FINOLEX INDUSTRIES LTD.: Initiating Coverage

Edel Invest Research Buy FINOLEX INDUSTRIES LTD.: Initiating Coverage

Piping growth, ripe for re-rating CMP INR: 203 Target Price INR: 300

Finolex Industries Ltd. (FININD) is India’s largest PVC pipes manufacturer (28% organized market share) and the second largest PVC resin manufacturer. The company is shifting focus from PVC resin business to high growth PVC pipes & fittings business, which will enhance its overall margins and ROCEs. FININD is Raj Gala an attractive play given its strong brand equity, robust distributor strength, sound management, healthy +91-22-4088 6137 balance sheet and sturdy return ratios. The company appears to be in a sweet spot, aided by multiple [email protected] drivers such as increased revenues from PVC pipes & fittings business, margin expansion, contracting forex losses through appropriate hedging policy. All these factors would lead to strong earnings growth (20% CAGR over FY14-16E) and trigger a re-rating in the stock. We initiate coverage with ‘BUY’ and a target price of INR 300, implying 48% upside.

Market leader in PVC pipes with strong brand saliency FININD is the largest PVC pipes manufacturer in India (~28% organized market share). The company’s PVC pipes division produces 210,000 MT spread over its two ultra modern plants at Pune and Ratnagiri. FININD also manufactures specialty pipes and fittings, namely SWR (Soil, Waste and Rain Water) pipes and fittings for the construction and agri industry. Over the years, the company has established a strong brand saliency in agricultural PVC pipes. Moreover, its PVC pipes are largely sold to its dealers on cash and carry model, which is a reflection of its strong brand equity. The company’s pipes also command a premium in markets in terms of pricing which reflects its strong positing over its competitors.

Bloomberg: FNXP:IN Shifting focus from PVC resin (B2B) to PVC pipes (B2C) business to reduce earnings volatility FININD has shifted its focus from PVC resins business to PVC pipes business, which will improve overall 52-week range (INR): 209 / 93 ROCEs and reduce earnings volatility. The company has a surplus PVC resin capacity of 270,000 MT because of greater focus on this business earlier rather than utilising the same capacity for its PVC pipes Share in issue (Crs): 12.4 segment. This resulted in huge earnings volatility, as price of its key raw material EDC remained highly volatile and due to commoditized nature of business the company had no pricing power. The company M cap (INR crs): 2,515 expects to use the excess capacity of PVC resins for captive consumption of PVC pipes business. As of FY13, PVC pipes business accounted for 63% of total revenues, which will increase to more than 90% by FY16E. Avg. Daily Vol. BSE/NSE :(‘000): 820

Enhancing distributor strength and capacity to drive growth FININD currently has more than 500 distributors, 1500 sub dealers and 15000 retail touch points mainly located in south, west and north regions. The company generates 40% of its revenues from west India, 30% from south India, 20% from north India and 10% from east India. Going forward, it plans to expand in the north-east region, which will further boost its revenues as it enjoys strong brand equity in PVC pipes SHARE HOLDING PATTERN (%) business. FININD is also expanding capacity from current 30,000 MT to 240,000 MT by FY14 end to cater to additional demand in its pipes business.

Return ratios set to improve significantly FININD’s return ratios are set to expand significantly on the back higher margins, lower forex losses and improved asset turns due to reduction in excess buyer’s credit. In the past, the company used to deploy surplus cash, after availing excess buyer's credit, into short-term financial instruments, thereby increasing its capital employed and weighting down ROCEs. Consequently, average ROCEs over FY08-13 stood at 8%. With the company now availing far lesser trade credit, this would result in significant reduction of working Others Promoter capital debt going forward, which in turn would trim its balance sheet size. Increased earnings, resulting 42.08 52.43 from higher margins, and anticipated lower forex losses over the next three-years would thus significantly expand ROCEs to +20% over FY15-16E.

Outlook and valuation: Attractive, initiate coverage with “Buy” DII FININD appears to be in a sweet spot, aided by multiple drivers such as increased revenues from PVC pipes 0.96 FII business, margins expansion due to price hikes and increase in EDC spreads, containing forex losses 4.53 through appropriate hedging policy, which could lead to strong earnings growth and trigger a re-rating in the stock going forward. The company is trading at attractive valuations compared to its peers at P/E of 12.3x FY15E and 10.1x FY16E earnings, delivering sustainable ROCEs of around +20%. We recommend 360 'BUY' with a one-year target price of INR 300, valuing the company at P/E of 15x FY16E. 310 Financial Table 260 Year to March (INR crs) FY12 FY13 FY14 FY15E FY16E 210 Revenue 2,100 2,145 2,296 2,321 2,452 Rev. growth (%) 6.2 2.1 7.1 1.1 5.7 160 EBITDA 217 263 307 350 408 110

