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Higher raw material prices weighed on margins

Summary

Finolex Industries’ (FIL) Q1FY23 result was a mixed bag as net sales was beat to our estimate, while margins disappointed owing to inflationary raw material prices. Higher raw material prices dented on demand economics which in turn resulted in lower agri-pipes off-take. However, on a positive note non-agri pipes demand traction was encouraging. The management guided that softening of raw material prices will ease the pricing pressure and boost demand going forward. Net sales increased by 23.2% YoY to Rs11.8bn, while EBITDA came in at Rs1.2bn, lower by 40% over Q1FY22. The company reported adjusted net profit of Rs0.9bn, down by 31.8% YoY. We have broadly kept our estimates unchanged. Maintain BUY with a TP of Rs195, assigning 18x PER on FY24E.

Key Highlights and Investment Rationale

* Non-agri pipes segment boosted sales volume: FIL’s blended sales volume improved by 27% YoY to 134,706MT. Pipes volume grew by robust 28.9% YoY to 71,960 MT, while PVC volume was up by 24.9% YoY to 62,746MT. Raw material prices are on a softening trajectory, which resulted decline in NSR QoQ, while growth over YoY in PVC and pipes segment was at 0.2%/3.9% respectively. PVC/EDC delta stood at $530MT in Q1FY23 & PVC/VCM delta stood at $170MT. We believe demand traction may improve in agri-pipes business as prices soften for end users led by lower raw material prices. 

* Remains our preferred pick in pipes, BUY with a TP of Rs195: Amongst our building material coverage stocks, we like FIL in pipes segment owing to its strong positioning in domestic agri-pipes market, backward integrated operations and healthy balance sheet. After recent fall in the stock price, the valuation looks attractive. BUY with a TP of Rs195.

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