PL Stock Report - Finolex Industries (FNXP IN) - Q1FY24 Result Update - Healthy vol. growth, soft margin with PVC-EDC spread - ACCUMULATE

Finolex Industries (FNXP IN) - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs184 | TP: Rs197

Q1FY24 Result Update - Healthy vol. growth, soft margin with PVC-EDC spread

Quick Pointers:

§ Healthy volume growth of 28% YoY in Pipe & fittings segment.

FNXP reported robust volume growth of 28% in its seasonally strong quarter. The company indicated 15% volume growth guidance for rest of the year from agri/non agri pipes and fittings segment, with additional improvement from newly commissioned facility. However, the PVC-EDC spread, which was USD 468/MT in Q1FY24, had an impact on FNXP's margin (EBIT/Kg was Rs 12.5). The spread has since increased to USD 540/MT in Jul-23 and management expects EBIT per Kg of Rs 14-15 for FY24. Considering decent volume growth guidance and lower EBIT per Kg guidance, we have downwardly revised our FY24 earnings by 6.3% and made minor adjustments for FY25. We now estimate Revenue/EBITDA/PAT CAGR of 9.2%/64.8%/51.7% for FY23-25E with P&F volume CAGR of 13.2% and EBITDA margin of 14.2%/15.2% for FY24E/FY25E. As a result of our adjustments, we have tweaked the TP to Rs197 (Rs194 earlier), based on 18x FY25E EPS plus 50% discount to Finolex Cables’ stake. Maintain ‘Accumulate’ rating.

Revenues flat with 0.9% de-growth YoY; Adj. PAT up by 7.7% YoY: FNXP revenue came in at Rs11.8bn (down 0.9% YoY), 7.6% above our estimate (PLe: Rs11bn). The P&F business posted revenue of Rs11.5bn (up 2% YoY) with 28.1% YoY volume growth. The realizations stood at Rs125 per Kg down 20.4% YoY (PLe: Rs123.5 per Kg). PVC resin segment posted revenue of Rs3.6bn (down 54.2% YoY), volume down by 26.6% YoY to 46,074 MT. The external sales vol. were down 41% YoY and external realization were down 26.5% YoY resulting into 57% decline in PVC resin external sales. Gross margin expanded by 100bps YoY to 33.8%. FNXP posted EBITDA of Rs1.5bn (up 21.1% YoY), 5.7% above our est. of Rs1.4bn with EBITDA margin of 12.9% (up 230bps YoY) against our est. of 13.2% as the PVC-EDC/PVC-VCM spread for Q1FY24 was USD 468/USD133 per MT as against USD 785/USD279 per MT in Q1FY23. P&F business reported EBIT of Rs1.3bn (up 197% YoY) and EBIT margin of 11%. PVC resin EBIT stood at Rs31.2mn (down 96% YoY) with EBIT margin of 0.9%. Reported adj. PAT of Rs1.1bn up 7.7% YoY, (PLe: Rs1.05bn).

Con call highlights: 1) Mgmt. has guided for a 15% volume for coming years, 2) P&F segment has a agri:non-agri mix of 70:30 in volume terms which will improve to 50:50 in next 4-5 years, 3) Major focus will be on retail branding going forward, 4) PVC resin segment underperformed due to correction in PVC prices in last few months, 5) PVC resin production target for FY24 is at 230kMT, 6) Increase in other income is mainly attributed with improvement in yields and increase cash, 7) Mgmt. has guided for Rs2-2.5bn capex in FY24 and on similar lines for FY25 as well which will mainly be used as maintenance capex for PVC resin plants and molds production for P&F business, 8) Mgmt. is targeting EBIT/kg to be at Rs14-Rs15 per Kg with improved volume growth and reduction in fuel costs, 9) New fittings’ plant started in March’23 with Rs1bn investment, is expected to reach its peak capacity by end of July’23, 10) In Q1FY24, there was no inventory loss reported, primarily because the company held lower inventory levels during that period.

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