Net profit 75 136 171 206 250 60

13 13

13 14 13

14 13 14

Profit growth (%) (1.3) 81.2 25.4 20.6 21.7 13

- - -

- -

Shares outstanding (Cr) 12 12 12 12 12 Jul

Jan Jan

Jun

Oct

Apr

Feb Feb Sep

Dec

Aug

Nov

Mar Mar May Diluted EPS (INR) 6.1 11.0 13.8 16.6 20.2 Finolex Sensex EPS growth (%) (1.4) 81.2 25.4 20.6 21.7 Diluted P/E (x) 33.7 18.6 14.8 12.3 10.1 th EV/ EBITDA (x) 16.4 12.8 10.2 8.6 7.3 Date: 10 April 2014 ROE (%) 11.7 19.7 22.6 24.6 26.9

FINOLEX INDUSTRIES LTD

Market Leader in PVC pipes with strong brand saliency Investment Finolex Industries Ltd. is the largest PVC pipes manufacturer in India (~28% organized market share). It offers a wide range of PVC pipes & fittings for diverse applications in agriculture, housing, construction Rationale and telecom industries. The company manufactures a wide range of pipes between 20mm and 400mm diameter in different pressure classes. Its PVC pipes division produces 210,000 MT spread over its ultra modern plants at Pune, Ratnagiri and Gujarat. FININD also manufactures specialty pipes and fittings, namely SWR (Soil, Waste and Rain Water) pipes and fittings for the construction and agriculture industry. The company intends to grow its fittings business from current 7% of the total revenues to Finolex pipes are sold 12% in next couple of years. on cash-n-carry model, which is a reflection of Over the years, FININD has been enjoying strong brand saliency in agricultural PVC pipes. The company its strong brand equity generates 70% of its pipes revenues from agriculture - irrigation segment and 30% from the in PVC pipes business. construction segment. Moreover, its pipes are sold to its dealers on cash-n-carry model, which is a reflection of its strong brand equity in PVC pipes business. Finolex pipes also command a premium in the markets in terms of pricing, which reflects its strong positing over its competitors.

Breakup of Indian Pipes Industry

~INR 21,000 crs Total Pipe Industry

CPVC Pipes PVC Pipes GI Pipes ~INR 1,000 Crs ~INR 12,000 Crs ~INR 8,000 Crs

Astral, Supreme, 50% 50% Aashirwad & Organized Unorganized Ajay

Jain Irrigation Finolex 28% Supreme 8% 15% Mkt MktShare MktShare Share

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

PVC Pipes – Immense growth opportunity India has INR 21,000 crs worth market for pipes, which is growing at a rate of 12% annually. Polyvinyl-Chloride (PVC) pipe is a plastic product which has unmatched versatility. It effectively replaces wood, paper and metal in several applications. As such plastic pipes have been progressively replacing conventional pipes like G.I., Cast Iron, Asbestos Cement or Stone-ware for a number of important uses. Among the various types of plastic pipes which are commonly used for such applications, PVC pipes are the most widely used all over the world on account of their most favourable balance of properties. PVC pipes are light in weight, rates for use under pressure, easy to install, low frictional loss, low on maintenance cost, and have low frictional loss. Rigid PVC pipes have wide variety of uses in fields like city/town/rural water supply scheme, spray irrigation, deep tube well schemes and land drainage schemes.

The major consumers of PVC pipes are the Public Health Engineering Department, Irrigation Department, Farmers for agricultural purposes, Municipal Corporations, Housing and Construction Industries. Also, there is a strong replacement demand emanating from GI/DI pipes.

Demand from irrigation and micro

irrigation projects Drivers Replacement demand from GI/DI pipes

Pipes Growth Pipes Strong demand from Construction

& Housing segment PVC

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Robust demand from agriculture and irrigation projects PVC pipes are used for a variety of purposes e.g. water supply schemes, spray irrigation, deep tube well schemes and land drainage schemes. PVC slotted and corrugated pipes are ideal systems for drainages of water from land where water logging is inevitable. Now-a- days, it is widely used by various utility services too. Also, the Government of India’s (GOI) Plan allocation to thrust on irrigation, micro-irrigation, water and housing projects is expected to drive demand irrigation in the 12th for PVC pipes and fittings. Plan allocation to irrigation in the 12th five-year plan has increased five-year plan has by 62% to INR 341,900 crores over the previous five-year plan. We expect the demand from increased by 62% to INR micro irrigation projects to increase significantly in the next few years. FININD is well placed 341,900 crores over the to exploit this opportunity directly as it has a strong rural presence and it derives 70% of its previous five-year plan. pipes revenues from agriculture and irrigation sector.

