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Finolex Industries Ltd

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Recommendation CMP

BUY

Increasing rural consumption to drive growth

Finolex Industries Ltd (FIL) is the 2nd largest player in the PVC resin segment and the largest manufacturer of PVC pipes and fittings in India. It is the only PVC pipe manufacturer with its own PVC resin plant which gives it complete control on the quality of pipes. FIL mainly caters to rural markets of India and with rural economy poised for substantial growth; FIL is positioned to reap the benefits.

Rs.157

rage

Target Price Sector

Rs. 218

Plastic Products

Stock Details
BSE Code NSE Code

500940 FINPIPE FNXP IN 1,947 47.57% 179/73 39529 10.00 55% 12.41

Bloomberg Code Free Float (%)

Market Cap (Rs cr) 52- wk HI/Lo (Rs) Avg. volume BSE Quarterly)

Face Value (Rs)

Dividend (FY13) Shares o/s (Crs) Relative Performance 1Mth -8.4% 0.3% 3Mth 19.3% 2.7%

Q3FY14 result was good on operational front with EBITDA margins at 17.9% higher on YoY basis. PVC resin segment witnessed sharp improvement as advantage of manufacturing PVC via EDC route resulted in higher margins. Prolonged monsoon impacted the PVC pipes segment and it witnessed volume de-growth of 7.4% YoY. However, in Q4FY14E volumes are expected to witness improvement from current levels. Management has scaled down the volume growth for PVC pipes and fittings from earlier 15% to 8-10% for FY14E. Power segment witnessed decline in margins as there was maintenance shutdown in the power plant and FIL had to resort to purchase from outside (to the tune of Rs 15.35 cr) which resulted in higher costs and is one off in nature. Going forward, we are positive on FIL owing to: Strong demand of PVC pipes driven by good monsoon and rural buoyancy Focus on increasing fittings contribution which is margin accretive segment Strong distribution network of dealers and distributors across the country Ability to maintain higher margins owing to usage of EDC process in manufacturing PVC We believe that in the long term, FIL will be perceived as a PVC pipe company as compared to PVC (Commodity) company as it is consistently increasing share of PVC pipe in total revenues. PVC being commodity is highly volatile and thus we have seen that the margins of the company have also remained in tandem to the movement of PVC prices. As FIL is focusing on being converted into 100% pipe company, business will become more stable and margins will also remain less prone to volatility. Other PVC pipe manufacturers like Supreme Industries and Astral Poly enjoy much higher multiple as compared to FIL. In our view, with increasing contribution from PVC pipe, FIL will also start commanding higher multiple as compared to current levels. At CMP, the stock is trading at 7.9x FY14E and 6.7x FY15E Adj EPS and 6.1x FY14E and 5.2x FY15E EV/EBITDA; lower than the peer group primarily due to lower return ratios, volatility in margins and considerable proportion of business coming from PVC resins. An improvement in return ratios is likely to be the key trigger for the re-rating of the stock going forward and we believe that the stock will command a higher multiple from current levels. We have seen a sharp run up in the stock in the last one year (+101%); and we believe that the stock still holds potential to further re-rate from current levels. We recommend investors to BUY the stock for a target price of Rs 218 (based on SOTP basis) generating an upside of 38.7% from current levels.
Margin (%) Adj PAT (Rs cr) Adj Margin (%) EPS (Rs) PE (x) EV/EBITDA

1Yr 101.0% 6.1%

Finolex Sensex

Shareholding Pattern

31 Dec 13

st

Promoters Holding Institutional (Incl FII) Corporate Bodies Public & others
Sunil Jain HOR Retail Silky Jain Research Analyst Year

52.43% 5.48% 6.48% 35.61%

(91 22 3926 8196) sunil.jain@nirmalbang.com (+91 22 3926 8178) silky.jain@nirmalbang.com

Revenues (Rs cr)

Growth (%)

EBITDA (Rs cr)

