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Disappoints on profitability, assign REDUCE!

Result Synopsis

Finolex Industries Ltd reported a poor performance in Q2FY25 wherein revenue declined by 6%YoY. Pipe revenue declined by 4%YoY wherein volumes grew by 10%YoY driven by higher volumes from plumbing segment & ASP declined by 13%YoY to Rs118/Kg. Though volumes for pipes increased, profitability took a sharp knock and registered an EBIT loss of Rs390Mn Vs profit of Rs680Mn in Q2FY24, largely owing to reduction in ASP. PVC revenue increased by 4%YoY wherein volumes grew by 7%YoY & ASP declined by 3%YoY to Rs77/Kg. PVC segment’s EBIT/kg came in at Rs8.9 Vs Rs5.4/Rs9.9 in Q2FY24/Q1FY25 respectively. Other income for the quarter was elevated at Rs826Mn Vs Rs614Mn/Rs549Mn in Q2FY24/Q1FY25 respectively. PVC ($/Te) stood at 842 Vs 847 in Q2FY24 & PVC/EDC delta ($/Te) came in at 509 as compared to 571 in Q2FY24.

Guidance

Management maintained their annual growth guidance of 10-12% for FY25 despite a muted growth in H1FY25. Company is undergoing brownfield expansion at both their plants post which total capacity for pipes & fittings will be 520,000Te from current 470,000Te. This incremental capacity will be operational from Q4FY25.

Our View 

Though volume growth in Q2FY25 was 10%YoY, for H1FY25 growth stands at mere 3%YoY. Factoring-in the restocking from Q3FY25 and expected recovery in H2FY25, we expect pipe volumes to grow by 8%YoY for FY25 & 9%CAGR over FY24-FY27E. Owing to slump in profitability in H1FY25, we have revised our EBIT/Kg expectation to Rs9.5 for plastic pipes. For resin biz, we expect a steady growth of 10%CAGR & ~95% should be used for captive consumption. We have revised our EPS estimate downwards by 13%/7% for FY25E/FY26E respectively. At CMP, the stock trades at P/E(x) of 31x on FY27E EPS of Rs9, we continue to value the company at P/E(x) of 30x on FY27E EPS, arriving at a target price of Rs270. Hence, we have assigned a REDUCE rating to the stock.

Result Highlights

* Revenue for the quarter stood at Rs8.28Bn (in-line with our est), a decline of 6%YoY.

* Operating margins contracted sharply to 1.3% Vs 11.7%/18.1% in Q2FY24/Q1FY25 respectively. Hence, EBITDA declined to Rs106Mn Vs Rs1.03Bn in Q2FY24. 

* Net profit stood at Rs407Mn as compared to Rs980Mn/Rs837Mn (adjusted for one-time gain) in Q2FY24/Q1FY25 respectively.

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