As of end FY13, 35 million hectares (mha) of India’s agriculture land had been brought under irrigation against a total potential of 139.9 mha. The GOI has targeted to bring in another 7.9mha of potential land under irrigation in the 12th five-year plan (FY02-17) against 4.6mha achieved in the 11th five-year plan. This will bring additional 18 mha of potential land under irrigation in the 12th plan.

Chart 1: Major & Medium Irrigation (INR bn) 4000 3500 3000 2500 2000 1500 1000 500

(2007‐

(2002‐0

Ninth Ninth

(1951‐56) (1969‐74) (1985‐90) (1992‐97)

(1966‐69) (1978‐80) (1990‐92)

(1956‐61) (1961‐66)

(1980‐85)

Plan

Fifth(1974‐78

17) outlay 17)

2012) outlay 2012)

Plan(1997‐02)

First

Sixth

Eleventh

Third

Eighth

Fourth

Annual Annual Annual

Second

Twelth Plan (2012 Plan Twelth Seventh Tenth

As of FY13, 35 mha of Chart 2: Total land under irrigation India’s agriculture land 49 had been brought 42 under irrigation against 35 28 a total potential of 139.9 mha. 21

(Mha) 14

5th Plan 5th Plan 8th

3rd Plan 3rd

1st Plan 1st

4th Plan 4th Plan 6th Plan 7th

2nd Plan 2nd

9th Plan Plan 9th

10th Plan 10th

11th Plan Plan 11th

(1966‐69) (1978‐80) (1990‐92)

12th Plan Est Est Plan 12th

Annual Annual Annual Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Demand from micro irrigation projects alone can drive healthy volume growth Increased thrust on micro irrigation projects in various states in India will drive demand for pipes for drip/sprinkler irrigation systems. Micro irrigation not only leads to efficient use of Currently, only 5 mha water, it also provides benefits by increasing crop yields, arresting problems of water logging, (7% coverage) of the salinization, receding water tables and deteriorating water quality. The estimated potential possible 69 mha area is of micro irrigation in India is 69.5 mha (27 mha for drip irrigation and 42.5 mha under covered under the sprinkler irrigation). micro and sprinkler irrigation in the country. The current estimate of industry size is INR 33 bn. and it is growing at a fast pace. Currently, only 5 mha (7% coverage) of the possible 69 mha area is covered under the micro and sprinkler irrigation in the country. However, as per Government task force, 17 mha of land can be easily brought under micro irrigation coverage in the country by 2017, while by 2030 the extent of MIS/SIS coverage may reach 69.5 mha. All 69.5 mha of land will generate demand for 7.1 million MT of PVC pipes. We expect the demand from micro-irrigation projects to increase significantly for the next few years.

PVC demand from micro irrigation projects Total cost / mha (INR Crs) 4375 Total potential for irrigation (mha) 70 Total spending planned (INR crs) 306250 Cost of PVC pipes in micro irrigation systems (%) 20 PVC Pipes demand (INR crs) 61250 PVC Pipes demand (@INR 85/kg) (MT) 7205882 Current total Indian demand in FY13 (MT) 1500000 Expected demand in next 15 years (MT) 5705882 Expected CAGR in next 15 years 9%

Chart 3: PVC pipes usage in India FY13: Chart 4: Finolex revenues breakup FY13:

Plumbing Flexible 10% 4% Residential 30% Sewage 12% Irrigation 45%

Irrigation Water 70% Supply 29%

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Urban & rural housing will drive growth for PVC pipes in coming years Strong growth drivers are in place for long–term housing demand in India. In our view, demand factors like rising urban population, decline in average household size (number of As per industry people per house), increasing affordability led by higher per capita GDP and rising credit estimates, housing availability are in place for strong demand for residential property in India. As per industry shortage in urban area estimates, housing shortage in urban area is ~22 mn units. The Government is targeting to is ~22 mn units and in build ~ 2mn units/year. One unit in urban area consumes ~200 Kg of PVC products like pipes, rural area is ~54 mn flooring, door & windows, etc. Housing shortage in rural area is ~54 mn units. The units. Government is targeting to build ~4.5mn units / year. One unit in rural area consumes ~75 Kg of PVC products like pipes, doors, roofing, etc.

Growth prospects for the construction sector are also strong, given the large One unit in urban area underdeveloped infrastructure and acute housing shortage. Further, structural factors like consumes ~200 Kg of shift in favor of nuclear families, rising GDP growth and widespread credit availability would PVC products like pipes, lead to demand for housing which in turn would lead to growth for pipes and plumbing. flooring, door & Further, demand also emanates from the commercial real estate side - new construction of windows. hospitals, academic institutes, resorts, clubs, government sectors, construction houses, technology parks, industries, hotels, commercial complexes, corporate houses, etc.