FY12 FY13 FY14E FY15E

2099.8 2144.8 2306.7 2635.7

6.17% 2.15% 7.55% 14.26%

216.8 358.7 425.6 491.7

10.3% 16.7% 18.5% 18.7%

ge

75.2 204.9 246.4 296.0

3.6% 9.6% 10.7% 11.0%

6.1 16.5 19.9 23.4

25.9 9.5 7.9 6.7

13.5 7.7 6.1 5.2

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Company Description
Finolex Industries Ltd (FIL) was incorporated in 1981 and is a part of Finolex group. The Finolex group comprises of two listed companies, Finolex Industries which is managed by Mr. Prakash Chhabria (Executive Chairman) and Finolex Cables which is managed by Mr. D.K Chhabria (Executive Chairman). There is a cross holding between the group companies. Finolex Cables holds 32.4% of FIL and FIL holds 14.5% of Finolex Cables. FIL is the second largest player in the PVC resin segment and the largest manufacturer of PVC pipes and fittings in India. It is the only manufacturer with its own PVC resin plant which gives it complete control on the quality of pipes. It is mainly involved in rural markets of India and with rural economy poised for substantial growth; Finolex is positioned to reap the benefits. Business units PVC Resins: Finolex is the second largest player in PVC resins after Reliance Industries. PVC finds applications in manufacturing of pipes, insulation of cables, window profiles, flooring, blister packaging, etc. The best thing about PVC is that new areas of application are being continuously developed. Grades of PVC resin: Suspension Suspension PVC resin is the powdered form which is used in many rigid and semi Rigid applications like pipes, conduits, hoses and tubes, wire and cable coating etc. FIL has PVC suspension capacity of 250,000 tpa. Emulsion Emulsion PVC (Poly Vinyl Chloride) resin is a flexible application which is used in artificial leather cloth, footwear, flooring etc. FIL has recently completed expansion of the Emulsion PVC resin capacity from 11,000 tpa to 22,000 tpa. As per FIL, there is a demand supply gap in the Indian market for Emulsion PVC and FIL aims to capture this situation by expansion. The company manufactures PVC by two routes: FIL manufactures 60% from EDC to VCM to PVC and 40% from VCM to PVC

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EDC (Ethylene Dichloride) route: Ethylene Dichloride Vinyl Chloride Monomer Chlorine Ethylene

ge

PVC

VCM (Vinyl Chloride Monomer) route:

Vinyl Chloride Monomer

PVC

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Industry snapshot for PVC resin: The global demand of PVC stands at around 37.5 mn tpa whereas the market has grown by mere 2% in FY13. On the other hand, Indian market for PVC resin stands at 2 mn tpa and has grown by ~12% in FY13. Globally, the application of PVC in pipes and fittings accounts for almost 43% of the total consumption. In India, the application of PVC in pipes and fittings is almost 70% of the total consumption. The per capita consumption of PVC resin in India is hardly 2 kg as compared to 10 kg in China and 12 kg in USA. It is expected that the PVC demand in India will continue to witness higher growth as compared to global markets in the coming years. At global levels, PVC manufacturing capacity exceeds the global demand.

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In India, the total demand for PVC stands at about 2 mn tpa of which 50% in imported due to limited capacity available in the domestic market. Major players in this industry are Reliance, Finolex and Chemplast. No major capacity expansion is planned by the industry as a whole as it is highly capital intensive and generates lower return.
700 600 650

Domestic PVC Capacities (KT)

500
400 300 200 270 250

ge

100 0 Reliance Finolex Chemplast

90

61

DCW

Shriram

Source: Company data, Nirmal Bang Research As per FIL, in order to set up a plant of around 130,000 tonnes the approximate cost stands at around Rs 1200 cr and takes nearly 3 years for the plant to commission and will result in revenue of 700 cr; indicating that the asset turnover ratio is lower in the segment. PVC pipe and fittings: FIL is the largest PVC pipe manufacturer in India. FIL offers a wide range of PVC pipes and fittings for diverse applications in agriculture and housing. The pipes range between 20 mm to 400 mm diameter. Approximately 70% of the pipes manufactured by FIL are used for irrigation purposes while the balance is used in the construction industry. Production capacity of FIL in the pipes division is about 2,10,000 tpa which is spread over its three plants: Urse (near Pune) Ratnagiri Masar (Gujarat) 80,000 tonne 100,000 tonne 30,000 tonne (which the company intends to scale to 50,000 tonnes.

