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Softness in demand weighed on sales volume

Finolex Industries’ (FIL) Q3FY22 result was below our estimates on key parameters. Sharp increase in raw material prices in the earlier quarters and untimely rains during Q3FY22 led to deferment of purchases and dented sales volume for FIL. Net sales declined by 5.8% YoY to Rs10bn, while EBITDA came in at Rs2.4bn, de-growth of 30.2% over Q3FY21. The company reported net profit of Rs1.7bn, lower by 31.6% YoY. Though demand remained laggard in January, 22, the management guided that things may improve as new season opens. The company remains focused on increasing share of non-agri products in totalsales, new products launches and improved supply chains. We have broadly maintained our earnings estimates for FY23E/FY24E. With recent correction in the stock price, valuation looks attractive at current level. BUY with a TP of Rs213, assigning 20x PER on FY24E.

Key Highlights and Investment Rationale

* Lower sales volume dragged net sales

FIL’s blended sales volume declined by 26.5% YoY to 90,458MT. Pipes volume de-grew by 15% YoY to 46,994MT, while PVC volume was down by 35.8% YoY to 43,464MT. On a positive note, NSR strengthened in both PVC and pipes segment by 43.3%/34.9% respectively over Q3FY21. PVC/EDC Delta stood at $795MT in Q3FY22 & PVC/VCM delta stood at $350MT. Agri business contribution was ~60%, rest was contributed by non-agri business.

* Outlooks remains positive, BUY with a TP of Rs213

We prefer FIL in pipes segment owing to its strong positioning in domestic agri-pipes market, backward integrated operations and healthy balance sheet. The company’s focus on increasing share of value added products and ability to expand capacity bodes well for future earnings growth. BUY with a TP of Rs213.

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