Chart 5: Nuclearisation of households

1400 5.1

1300 4.9

Household Size 1200 4.7

1100 4.5 Total Population Total

1000 4.3

900 4.1

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Average household size – Rural (No.) (LHS) Total Population (LHS) Average household size – Urban (No.) (RHS)

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Replacement demand from galvanized iron pipes driving PVC pipes growth A look at the break-up of the pipes market suggests that the 40% of the total market is dominated by galvanized iron (GI) pipes. The market is witnessing a strong shift in demand in favor of better quality and cheaper PVC pipes and this trend is expected to continue in the coming years. PVC pipes are gaining more acceptance due to strong benefits such as lower corrosion, non-toxic, maintenance-free, easy-to-install, , excellent jointing techniques and lower pricing relative to GI pipes and CPVC pipes. Even if we estimate a shift in the favor of plastic to 70% from the current 53% over the next 10 years, the plastic piping market would deliver 34% CAGR in revenues. Thus, there exists an immense opportunity for FININD to cater to this large shift in demand in favor of PVC pipes.

Advantages of PVC pipes over GI pipes and CPVC pipes

Factor CPVC PVC GI Pipes

Life Over 30-35 years 30-35 years 10-15 years

70% cheaper than GI pipes, 25% Cost Cheapest Most expensive costlier than PVC

Low Thermal conductivity, can Low Thermal Conductivity, Heat resistance carry liquid upto 93 degree temperature resistant High Thermal conductivity centigrade upto 55 degree centigrade

Corrosion Anti Corrosive Anti Corrosive Corrosive in nature

Installation Easier Easier Requires time & energy

Hygienic factor Highest Highest Least

FINOLEX INDUSTRIES LTD

Enhancing distributor strength and capacity to drive growth FININD currently has more than 500 distributors, 1500 sub dealers and 15000 retail touch points mainly spread in south, west and north regions of the country. The company generates 40% of its revenues from west India, 30% from south India, 20% from north India and 10% from east India. Distribution to dealers is spread in such a way that no single dealer contributes more than 1% of the PVC pipe and fittings revenues. Going forward, it plans to expand in north and east regions which will further boost its revenues as it enjoys strong brand equity in PVC pipes business.

Chart of PAN India distribution network:

Finolex plans to expand in north and east regions as it derives ~30% from this regions.

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Capacity expansion to cater growth FININD has been regularly expanding PVC pipes capacities to cater to the growth in its PVC pipes and fittings business. The company has doubled its capacity over the past 5 years. The company would further expand capacities by 30,000 MT over the next two years.

Chart 6: Installed Capacity 300,000 50% 250,000 40% 200,000 30% 150,000 20% 100,000 50,000 10%

- 0%

FY08 FY09 FY10 FY11 FY12 FY13

FY14E FY15E FY16E

- Installed Capacity (MT) Growth (%)

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Shifting focus from PVC resin (B2B) to PVC pipes & fittings (B2C) business to reduce earnings volatility FININD has shifted its focus from PVC resins business to PVC pipes business, which will improve overall ROCEs and reduce earnings volatility. The company has a surplus PVC resin capacity of 270,000 MT because of its focus earlier on selling PVC resin rather than utilising the same capacity for its PVC pipes segment. This resulted in huge earnings volatility as price of its key raw material EDC remained highly volatile and due to commoditized nature of business the company had no pricing power. Now, the company expects to use the excess capacity of PVC resins for captive consumption of PVC pipes & fittings business. As of FY13, PVC pipes business is 63% of total revenues which will increase to more than 90% by FY16E.

Chart 7: Highly Volatile PVC Resin EBIT margins 21

18 18 15 16 15 12

11 10

(%) 9 8 8 6 6 3

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company, Edel Invest Research.

Chart 8: Fully integrated PVC Pipes & Fittings manufacturer by FY16E

300,000 250,000

200,000

150,000 (MT) 100,000 50,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

FY14E FY15E FY16E

Resin Installed Capacity (MT) Pipes Installed Capacity (MT)

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Return ratios set to improve significantly FININD’s return ratios are set to expand significantly on the back higher margins, lower forex losses and improved asset turns due to reduction in excess buyer’s credit. In the past, the company used to deploy surplus cash, after availing excess buyer's credit, into short-term financial instruments, thereby increasing its capital employed and weighting down ROCEs. Also, the buyers credit was largely kept unhedged, thereby exposing itself to huge foreign exchange volatility that eventually led to forex losses. Consequently, average ROCEs over FY08-13 stood at 8%. With the company now availing far lesser trade credit, this would result in significant reduction of working capital debt going forward, which in turn would shrink its balance sheet size. Increased earnings, resulting from higher margins, and anticipated lower forex losses over the next three-years would thus significantly expand ROCEs to +20% over FY15-16E.