Source: Company data, Nirmal Bang Research

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Power plant In March 2010, FIL had commissioned its 43 MW captive coal based power plant at Ratnagiri to cater to its power requirements of the PVC plant. About 65% of the power is used in house to meet its captive requirements while the rest is sold to Maharashtra State Electricity Board. This results in huge savings for the company and also acts as an additional source of income by selling excess power @ Rs 4.1 per unit. FIL intends to use the full power capacity for consumption as it is looking to expand the pipe capacity going forward with an increase in demand. The company has its own jetty for import of raw material.

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Investment Rationale
Elasticity to manufacture PVC via 100% VCM or mix of VCM and EDC depending on the pricing FIL has the unique benefit as compared to other players where it can manufacture PVC via both routes- EDC and VCM. If VCM prices are favorable, FIL can increase the production from VCM upto 100% instead of EDC. In the current scenario, where the VCM prices are higher, FIL is manufacturing around 60% of the total production via EDC (which has a high delta advantage) which is also reflected in the stupendous improvement in margins in last few quarters. The delta impact is much higher in EDC process as the prices of EDC are lower as compared to the imported prices of VCM.

ge

Delta =50

EDC

VCM

PVC

Delta = 250

In current situation, there is over capacity of EDC which will keep EDC prices lower. We have seen some uptick in the EDC prices recently; however as per management it is temporary in nature as some of the facilities have been non operational leading to increase in demand and thus prices. In our view FIL stands beneficiary as it can produce upto 60% of PVC through this method which will lead in higher margins for the company. And in times when VCM prices are favorable, it can increase production from VCM instead of EDC method. So the company is in a win-win situation in both the cases. Healthy demand for PVC pipes to continue PVC pipe industry is growing at a steady pace witnessing CAGR of over 10% in the last 5 years. Currently, the total pipe market stands at about 1.6 MT as per Industry estimates. The pipe industry has been largely governed by unorganised markets (50% is unorganised). Within the organised segment, Finolex Industries has a market share of nearly 30%.

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Segmental usage of Pipes 3% 1%

10%

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Irrigation Water supply

Sewerage

12%

45%

Plumbing
Flexible

29%

Others

Source: Company data, Nirmal Bang Research We believe that going forward, demand for PVC pipe will continue owing to following reasons: Shift from galvanized pipes to PVC pipes Organised players gaining market share from unorganised players. Government spending on infrastructure. Durability of PVC pipes along with the various applications makes it preferred option over conventional pipes. Construction and agricultural sector are the main triggers for the increase in demand for PVC pipes. Of the two above mentioned sectors, agricultural sector is already seeing signs of revival which is expected to result in increased demand for PVC pipes. The company is already undertaken expansion of pipe capacity at its Gujarat plant (20,000 MT expected to be commissioned by March 2014). In addition, FIL is also focusing on debottlenecking in existing plants to increase pipe capacities. o Good monsoon to drive demand for pipes Agriculture accounts for around 15% of GDP in India and nearly 800 million people live in rural areas. As the PVC pipe industry largely caters to irrigation needs of farmers, any improvement in the monsoon will lead in higher spending capacity of the farmers and thereby result in buoyant growth for the PVC pipe industry as well. The distribution of monsoons was almost normal across India this year which augurs well for rural growth. We believe that demand for PVC pipes will remain good driven by better monsoon. Other factors to drive growth for pipes: o Only 40% agricultural land is under irrigation. Of this 60% dependent on groundwater for its requirements o Continuous depletion of water tables across the country, forcing people to source water from far flung places Focus on improving distribution network in less present areas FIL has most of the plants located in the western region of the country. However, this has not been a barrier for the company in any form as it has been able to sell products in almost all the regions. In addition, the company has been able to sell most of its products at a premium as compared to other players considering the brand name created by FIL. FIL has a wide spread network of dealers and distributors which caters to the ever increasing demand from the various parts of the country. However, FIL is more focused in the western and the southern markets where almost 70% of the sales happen. As FIL is less present in the eastern and northern regions, it intends to focus on increasing visibility and presence in the North and East India. P age |5

