Finolex Industries Rating ‘Buy’; Results were well ahead of estimates

FNXP posted a stellar FY21, with sales/PAT growth at +16%/+125% y-o-y and all-time high op-margin at 28.6% (+1,360bps y-o-y). Favourable PVC/EDC spread aided Resin margin. Pipes Ebit/ton is consistently growing y-o-y over 7 quarters now, led by higher Plumbing mix (37% of Pipes sales). Factoring in Q4 beat, we raise FY22-24e EPS by 15%+. But in FY22, we expect PVC prices to soften and estimate op-margin to revert to normalised 17-18% over FY22-24. Retain Buy; PT at Rs 198.

Impressive FY21, despite disruption: FNXP posted its highest-ever revenue and op-margin in FY21. Even on a 2-yr basis over FY19-21, PAT clocked a stellar CAGR of +44%. Such strong performance was mainly led by sharp rise in PVC resin, supporting FNXP margins. Pipes industry allows a pass-through of volatility in raw materials – hence rising PVC prices typically entail inventory gains, which led to expanding margins.

FNXP is backward integrated into manufacturing of PVC resin. Hence, a better PVC/EDC spread augurs well for FNXP, esp. Resin. Q4 average PVC/EDC spread stood at $877/MT, a sharp improvement y-o-y ($574/MT in Q4FY20).

Pipes profitability improving: Ebit/tonne in Pipes & Fittings has been consistently growing y-o-y for the past 7 quarters now. Key drivers are higher traction in Non-Agri Mix (margin-accretive), Fittings volumes growth (higher margin), and growth in CPVC mix. CPVC is a high-margin segment in Pipes, albeit at a low base (< 10% of Pipes mix). Despite a tough FY21, CPVC volumes grew by +4% y-o-y to 9,635 MT.

Business update: With onset of monsoons, agri-pipes demand in Q2 is seasonally weaker than Q1. FNXP cited that Non-Agri is gaining traction in recent quarters and demand is better than Agri Pipes now (even in Apr-May). In fact in Q4, while agri demand dipped by -14% y-o-y, Plumbing grew by +22%. This has helped FNXP increase its Non-Agri Mix to 37% of sales mix (30% earlier). Plumbing is a margin-accretive, retail-focused segment, hence higher mix could bode well for FNXP’s profits. FY22 capex expected at ~Rs 1 bn, although Pipes capacity expansion would primarily depend on the demand scenario.

Outlook: Q4/FY21 was a strong beat to JEFe. However, PVC and EDC being global commodities, their volatility is a key monitorable and hence we do not foresee peak FY21 margins to sustain. In FY22, we expect PVC prices to soften from peak FY21 levels. We expect FY22 EPS to dip -31% y-o-y.

Retain Buy: Over FY20-24e, we estimate FNXP’s revenue/PAT CAGR at +14%/+21%, while sustaining a robust B/S (net liquid investments at Rs 8.2 bn as of Mar’21). Retain Buy on FNXP with revised PT of Rs 198 (vs. Rs 160). Maintain target PE at 20x, broadly in line with hist 5-yr avg. Valuation appears undemanding at ~18x/16x PE on FY23/24e. Key risks: Sharp fall in PVC/EDC spread could impact margins, demand slowdown.