PL Stock Report: Finolex Industries (FNXP IN) - Q2FY24 Result Update – Weak margin despite wider PVC-EDC spread - Accumulate

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

Rating: ACCUMULATE | CMP: Rs203 | TP: Rs238

Q2FY24 Result Update – Weak margin despite wider PVC-EDC spread

We downward revise our FY24 earnings by 9.7% to factor in lower volume growth and EBIT per kg, while marginally cut FY25/FY26 earnings by 2.9%/2% considering gradual improvement over coming years and revise TP to Rs238 (Rs243 earlier) based on 21x Sep’25E EPS plus 50% discount to Finolex Cables’ stake. FNXP reported soft volume growth of 6.2% in its seasonally weak quarter as 60% volumes came from agri segment which is highly price-sensitive, thus, in anticipation of PVC resin price drop, sales volume impacted in Q2FY24. The company reiterated guidance of 15% volume growth in pipes and fittings segment in FY24. PVC-EDC spread, which was USD 571/MT in Q2FY24, had improved FNXP's gross margin to ~40% (EBIT/Kg was Rs 11.5). The spread has since decreased to USD 450/MT in Oct-23, even after management expects EBIT per Kg to be Rs 11-12 for FY24.

We expect Revenue/EBITDA/PAT CAGR of 12.1%/40.5%/39.8% for FY23-26E with P&F volume CAGR of 13.9% and EBITDA margin of 13.7%/14.0% for FY25E/FY26E. Maintain ‘Accumulate’ rating.

Revenues decline 6.2% YoY; P&F vol. grew 6.2 YoY: FNXP revenue came in at Rs8.8bn (down 6.2% YoY), ~10% below our estimate (PLe: Rs9.8bn). The P&F business posted revenue of Rs8.6bn (up ~7% YoY) with 6.2% YoY volume growth. The realizations stood at Rs136 per Kg up 0.6% YoY (PLe: Rs128 per Kg). PVC resin segment posted revenue of Rs3.0bn (down 38.1% YoY), volume down by 30.6% YoY to 37,516 MT. The external sales vol. were down 82.4% YoY and external realization was up 6.2% YoY resulting into 81.3% decline in PVC resin external sales. Gross margin expanded to 39.9% from 9.4% in Q2FY23. (PLe: 35%). FNXP posted EBITDA of Rs1.0bn against loss in Q2FY23 (PLe: Rs1.2bn) with EBITDA margin of 11.7% (PLe: 12.2%) as the PVC-EDC/PVC-VCM spread for Q2FY24 was USD 571/USD157 per MT as against USD 575/USD165 per MT in Q2FY23. P&F business reported EBIT of Rs676mn with EBIT margin of 7.9%. PVC resin EBIT stood at Rs20.4mn with EBIT margin of 6.8%. Reported PAT of Rs980mn against loss in Q2FY23, (PLe: Rs 932mn).

Con call highlights: 1) Mgmt. has reiterated its guidance of 15% volume for FY24 2) P&F segment has a agri:non-agri mix of 60:40 in volume terms in Q2FY24 which will improve to 50:50 in next 4-5 years, 3) Major focus will be on non-agri segment growth going forward, 4) Retail network increased to 23,000 pan India, 5) PVC-EDC spread has reduced to USD 450/MT and PVC-VCM to USD95/MT by Oct-23, 6) Higher realization in external sales PVC resin was because of product mix, emulsion grade is better than the suspension grade PVC resin, 7) P&F industry import around 50% of PVC resin requirement, 8) Mgmt. is targeting EBIT/kg to be at Rs14 per Kg with improved volume growth and reduction in fuel costs, 9) Captive fittings plant has capacity of 12kMT and company also outsource, 10) In Q2FY24, there was marginal inventory gain.

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