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Weak results on volatile PVC prices

* Finolex Industries (FIL) reported weak set of numbers in Q3FY22. This could be attributed to decline in volumes resulting from destocking at the dealer/distributor level due to fluctuation in PVC resin prices and COVID’s 3rd wave as well as extended rainfall-impacted agri pipe demand. FIL’s revenue/EBITDA/PAT declined by ~6%/30%/32% YoY, as expected. Revenue/EBITDA/PAT were lower than our estimates by ~3%/8%/9%, respectively.

* Gross Margin for the quarter declined 60 bps to 44.4% (vs 44.3% in Q2FY22) due to rise in input costs.

* EBITDA for the quarter came in at INR242cr as the margin contracted by 840 bps to 24.1% (vs est. of 25.3%), led primarily by higher employee cost (up 110 bps YoY) and other overhead costs (up 670 bps YoY).

* FIL reported PAT of INR 177cr; the margins came in at 17.7%, expanding 660 bps YoY, mainly due to decline in EBITDA margin and a share of loss from associate of INR0.7cr (vs profit of INR6cr in Q3FY21). We maintain ‘BUY’ rating.

Plastic pipe segment – Decent performance, supported by higher realisation

FIL’s pipes and fittings sales grew 14.6% YoY (vs Apollo – up 49% YoY, Supreme – up 0.7% YoY), led by significantly higher realisation of 34.9% YoY (vs Apollo – 36% YoY, Supreme – 35% YoY) despite volume de-growth of 15.0% YoY (vs Apollo – up 9% YoY, Supreme – down 26% YoY). The pipes and fittings segment has been on the growth trajectory since Q2FY20, reporting higher realisations over several quarters (realisation increased to INR177.0/kg in Q3FY22). Revenue from CPVC pipes remained flat sequentially due to 9% QoQ rise in realisation and 8% QoQ fall in volume. EBIT margin for the pipes and fittings business declined 590 bps YoY to 6.6% (vs 6.4% in Q2FY22) despite higher realisation.

PVC resin segment – Volatile PVC resin prices result in lower revenue and margins

FIL’s resin business de-grew by ~8% YoY on account of 35.8% YoY decline in volumes, despite 43.5% YoY growth in realisation. The segment reported 750 bps contraction in EBIT margin to 28.0% as average PVC resin prices remained extremely volatile in Q3FY22. Average PVC resin price was USD1,514/MT in Q2FY22; it rose sharply to USD1,753/MT in Q3FY22 and fell sharply to USD1,500/MT in January 2022. During the quarter, polyvinyl chloride (PVC)– ethylene dichloride (EDC) spreads improved ~4% YoY to USD795/MT (vs USD790/MT in Q2FY22). However, after Q3FY22, spreads fell sharply to USD580/MT, in January 2022.

Valuation and outlook: Maintain ‘BUY’ rating

FIL reported weak set of numbers in Q3FY22, after a very strong Q2FY22. This was attributed to decline in volumes resulting from destocking at the dealer/distributor level due to fluctuation in PVC resin prices and COVID’s 3rd wave as well as extended rainfall-impacted agri pipe demand. FIL’s pipe EBIT per kg increased 13% QoQ to ~INR 11.7/kg in Q3FY22, indicating favourable product mix. We continue to maintain our positive view on the company because of a) expected improvement in agri pipe volume on account of favourable base and demand pick up, as deferment of demand for a consecutive third season seems unlikely; and b) improved traction in the plumbing pipe segment. The stock is currently trading at 15x of FY23E earnings. We maintain our ‘BUY’ rating on the stock with a revised target price of INR258/share, valuing the stock at 21x FY23E earnings.

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