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Margins disappoint, downgrade to Neutral!

Our view and valuation

Finolex Industries Ltd (FIL), reported a soft quarter wherein PVC biz volumes grew by 25%YoY & declined 21%QoQ. Pipe volumes increased by 29%YoY & degrew by 9%QoQ in Q1FY23 which was largely driven by higher growth in non?agri biz. However, margins witnessed a sharp contraction from 21.7%/16.6% in Q1FY22/Q4FY22 respectively to 10.6% in Q1FY23 owing to inventory loss due to sharp fall in PVC prices coupled with higher fuel cost which increased by ~48% sequentially. Additionally, company had a forex loss of Rs200?250Mn largely for the PVC biz

Going ahead, we believe demand from agri segment is likely to remain muted & major growth will be driven by non?agri segment. Hence, we reckon pipe biz volume should grow by 10%CAGR over FY22?FY24E. With further fall in PVC prices, we believe company will witness inventory losses in coming quarter. We expect FIL’s EBITDA margins to come in at 13%/15.5% in FY23E/FY24E respectively.  

At CMP, Finolex industries is trading at 20x/14x on FY23E/FY24E EPS of Rs6.6/9.3 respectively. We continue to value the company at 15x on FY24E EPS & arrive at a target price of Rs139 (previous Rs177), hence we downgrade our rating on the stock to NEUTRAL.  

Result Highlights

* Revenue for the quarter stood at Rs11.9Bn, reporting a growth of 28.8%YoY & a decline of 22%QoQ. Revenue was 4% below our estimates. Q1 revenue CAGR for FY20?FY23 came in at 8%.

* PVC biz revenue stood at Rs7.84Bn, registering a growth of 25.1%YoY & a 25% sequential degrowth (FY20?FY23 CAGR 14%). Pipe biz’s sales came in at Rs11.32Bn, reporting a 34%YoY growth & a 11%QoQ degrowth (FY20?FY23 CAGR 10%).

* PVC EBIT margins came in at 9% in Q1FY23 Vs 15%/25% in Q4FY22/Q1FY22 respectively. Pipe’s EBIT margins stood at 4% as compared to 5.2%/7.4% in Q1FY22/Q4FY22 respectively

* EBITDA stood at Rs1.25Bn, registering a steep decline both YoY & QoQ owing to contraction in EBITDA margins form 21.7%/16.6% in Q1FY22/Q4FY22 respectively to 10.6% in Q1FY23. Notably, other expense as %sales came in at 17.9% during Q1FY23 Vs 13.7%/10.2% in Q1FY22/Q4FY22 respectively

* Net profit stood at Rs0.99Bn in Q1FY23 as compared to Rs1.19Bn (excl exceptional gains) in previous quarter & Rs1.45Bn in Q1FY22. Company’s net profit growth in Q1’s over FY20?FY23 came in at 11%

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