Finolex Industries Q3 Review - Weak Result With Less Visibility Of Rebound In The Near-Term: Systematix

Systematix Research Report

Finolex Industries Ltd.’s large 27% earnings miss in Q3 was mainly due to lower realisation and weak margins in pipes and poor results of the PVC resin segment.

Consolidated revenue declined 9% YoY (19% miss) driven by lower realization (down 10% QoQ) in pipes and large volume miss in PVC-resin (down 32% YoY).

Gross margin contracted 389 basis points QoQ to 36%; Ebitda margin came flat QoQ at 11.8%. Weak margins in both the segments led to subdued margins. It generated Rs 1.16 billion cash flow from operation in Q3; the cash balance piling up to Rs 15.7 billion (yet to decide its usage).

Pipes volume (down 10% YoY) came soft and inline. On near-bottom PVC prices, management is hopeful to double sales volume in three-four years with agri mix reaching 50% (from ~32% currently).

For FY25, it expects single digit volume growth in agri segment (15-20% in non-agri). At $465/tonne PVC-EDC and $143/tonne PVC-VCM spreads, PVC-resin Ebit margin stood low at 9.6% (though recovered 180 basis points QoQ on liquidation of high-cost inventory).

However, the current low spreads ($410/tonne and $140/tonne, respectively) suggest weak margins in near future. PVC-resin is a commodity business with no pricing power, hence the volatility in margins.

We cut earnings by 15% for FY24 after a weak Q3 performance. However, we broadly maintain it for FY25E and FY26E.

We now estimate 12%/45%/40% compound annual growth rate in Finolex Industries’ revenue/Ebitda/PAT over FY23-26E (FY18-23: 10%/-10%/-4% CAGR), as volume growth and margins in pipes segment likely normalise and expand.

Given its low return on capital employed profile (~14% in FY26E) and ~20 times FY26E price/earning, we maintain 'Hold' rating on the stock, with an unchanged target price of Rs 220.

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