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Region West South North East Source: Company data, Nirmal Bang Research

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% of sales 40% 30% 20% 10%

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Continuous expansion in PVC pipe capacity FIL has continuously expanded its PVC pipe capacity over the years to meet the ever increasing demand for the PVC pipes. The capacity has increased at a CAGR of 15.7% over the last 10 years.

Source: Company data, Nirmal Bang Research Increased focus on fittings business PVC fittings business is a high value and high margin business for the company. Fittings are more profitable than pipes as the realization prices are higher by almost Rs 35,000-40,000 per tonne. As the business is a margin accretive business for the company, FIL has increased its pipe fittings capacity from 7,000 tpa to 12,000 tpa at Pune. Earlier, fitting was supplied along with own pipe application whereas now the company has started supplying fittings for PVC pipe manufactured by others as well. Currently fittings contribute nearly 6-7% of the total PVC pipe and fitting volumes and the management is targeting to increase the contribution from current levels to 15% going gorward. FIL currently offers about 650 varieties of fittings. FIL sells its pipes & fittings via a network of ~500 dealers and ~15,000 retail outlets. We believe that the expansion in capacity and higher realisation prices would continue to lead to improvement in margins in the long term. Margins to continue to witness improvement FIL reported EBITDA margin of 17.9% in Q3FY14 driven by improvement in margins in the PVC business. However, margins in the PVC pipe business was impacted owing to prolonged monsoon and thus FIL could not take the benefit of it in the last quarter. Going forward, we believe that margins will continue to witness improvement from current levels owing to following reasons: o Increase in contribution from fittings o Good monsoon to lead to improved demand o Higher margin in EDC route of manufacturing of PVC.

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25.0% 20.0%

C overage

EBITDA margins

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18.1%

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20.9% 16.7% 16.8% 17.9%

15.0% 10.0% 5.0% 0.0%

11.1%

10.3%

FY10

FY11

FY12

FY13

Q1FY14

Q2FY14

Q3FY14

Source: Company data, Nirmal Bang Research Change in perception: Transformation from PVC to PVC pipe company FIL will be perceived as a PVC pipe company as compared to PVC (Commodity) company as it is consistently increasing share of PVC pipe in total revenues. FIL has reduced sales of PVC to outside parties in the last 4-5 years and going forward in next 1-2 years, it intends to use 100% of PVC for internal consumption. PVC being commodity is highly volatile and thus we have seen that the margins of the company have also remained in tandem to the movement of EDC, VCM and PVC prices. As FIL is focusing on being converted into 100% pipe company, business will become more stable and margins will also remain less prone to volatility. Other PVC pipe manufacturers like Supreme Industries and Astral Poly enjoy much higher multiple as compared to FIL. In our view, with increasing contribution from PVC pipe, FIL will also start commanding higher multiple as compared to current levels.
250000 200000 90.0%

77.7%
63.4% 60.7%

80.0%
70.0%

150000
100000

55.6%

60.0%

46.3%

50.0%
40.0% 30.0%

50000
0

20.0%
10.0% 0.0%

FY09

FY10
Sales of PVC

FY11

FY12

FY13

% of total production of PVC

Source: Company data, Nirmal Bang Research

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Quarterly Analysis

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Particulars

Q3FY14

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Q3FY13

YoY (%)

Q2FY14

QoQ (%)