Chart 9: ROCE to improve significantly

30% 18% 16% 25% 14% 20% 12% 10% 15% 8% 10% 6% 4% 5% 2% 0% 0% FY11 FY12 FY13 FY14E FY15E FY16E

ROCEs EBIT Margins (%)

Source: Company, Edel Invest Research.

Reduced working capital debt to curb forex losses: FININD has trimmed down its working capital debt from 360 days earlier to 90-120 days besides adopting a hedging policy which would cover 50% of its working capital debt and reduce the overall forex losses and earnings volatility going forward.

Chart 10: Lower Forex Losses 210 188 180 150 120 96 90 75 54 60 50 45 30 17 15 0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Increase in PVC fittings component to increase overall margins: FININD’s current fittings revenues are ~8% of the total revenues, which the company intends to increase up to 12% by FY16E. PVC fittings business is a high margin businesses compared to PVC pipes business, where the company makes around 20% EBITDA margins. As the company scales up fittings revenues it will aid in margin improvement on an overall basis.

Chart 11: PVC fittings revenue to increase

25,000 12

20,000 10

15,000

6 (%)

(MT) 10,000 4 5,000 2

- 0

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

FY15E FY14E FY16E

PVC Fittings Volumes (MT) PVC Fittings as a % of revenue

Source: Company, Edel Invest Research.

Price hikes to subsidize cost pressures: As of FY13, FININD’s PVC pipes margins have been below industry average despite having strong brand equity and leadership position mainly due to lack of focus on pipes business. Over the last few quarters, the company’s management has shifted its focus on pipes business to leverage its strong brand equity. It has also taken price hikes over and above the cost pressures, thereby improving the EBIT margins of PVC pipes business to 8.5% from 5% levels. Going forward, the company intends to maintain its margin at current levels with an upward bias.

Chart 12: Calibrated Price Hikes to offset cost pressures

100.0 12

80.0 10

60.0

6 (%) (INR) 40.0 4 20.0 2 0.0 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

PVC Pipes Realization (INR KG) PVC Pipes EBIT Margins (%)

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

SWOT Analysis Strength Weakness To pass on cost pressures Large opportunity size To manage forex volatility Strong Brand Name Strong Product Quality Cash and Carry Model

Opportunity Threat Shift from GI/DI pipes to PVC pipes INR Depreciation Expansion of Dealership Poor Monsoon Increase in fittings revenues

FINOLEX INDUSTRIES LTD

Porter’s Analysis

Bargainin Power of Buyer: Medium

Threat of Threat of new Substitues entrants: : Low Medium Porter's 5 Forces

Rivalry Bargaining amongst Power of existing Supplier: players: Low Low

Bargaining power of buyers: Medium FININD is a strong brand in PVC pipes with 28% organized market share. Price and quality are two major drivers for any purchase. In our view, farmers and houshold consumers are the ones who prefer the best quality over lower prices. Therefore, the company’s products are best for them due to the sheer focus on quality, despite prices being ~5% higher than competitors. Thus, bargaining power of buyers is medium to low in our view.

Rivalry among existing players: Low The rivalry among existing players like Finolex, Jain Irrigation and Supreme is medium to low. Some unorganized players are focused towards being the lowest priced players with substantial disregard for product quality, while others like Finolex have a single-minded focus on product quality and long-term durability. Thus, the rivalry among competitors is low – medium.

Threat of new entrants: Medium The PVC pipes industry already has quite a few players with a large number of them in the unorganized space. For PVC pipes, entry barriers are minimum but access to raw materials, technological know-how, distributor strength and key-inputs are however difficult for a new entrant, as the industry already has a few big players. Thus, each of them is having contracts with a fixed set of suppliers as well as customer base, thereby indicating that it’s very difficult for a new entrant in this scenario to grab business from existing players.

Bargaining power of sellers: Low FININD is a fully backward integrated company with captive power plant. Majority of inputs like EDC and VCM are globally traded commodities whose prices are determined by demand–supply dynamics. Going forward, globally traded EDC capacities are likely to increase to 4.8MT over the next three-years from 2.8MT, with EDC demand likely to be ~2MT. Thus, we expect oversupply of EDC to lead to lower bargaining power of sellers.

Threat of substitutes: Low GI/DI pipes are the major substitute for PVC pipes. In our view, GI pipes are poised to lose market share in the coming years because of their disadvantages like higher cost and corrosion.

FINOLEX INDUSTRIES LTD

Valuations FININD is trading at attractive valuations compared to its peers at P/E of 10x FY16E and at EV/EBITDA of 7.3x FY16E, delivering RoAEs of around 27% and RoACEs of 23%. The company is well poised for growth, given its strong brand equity, increasing distributor strength and increased focus on PVC fittings business. It appears to be in a sweet spot, aided by multiple drivers such as increased revenues from PVC pipes business, margins expansion due to price hikes and increase in EDC spreads, containing forex losses through appropriate hedging policy, which could lead to strong earnings growth and trigger a re-rating in the stock going forward.

