Buy Finolex Industries Ltd For Target Rs.173 - Anand Rathi Share and Stock Brokers
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Disappointing performance, near-term pain to persist; retaining a Buy
Finolex’s Q1 FY23 revenue grew 23% y/y to Rs11.9bn. Higher input prices slashed the gross margin 726bps y/y to 32.8%. This and higher other operating expenses further hurt the EBITDA margin, which contracted 1,112bps y/y to 10.6%. Higher other income and lower tax restricted the decline in PAT (Rs992m) to 32% y/y (ARe: revenue/EBITDA margin/ PAT of Rs13.2bn/16.3%/Rs1.6bn). The performance considerably belied our expectation.
Performance disappoints, pricing plays havoc. High prices at the start of the quarter led to a build-up of high-cost stocks; the fall in prices toward the quarter’s end led to unsold stocks being marked down. This cut into profits.
More sales volumes (y/y) drove revenue growth. Sales volumes of PVC resin and PVC pipes & fittings were up 25% and 29% y/y to 62,746 and 71,960 tonnes respectively (sequentially down 21% and 9%). Realisations in PVC resin were subdued (Rs125/kg); in PVC pipes & fittings they rose 4% y/y to Rs157 (sequentially down 5% and 3% respectively).
Healthy balance sheet. Significant capex at this stage has been ruled out as capacity utilisation is not yet at an optimum level. The company has surplus cash of ~Rs13bn. Inorganic growth opportunities are being explored in case otherwise shareholders will be rewarded appropriately (timeframe uncertain).
Valuation. At the CMP, the stock trades at 15.9x/13.4x FY23e/FY24e EPS. It has fallen a steep 46% from its 52-week high (16%/26% in the last 3M/6M). Performance would be muted as the near-term pricing situation is challenging (likely to stabilise by end-Q2 FY23). However, we derive comfort from the encouraging demand outlook (lower PVC resin prices would boost off-take). Also, an early announcement of surplus-cash deployment to reward shareholders or for inorganic opportunities could boost sentiment. Hence we maintain a Buy rating on the stock, cutting our TP to Rs173 (earlier Rs218) based on 17.5x (unchanged) FY24e earnings.
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