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Our Take:

Finolex Industries (FIL) is one of the largest and only fully integrated plastic piping company in India. It has a strong track record of consistently expanding its piping capacity by more than 3x (114k MT in FY10 to 370k Mt in FY21) over the last decade and has been simultaneously operating a net debt free balance sheet with strong free cash flow generation which has been cumulatively to the tune of Rs. 2521cr over last 10 years.

The company has been operating with a clear focus on “cash and carry” business model whereby its receivable days are amongst the lowest in the industry. FIL mainly caters to the agriculture space which contributes ~70% of its overall revenues. It has been constantly expanding its footprint in the non-agri space (CPVC ~12% of its piping revenue) mainly in tier 2-3 cities through its robust network of 900+ dealers and 21,000+ retailers spread across India.

On the PVC resin side, the company has been constantly scaling-up its captive use for PVC piping segment which has increased from 36% in FY12 to ~70% as on FY21. It has a capacity of 270k MT on the PVC resin side which has been almost the same for more than a decade. Going forward, the company has no plans to further expand on the PVC resin side.

On the piping side, the company aims to continuously expand its capacity by ~25k MT every year in its existing facilities. Also in order to expand in Eastern India, the company is evaluating and is in an early exploratory stage of setting-up a green-field facility in Eastern India.

Valuation & Recommendation:

FIL’s earnings grew at a CAGR 17% during FY10-21. Going forward, we are positive on the future growth prospects of agri piping, housing and building materialssegment. In our view, FIL’srevenue islikely to record a growth of 11% over FY21-23E while PAT is expected to decline at CAGR 3.3% on an extremely high base. Along with this it’s expected to generate consistent FCF with stable working capital. Segmentwise, we expect, Piping/Resin segment revenue to report +19/-5.7% CAGR growth over the same period.

The company’s balance sheet comprises of a 14.53% stake in Finolex Cables (FCL), which as on the current price is worth ~Rs 1150cr. As on FY21, FIL non-current investment of in FCL was 24% of its total assets and 27% of its networth. The management has reiterated to grow sales volume by ~10%-15% in FY22E and aims to achieve pre-pandemic sales volume.

Though the two year CAGR growth on the bottom line does not seem too exciting, in the interim FIL could post very good numbers due to favorable finished goods prices. Also the gradual shift from agri to non-agri in its piping segment could bring in better margins and valuation. The entire chemicals and pipes space has been rerated over the past few quarters while FIL is available at attractive valuations on a relative basis.

The dispute among the promoters family is one of the reasons for the stock not getting its due valuation. However we feel the discount given by the street to FIL on this count is quite high. The stock is currently trading at valuation of 16x FY23E earnings. We feel the base case fair value of the stock is Rs. 206 (18.6x FY23E) and bull case fair value is Rs. 222 (20x FY23E). Investors willing to take risk can buy the stock in the band of Rs. 180-186 and add on dips at the price of Rs 166.

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