We expect earnings CAGR of 23%, respectively, over FY13-16E.

We initiate coverage on the stock and recommend a 'BUY' with a one-year price target price of INR 300, valuing the company at 15x FY16E.

25 Chart 13: 1 year Forward P/E Chart 14: P/E Band 300 20 250 15x

200 15 11x 150 (INR) 8x 10 100 5x 5 50

09 11 12 14

08 09 10 10 13

13 08 11 12 13

- - - -

- - - - -

13 13

11 12 12

09 10

- -

- - -

- -

Jul

Jan

Jun Jun

Oct

Apr Apr

Sep Feb

Dec

Aug

Nov Nov

Mar

May

Jul

Oct

Apr

Feb Sep

Dec

Nov

Mar May

Source: Company, Edel Invest Research.

Company Absolute CMP Diluted EPS (INR) P/E( x) Reco (INR) FY14E FY15E FY16E FY14E FY15E FY16E Finolex BUY 203 13.8 16.6 20.2 14.8 12.3 10.1 Astral Hold 500 13.5 19.5 25.7 37.0 25.6 19.5 Supreme BUY 493 22.9 28.4 36.4 21.5 17.3 13.5 Jain Irrigation Buy 70 2.9 7.0 9.6 24.1 9.8 7.2

FINOLEX INDUSTRIES LTD

Key risks High sensitivity to currency movement FININD imports majority of its raw materials, which exposes it to INR movement. Although the company hedges 50-70% of its imports on a rolling basis, significant depreciation of INR against the USD/EUR/GBP will impact its financials materially.

Poor Monsoons PVC pipes demand in India is driven by the agricultural sector, which in turn depends on the monsoon rains. The shortage of rainfall may result in fall in demand for PVC pipes. However, going forward, as demand from housing increases, the dependency of PVC pipes sales on agriculture sector will decrease.

Volatile crude oil prices increase inventory risks PVC resin is the key raw material. Any major fluctuation in crude oil prices globally would have a corresponding impact on prices of PVC as well as other raw materials.

FINOLEX INDUSTRIES LTD

Business Finolex Industries Ltd., erstwhile Finolex Pipes, was incorporated in 1981. It is the largest PVC Overview pipes manufacturer in India. The company started as a rigid PVC pipe manufacturer before going in for backward integration in 1994 to manufacture PVC resins. The company has two divisions: PVC resin and PVC pipes.

FININD is one of the largest PVC resin manufacturers. It also manufactures suspension and emulsion grade PVC. It has a capacity of 270,000 MT for PVC resins in the West Coast of Maharashtra. PVC pipes division produces 210,000 MT spread over its ultra modern plants at Pune, Ratnagiri and Masar (Gujarat). FININD also manufactures specialty pipes and fittings, namely SWR (Soil, Waste and Rain Water) pipes and fittings for the construction industry.

The company is promoted by the Finolex group, which holds a 51% controlling stake in the company. Finolex Cables holds 32.4% of the company and the direct holding of the promoters is around 18.8%.

FINOLEX INDUSTRIES LTD

Best in class infrastructure created by Finolex Industries

PVC pipes plant at Ratnagiri 43 MW Captive power project

Open sea cryogenic jetty PVC pipe facility at Urse, Pune

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

Strong management credentials FININD has a high-quality broad-based senior management team. The management team has strong credentials and work experience that has helped the company to build a strong foundation.

Name Designation Experience

Mr. Prakash P. Chhabria is an industrialist having an overall industry experience of 21 Prakash P Chhabria Executive Chairman years. He is the only member of the family who represents the Board. He looks after the strategic decision making in the company.

Mr. Dhanorkar is a qualified Chartered Accountant and a respected Fellow member of Managing Director ICAI. After a brief stint in an international accounting firm, Mr. Dhanorkar joined S.S Dhanorkar Finolex Industries Limited in 1983. He has over 30 years of industry experience heading various departments like finance and marketing and has assumed leadership position in guiding the company through many historic milestones.

Mr. Sanjay S. Math has been a Director of Operations at Finolex Industries Ltd., since February 2012. He served as Director of Manufacturing of Finolex Industries Ltd and S.S Math Director - Operations also as the in-charge of PVC Manufacturing Plant at Ratnagiri of Finolex until July 19, 2008. He has been a whole-time Director at Finolex Industries Ltd. since February 4, 2012.

FINOLEX INDUSTRIES LTD

Financial Revenue growth to remain muted, PVC pipes volumes to grow at 15% CAGR Analysis FININD’s revenue is expected to grow at 5% CAGR over FY13-16E due to mix change from PVC resin to PVC pipes. Standalone volume growth in PVC pipes business is expected to grow at 15% CAGR over next two years, led by strong demand from irrigation and agriculture projects.

