat revenue growth with volumes de-growing by 2% and realizations remaining flat YoY. PVC resin EBIT margins improve to 13% vs 7.7% QoQ due to sharp improvement in PVC/EDC spreads and inventory gains.  PVC pipes & fittings business reported volume growth of 9% YoY for Q3FY16. PVC pipes’ EBIT margins improved by 80bps to 8.7%, on back of falling crude oil prices during Q2FY16 which resulted in lower raw material costs down 200bps QoQ. Going forward, we expect volumes to pick up due to strong underlying demand from the irrigation sector and margins to improve sharply in PVC resin business as spreads between EDC and PVC resin have improved in Q3.

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 (7% of revenues), CPVC pipes & fittings (2% of FY15 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

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https://www.edelweiss.in/research/Finolex-Industries-Ltd--Margins-Spring-A-Positive-Surprise;-Result-Update-Q3FY16/10007049.html