Finolex Industries’ (FIL) Q2FY22 result was beat to our and consensus estimates on key parameters. Despite being a seasonally weak quarter, the company’s strong performance was driven by pent up demand in pipes segment. Net sales increased by 84.9% YoY to Rs 10.8 billion, while EBITDA came in at Rs 3 billion, a robust growth of 108.2% over Q2FY21.

The company reported net profit of Rs 2.3 billion compared to Rs1.2 billion in the same quarter last year. The management remained confident to keep the strong growth momentum in both agri and non-agri pipes in near term. "We have introduced FY24E financials in this report. After a sharp rally in the stock price, the value looks priced in at current level. Maintain HOLD with a revised TP of Rs 222, assigning 22x PER on FY24E," stated IDBI Capital Equity Research.

Key highlights and investment rationale

Healthy sales volume growth supported net sales

FIL's blended sales volume increased by 17.8% YoY to 107,482MT. Pipes volume grew by 27.1% YoY to 55,453MT, while PVC volume was up by 9.2% to 52,029MT. NSR further strengthened in both PVC and pipes segment by 62.7%/41.3% respectively over Q2FY21. PVC/EDC Delta stood at USD 790MT in Q2FY22 & PVC/VCM delta stood at USD 391MT. The spread have not moved much on QoQ basis as company has got certain inventory advantage. In Q2FY22 Agri contributed ~58% rest was contributed by non-agri.

EBITDA margin further improved

The company reported 310bps YoY improvement in EBITDA margin to 27.8%. Despite increase in raw material prices, the company was able to pass on the higher cost to the customer, which protected operating margin. We expect EBITDA margin to be in the range of 18%-19% in near future.

Value looks priced in, HOLD with a TP of Rs 222

Though we like FIL in pipes segment given its strong positioning in domestic agri-pipes market, backward integrated operations and healthy balance sheet, we believe the stock had a strong rally in recent times and the value looks priced in at current level. However, we remain positive on long term business growth of the company. HOLD with a TP of Rs 222.  

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.