Chart 15: Revenues (INR crs)

3,000 CAGR 5%

2,500 CAGR 9%

2,000

1,500 (INR Crs) (INR 1,000

500

FY08 FY09 FY10 FY11 FY12 FY13

FY14E FY15E FY16E

Source: Company, Edel Invest Research.

PAT growth to be healthy at 23% CAGR over FY13-16E PAT is expected to grow at 23% CAGR over FY13-16E led by lower forex losses and margin levers. Over the last 5 years, PAT has grown at a CAGR of 14%. We expect PAT to grow at 23% CAGR over FY13-16E, led by EBITDA margin improvement from 13% to 15% and reduction in forex losses.

Chart 16: Net profit (INR crs)

300 CAGR 14% CAGR 23% 250

200

150 (INR Crs) (INR 100 50

FY08 FY09 FY10 FY11 FY12 FY13

FY14E FY15E FY16E

Source: Company, Edel Invest Research.

FINOLEX INDUSTRIES LTD

EBITDA margins to improve from 13% to 15% led by higher PVC pipes sales and reduced forex losses. We expect FININD’s EBITDA margins to improve on the back of multiple margin levers: Increase in revenues from PVC pipes & Fittings business over the next two years, price hikes in PVC pipes business and reduction in forex losses due to appropriate hedging policy.

Chart 17: EBIDTA & EBITDA margin 450 20.0 400 350 15.0 300

250 10.0

200 (%) (INRCrs) 150 100 5.0 50 0 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

EBITDA EBITDA Margin

ROCEs and ROEs to remain improve significantly ROCEs and ROEs are expected to improve on the back of better asset turns and higher EBITDA & net profit margins. We expect ROCE to improve from 12% in FY13 `to 23% in FY16E and ROEs to increase from 20% in FY13 to 27% in FY16E.

Chart 18: ROE & ROCE 25 30.0

20 25.0

20.0

15 %)

15.0 (%) ( 10 10.0

5 5.0

0 0.0

FY13 FY08 FY09 FY10 FY11 FY12

FY14E FY15E FY16E

ROCEs ROEs

FINOLEX INDUSTRIES LTD

Du Pont Analysis: Composition of RoE to improve led by higher asset turns and margins With net profit margins at 7%, asset turnover at 0.8x and leverage at 3.9x, RoE is currently healthy at 23%. Going forward, we expect ROE and the quality of ROE to improve with better asset turns, higher operating margins and reduction in leverage.

Chart 19: Quality of ROE to improve 20

15 5.0 3.1 3.4 0.85 10 0.54 4.4 3.9 0.81 4.6 0.78 4.6 4.5 0.71 0.56 5 9 0.71 9 10 4.8 0.72 6 7 5 4 4 0 0.59 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Net Profit Margin Total Asset Turnover Leverage

Free cash flow generation to improve FININD has consistently made good cash flows from operations, excluding forex losses as the company has minimal working capital requirements. Going forward, we expect the company to generate high free cash flows, as the company has already done expansion and does not have any requirements for further capex.

400

200

0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E (200)

(400)

Operating Cash Flows Free Cash Flows

Higher free cash flows = Debt reduction Led by free cash flow generation, we expect FININD debt to reduce significantly.

1,200 1,042 1,000 812 834 839 747 800 692 639 539 600 439

(INR Crs) (INR 400 200 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

FINOLEX INDUSTRIES LTD

Financials Income statement (INR crs) Year to March FY12 FY13 FY14E FY15E FY16E Income from operations 2,100 2,145 2,296 2,321 2,452 Direct costs 1,617 1,505 1,607 1,611 1,667 Employee costs 56 72 77 78 82 Other expenses 266 377 382 360 378 Total operating expenses 1,883 1,882 1,989 1,971 2,044 EBITDA 217 263 307 350 408 Depreciation and amortisation 76 54 58 60 61 EBIT 141 208 249 290 347 Interest expenses 75 51 40 32 27 Other income 30 33 30 30 30 Profit before tax 97 190 239 288 350 Provision for tax 22 54 68 82 99 Core profit 75 136 171 206 250 Extraordinary items 0 0 0 0 0 Profit after tax 75 136 171 206 250 Minority Interest 0 0 0 0 0 Share from associates 0 0 0 0 0 Adjusted net profit 75 136 171 206 250 Equity shares outstanding (mn) 12 12 12 12 12 EPS (INR) basic 6.1 11.0 13.8 16.6 20.2 Diluted shares (mn) 12.4 12.4 12.4 12.4 12.4 EPS (INR) fully diluted 6.1 11.0 13.8 16.6 20.2 Dividend per share 3.0 5.5 6.9 8.3 10.1 Dividend payout (%) 49.5 50.1 58.2 58.2 58.2