Total Revenues Raw Mat Cons Emp Exp

660 430 19 37 55 542 118

614 434 17 22 48 520 94 15.3% 13 80 11 13 (37) 42 12 31 57 9.3% 4.6

7.4% -0.8% 16.3% 69.8% 14.5% 4.1% 25.6% 31.7% 24.5% -92.2% 44.8% 118.4% 108.7% (0.2%) (0.2%)

390 231 17 20 40 308 82 20.9% 15 67 17 12 (33) 39 12 27 50 12.9% 4.0

69.2% 86.4% 11.4% 89.5% 35.7% 75.7% 44.7% 19.8% 50.3% -94.8% 54.0% 135.2% 133.0% 13.8% 13.8%

Power and fuel Other expenses Total Exp EBITDA EBITDA margins Depreciation EBIT Other Income Interest Exceptional items PBT Tax Profit After Tax Adjusted Profit PAT margins

17.9% 18 100 1 19 10 92 28 64 57 8.7%

Adj Diluted EPS 4.6 Source: Company data, Nirmal Bang Research

Revenues increased 7.4% YoY to Rs 660 cr. Power and fuel cost increased as the power plant was shut for maintenance reason which led to FIL buying power from outside at higher cost. The cost is one off and is not expected to recur in the next quarter (~ Rs 15.35 cr was due to power purchase). EBITDA margins witnessed improvement on YoY basis led by higher gross margins. Sequentially margins were lower as there was no raw material imports in the last quarter and had led to higher gross margins. Other income declined as there was no redemption of investments and no dividend income during the quarter. Interest expenses were higher as it included cost of coverage of dollar bookings. FIL now covers almost 70% of its imports. Stable rupee lowered the volatility witnessed by FIL in the previous quarters. The company reported forex gains of Rs 9.643 cr. As on date, the realized loss of the company stands at Rs 32.73 cr while the unrealized profit stands at 42.37 cr.

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Segmental Analysis

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Particulars PVC

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Q3FY14

Q3FY13

YoY (%)

Q2FY14 325 278

QoQ (%)

ge

491 382

441 356

11.5% 7.3% (43.9%) 5.8% 1.6% 7.4% 8.0% 176.3% (85.0%)

51.3% 37.4% (14.9%) 41.1% (2.2%) 69.2% 87.9% 43.8% (69.6%)

PVC pipes and fittings

Power Total Total EBIT PVC

35

62 858 244 614 65.84 14.9% 12.30 3.5% 20.90 33.9%

41 643 253 390 37.87 11.7% 23.62 8.5% 10.32 25.4%

907 248 660 71.14 14.5% 34 8.9% 3

Less: Inter segmental

Margin PVC pipes and fittings Margin Power

Margin 9.1% Source: Company data, Nirmal Bang Research

Financial Analysis
Sales to grow CAGR 11% over FY13-FY15E, margin 18.7% Sales grew 3.7% over FY11-13 mainly on account of volume growth in PVC pipe and fitting business; while the companys PVC business witnessed a decline of 1.3% over the same period. Price hike taken by the company in the PVC pipes and fitting business and expansion in capacity to almost double in the same period led to a significant growth in the pipes and fittings segment. EBIDTA margins during the same period have increased from 11.1% to 16.7%. We expect margins to witness improvement from FY13 levels to 18.5% in FY14E and 18.7% in FY15E. In Q3FY14, margins stood at 17.9% and management targets to improve it going forward with improvement in PVC pipes and fittings business. The major benefit is expected to come from decline in EDC prices which will result in a higher delta and thereby result in higher margins. We have seen that the EDC prices have increased in the recent past to over $450 levels. This is primarily due to some supply constraint as some of the facilities were shut, however additional supply of EDC expected in coming month will again lead to decrease in EDC prices and the benefit of this should come up from Q4FY14E onwards. Going forward, we have assumed increased contribution from the PVC pipes and fittings business as compared to PVC business and thus expect a CAGR growth of 11% in sales over FY13-FY15E and CAGR growth of 17.1% in EBITDA.

