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Volume growth to be ~10%CAGR; maintain SELL!

Result Synopsis

Finolex Industries Ltd (FNXP) registered a revenue growth of 8%YoY & 21%QoQ. Pipe division reported the highest-ever quarterly volumes of 100,171Te, a growth of 23%YoY & QoQ. ASP declined on a sequential basis by Rs4/Kg to Rs118/Kg while EBIT/Kg came in at Rs13.3 compared to Rs9.1 in Q3FY24. Resin segment volumes grew by 19%YoY & 58%QoQ (2-year CAGR stood at -7%), ASP stood at Rs73/Kg Vs Rs86/Rs73 in Q4FY23/Q3FY24, respectively & EBIT/Kg came in at Rs9.5 as compared to Rs7.1 in Q3FY24. Overall, operating margins expanded by 515bps on a QoQ basis owing to a 132bps increase in GP margins driven by better volumes coupled with a sharp decline in other expenses as %sales to 16% Vs 19% in Q3FY23. Management stated that pipe volumes are likely to grow at a CAGR of 10-15%, which is in line with industry growth, and going ahead mix of the non-agri segment is expected to expand to 50% Vs 30% as on FY24, which should lead to gradual improvement in EBIT/Kg to Rs14. In the resin segment, management aims to deliver volumes similar to FY23 levels of ~230,000Te in FY25E. We expect the company’s pipe volumes to grow at a CAGR of 10% over FY24-FY26E. We have assumed an annual capacity expansion of 20,000Te (via de-bottlenecking) for FY25E/FY26E, enabling the company to operate at 77%/80% utilization levels in FY25E/FY26E, respectively. Hence, until the company finalizes plans for future expansion and sets up additional capacity (which is unlikely before FY27E if work commences in this fiscal), we believe FNXPs pipe volume growth will be capped. EBIT/Kg is expected to come in at Rs13 in FY25E & FY26E, which will improve gradually with a better product mix. We expect Revenue/EBITDA/PAT growth of 11%/9%/9% CAGR over FY24-FY26E. At CMP, the stock trades at P/E(x) of 33x/30x on FY25E/FY26E EPS of Rs8.2/Rs9.0, respectively. We have valued the company at a P/E(x) of 25x (a discount Vs industry peers due to lower volume growth and margins) on FY26E EPS arriving at a target price of Rs225. Hence, we maintain our SELL rating on the stock.

Result Highlights

? Revenue for the quarter stood at Rs12.35Bn, a growth of 8%YoY & 21%QoQ.

? EBITDA margins came in at 16.9% Vs 19.1%/11.8% in Q4FY23/Q3FY24, respectively (higher margin in Q4FY23 due to inventory gains). Absolute EBITDA stood at Rs2.09Bn, a degrowth of 4%YoY & a growth of 74%QoQ.

? Net profit stood at Rs1.65Bn, remaining flattish on YoY basis & a growth of 73%QoQ.

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