Common size metrics- as % of net revenues Year to March FY12 FY13 FY14E FY15E FY16E Operating expenses 89.7 87.8 86.6 84.9 83.4 Depreciation 3.6 2.5 2.5 2.6 2.5 Interest expenditure 3.6 2.4 1.8 1.4 1.1 EBITDA margins 10.3 12.2 13.4 15.1 16.6 Net profit margins 3.6 6.3 7.4 8.9 10.2

Growth metrics (%) Year to March FY12 FY13 FY14E FY15E FY16E Revenues 6.2 2.1 7.1 1.1 5.7 EBITDA (1.3) 21.2 17.0 14.0 16.5 PBT (15.8) 96.6 25.4 20.6 21.7 Net profit (1.3) 81.2 25.4 20.6 21.7 EPS (1.4) 81.2 25.4 20.6 21.7

FINOLEX INDUSTRIES LTD

Financials Balance sheet (INR crs) As on 31st March FY12 FY13 FY14E FY15E FY16E Equity share capital 124 124 124 124 124 Preference Share Capital 0 0 0 0 0 Reserves & surplus 538 597 669 755 860 Shareholders funds 662 721 793 879 984 Secured loans 1,023 820 0 0 0 Unsecured loans 20 20 0 0 0 Borrowings 1,042 839 639 539 439 Minority interest 0 0 0 0 0 Sources of funds 1,704 1,561 1,432 1,418 1,423 Gross block 1,627 1,771 1,871 1,901 1,931 Depreciation 843 891 950 1,010 1,072 Net block 784 880 921 891 859 Capital work in progress 85 51 0 0 0 Total fixed assets 869 930 921 891 859 Unrealised profit 0 0 0 0 0 Investments 493 360 200 200 250 Inventories 326 483 517 522 552 Sundry debtors 47 39 41 42 44 Cash and equivalents 29 9 28 44 8 Loans and advances 224 199 213 215 227 Other current assets 0 0 0 0 0 Total current assets 626 729 799 823 832 Sundry creditors and others 241 290 311 314 332 Provisions 44 80 84 88 92 Total CL & provisions 285 370 395 402 424 Net current assets 341 359 405 421 407 Net Deferred tax (90) (94) (94) (94) (94) Misc expenditure 91 6 0 0 0 Uses of funds 1,704 1,561 1,432 1,418 1,423 Book value per share (INR) 53 58 64 71 79

Cash flow statement Year to March FY12 FY13 FY14E FY15E FY16E Net profit 75 136 171 206 250 Add: Depreciation 76 54 58 60 61 Add: Misc expenses written off (22) 85 6 0 0 Add: Deferred tax 10 4 0 0 0 Add: Others 0 0 0 0 0 Gross cash flow 138 280 235 266 312 Less: Changes in W. C. 33 73 26 1 22 Operating cash flow 106 206 208 266 290 Less: Capex 80 115 49 30 30 Free cash flow 25 91 159 236 260

FINOLEX INDUSTRIES LTD

Ratios Year to March FY12 FY13 FY14E FY15E FY16E ROAE (%) 11.7 19.7 22.6 24.6 26.9 ROACE (%) 8.7 12.1 15.7 19.1 22.9 Debtors (days) 8 7 7 7 7 Current ratio 2.2 2.0 2.0 2.0 2.0 Debt/Equity 1.6 1.2 0.8 0.6 0.4 Inventory (days) 57 82 82 82 82 Payable (days) 42 49 49 49 49 Cash conversion cycle (days) 23 39 39 39 39 Debt/EBITDA 4.8 3.2 2.1 1.5 1.1 Adjusted debt/Equity 1.5 1.2 0.8 0.6 0.4

Valuation parameters Year to March FY12 FY13 FY14E FY15E FY16E Diluted EPS (INR) 6.1 11.0 13.8 16.6 20.2 Y-o-Y growth (%) (1.4) 81.2 25.4 20.6 21.7 CEPS (INR) 12.1 15.4 18.5 21.5 25.1 Diluted P/E (x) 33.7 18.6 14.8 12.3 10.1 Price/BV(x) 3.8 3.5 3.2 2.9 2.6 EV/Sales (x) 1.7 1.6 1.4 1.3 1.2 EV/EBITDA (x) 16.4 12.8 10.2 8.6 7.3 Diluted shares O/S 12.4 12.4 12.4 12.4 12.4 Basic EPS 6.1 11.0 13.8 16.6 20.2 Basic PE (x) 33.7 18.6 14.8 12.3 10.1 Dividend yield (%) 1.5 2.7 3.4 4.1 5.0

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