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3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0

C overage

Net sales and growth

40.0%

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ge

35.9%

35.0%
30.0% 25.0% 14.4%

20.0%
15.0%

7.6% 7.8%
6.2% 1.3% -2.5%

10.0%

5.0%
0.0% -5.0%

FY09

FY10

FY11
Sales

FY12

FY13
YoY growth

FY14E

FY15E

Source: Company data, Nirmal Bang Research

20.0% 18.0% 18.1%

EBITDA margins 16.7%

18.5%

18.7%

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

FY09

11.1%

10.3%

0.7%
FY10 FY11 FY12 FY13 FY14E FY15E

Source: Company data, Nirmal Bang Research Forex losses to reduce substantially The company incurred huge forex losses on account of rupee depreciation as the company has large proportion of imports (~90% of raw material is imported). Though the company hedges around 50% of forex exposure but fluctuation in currency in the recent past led to forex losses in the open position. Going ahead we believe that the volatility/ fluctuation in profits due to forex will reduce as management is increasing its hedging position. We have not assumed any significant loss or gain on account of this in Q4FY14 and FY15E. Other income Other income of the company will come down as the company has utilized liquid investments. Debt to equity ratio FIL intends to reduce its debt to equity ratio by repayment of debt going forward. No major capex planned will further help in improving the debt to equity ratio.

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1.2

1.2

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1.4 1.0 0.8

0.6 0.4

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1.6

verage

1.8

C overage

Debt/ Equity Ratio 1.6 1.2

0.8 0.6

0.2 0.0
FY11 FY12 FY13 FY14E FY15E

Source: Company data, Nirmal Bang Research We expect the company to witness a CAGR growth of 46.2% in profitability over FY13-FY15E leading to an improvement in its RoE from 19.7% in FY13 to 30.8% in FY15E and RoCE to improve from 13.8% in FY13 to 26.3% in FY15E.
35.0% 30.0% 25.0% 24.5%

Return ratios
30.8% 26.3%

20.0% 15.0%
10.0% 5.0% 0.0% FY11 FY12 12.5% 12.6%

19.7% 10.8%
11.7% 13.8%

19.8%

FY13

FY14E

FY15E

ROE

ROCE

Source: Company & Nirmal Bang Research

Healthy dividend yield FIL has consistently been paying healthy dividend to its shareholders. The company paid dividend of Rs 1 even after reporting loss in FY09. In FY13, the company increased dividend payout to 50% from 28% in FY10. Going forward, with no significant capex lined up, we expect the dividend payout to be strong and result into an attractive yield of 3-4%. We expect dividend payout of 60% for FIL in FY14E translating into dividend yield of 3.5%. Real estate value FIL has approximately 70 acres of surplus land at Pune. The book value of the land is negligible. We believe that the free land could be used for creating additional capacity (when the opportunity arises) or can be sold leading to significant gains. The amount realized could be used for investment in business and also a part of it can be rewarded to shareholders. We have not factored in value from this land sale in our estimates.

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There is no direct competitor for Finolex Industries as the business model of FIL is different as compared to other companies. However, we have tried to compare Finolex with Supreme Industries as both the companies have some portion of the business as PVC pipes. Finolex is the largest player in PVC pipes followed by Supreme Industries. If we look at the PVC pipes margin of Finolex with Supreme Industries Ltd, we find that Finolex margins are quite low. The margins of both the companies are not comparable as Supreme is present in other varieties of pipes as well. As Supreme is present in other business which is much stable in nature as compared to Finolexs PVC resin business, it enjoys higher return ratios as compared to Finolex and thereby trades at a higher multiple.
EBIT Margin comparison 15.9%
2.0

verage

Peer comparison

C overage

20.0% 15.0% 10.0% 5.0% 0.0%

FY09 4.1% 12.2%

ge

1.8 1.4

12.5% 11.1%

13.4%
11.5% 9.2% 6.5%

1.5

Working capital cycle 1.6 1.6

1.3

1.7

1.5 1.0

1.0

1.0

6.3%
0.5 0.3

0.0

FY10

FY11

FY12

FY13

FY09

FY10

FY11 Supreme Finolex

FY12

FY13

Supreme

Finolex

Source: Company & Nirmal Bang Research

Valuation and Recommendation

We are positive on FIL owing to 1) Increasing contribution from PVC pipes 2) Strong demand of PVC pipes going ahead driven by good monsoon and rural buoyancy. 3) Strong distribution network of dealers and distributors across the country. 4) Ability to maintain higher margins owing to usage of EDC process in manufacturing PVC 5) Reduction in D/E ratio 6) Lower capex 7) Decent dividend payout FIL profitability has remained highly volatile in the past owing to volatility in the PVC market. However, going forward we believe that with increasing contribution from PVC pipes - representing stable business will lead to an improvement in the companys financial performance and also result in improvement in return ratios. At CMP, the stock is trading at 7.9x FY14E and 6.7x FY15E Adj EPS which is much lower than the peer group primarily due to lower return ratios, volatility in margins and considerable proportion of business coming from PVC resins. Other PVC pipe manufacturers like Supreme Industries and Astral Poly enjoy much higher multiple as compared to FIL. In our view, with increasing contribution from PVC pipe, FIL will also start commanding higher multiple as compared to current levels. We believe that FIL is all set to enter the next phase with growth in profit and substantial improvement in return ratios Such a tremendous improvement in the return ratios are likely to be the key trigger for the re-rating of the stock going forward and we believe that the stock will command a higher multiple from current levels.

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Finolex Industries Ltd

verage

250

C overage

P/E - Forward

150

100

50

Oct-08

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Oct-11

200

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Oct-12

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Oct-13

Oct-09

Oct-10

Jan-09

Jan-10

Jan-13

CMP

2.0 X

4.0 X

6.0 X

8.0 X

10.0 X

Source: Company & Nirmal Bang Research We have seen a sharp run up in the stock in the last one year (+101%); and we believe that the stock still holds potential to further re-rate from current levels. We recommend investors to BUY the stock at current levels for a target price of Rs 218 generating an upside of 38.7% from current levels. Our target price is based on SOTP: We have valued Finolex Industries on the EV/EBITDA of the different business segment. FY15E PVC Pipe PVC EBITDA 204 341 Multiple 8 5 EV 1,630 1,702 Total EV of the company 3,333 Loan 631 Total Mkt cap of the company 2,702 No of shares outstanding 12.41 Target price 218

Key Risks
Threat from unorganized players in the PVC pipes and fittings business may lead to severe competition and thereby impact on margins Sharp volatility in crude oil prices can impact the raw material cost for the company as it is highly dependent on crude. Further depreciation of rupee can impact raw material cost as company imports 90% of its raw material requirement.

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Jan-14

Jan-11

Jan-12

Jul-10

Jul-11

Jul-12

Jul-13

Jul-08

Jul-09

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Financials
Profitability (Rs. In Cr) Revenues % change EBITDA % change in EBIDTA Depn & Amort Operating income Interest Other Income Exceptional items PBT Tax Tax rate% Rep PAT Adj PAT Adj CEPS Adj EPS Quarterly (Rs. In Cr) Revenue EBITDA Dep Op Income Interest Other Inc. Exceptional items PBT Tax PAT Adj PAT EPS (Rs.) Performance Ratio Adj PAT growth (%) EBITDA margin (%) Rep PAT margin (%) Adj PAT margin (%) ROCE (%) ROE (%) Valuation Ratio Price Earnings (x) Price / Book Value (x) EV / Sales EV / EBITDA

C overage

FY12A 2099.8 6.2% 216.8 (1.3%) 75.5 141.2 75.0 30.46 0.00 96.7 21.6 22% 75.2 75.2 12.1

FY13A 2144.8 2.1% 358.7 65.5% 54.4 304.3 51.4 33.37 (96.09) 190.2 54.0 28% 136.1 204.9 20.9

FY14E 2306.7 7.5% 425.6 18.6% 65.5 360.1 63.0 45.10 (76.81) 265.4 74.3 28% 191.1 246.4 25.1 19.9 Sep.13 384.9 81.5 14.8 66.7 12.2 17.2 -32.6 39.1 11.7 27.4 50.2 4.05 FY14E 20.2% 18.5% 8.3% 10.7% 19.8% 24.5% FY14E 7.9 2.3 1.1 6.1

FY15E 2635.7 14.3% 491.7 15.5% 71.0 420.7 56.3 39.81 0.00 404.2 113.2 28% 291.0 291.0 29.2

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Financial Health (Rs. In Cr) Share Capital Reserves & Surplus Total Shareholders equity Loan Funds Other Liabilities Total Liabilities Net Fixed Ass (Incl WIP) Investments Inventories Sundry Debtors Cash & Bank Loans & Advances CL & P Net Deferred tax assets Other assets Total Assets Cash Flow (Rs. In Cr) Operating OP before WC Change in WC (-) Tax CF from Operation Investment Capex Other Investment Other Income Total Investment Financing Dividend Paid Change in Equity Change in Borrowings Others Total Financing Net Chg. in Cash Cash at beginning Cash at end Per Share Data BV per share Dividend per share

FY12A 124.1 538.0 662.1 1012.8 144.4 1819.3 869.4 493.2 326.3 46.9 29.1 223.6 174.2 (89.9) 94.83 1819.3 FY12A 216.8 (15.0) (21.6) 180.1 (61.9) (285.2) 30.5 (316.7) (37.2) 0 277.9 (26.9) 138.8 2.2 26.9 29.1 FY12A 4.3 3.0

FY13A 124.1 597.1 721.2 840.1 118.8 1680.1 930.1 359.6 482.8 38.7 9.0 198.6 264.8 (93.6) 19.65 1680.1 FY13A 358.7 60.8 (54.0) 365.6 (144.5) 133.6 33.4 22.5 (68.3) 0 (301.8) 13.5 (408.1) (20.0) 29.1 9.0 FY13A 4.7 5.5

FY14E 124.1 713.7 837.8 662.6 139.5 1639.9 914.6 227.4 577.2 43.0 22.6 161.5 230.4 (95.7) 19.65 1639.9 FY14E 425.6 (166.3) (74.3) 185.0 (50.0) 132.2 45.1 127.3 (74.5) 0 (177.5) 16.2 (298.8) 13.6 9.0 22.6 FY14E 5.4 6.0

FY15E 124.1 930.2 1054.3 631.4 172.4 1858.1 903.7 327.4 663.8 50.5 36.4 184.5 232.1 (95.7) 19.65 1858.1 FY15E 491.7 (73.8) (113.2) 304.7 (60.0) (100.0) 39.8 (120.2) (74.5) 0 (31.2) (8.8) (170.8) 13.8 22.6 36.4 FY15E 6.8 6.0

6.1 Mar.13 624.2 109.9 13.2 96.8 8.2 4.3 17.8 110.6 31.3 79.3 66.6 5.37 FY12A -1.3% 10.3% 3.6% 3.6% 10.8% 11.7% FY12A 25.9 2.9 1.4 13.5

16.5 June.13 555.1 94.6 14.6 79.9 13.7 19.4 -53.9 31.8 9.1 22.6 61.1 4.92 FY13A 172.7% 16.7% 6.3% 9.6% 13.8% 19.7% FY13A 9.5 2.7 1.3 7.7

23.5 Dec.13 654.3 118.0 17.7 100.2 18.8 0.9 9.6 92.0 28.1 63.9 57.2 4.61 FY15E 18.1% 18.7% 11.0% 11.0% 26.3% 30.8% FY15E 6.7 1.8 1.0 5.2

Source: Company & Nirmal Bang Research

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NOTES

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Disclaimer:
This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt Ltd) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010

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