Stock Pick From The Industrial Machinery sector

Here Is Why: 

• Market leader and strong brand recognition. 
• Focus on improving return ratios going forward. 
• Consistent dividend payment for over two decades. 

Strong brnd, strong distribution network, better management and healthy return ratios make Finolex Industries (FIL) an attractive proposition for ones portfolio. The company is the largest PVC pipes manufacturer in India having around 28 per cent market share in the organised markets. The company’s PVC pipes division produces 210,000 MT spread over its two ultra modern plants at Pune and Ratnagiri. Let us look a look at the investment rationales in details which will justify our stance in recommending this stock in the Choice Scrip column in this issue.

The first major development that is happening in the company is that Finolex is shifting focus from PVC resin business to high growth PVC pipes and fittings business, which will enhance its overall margins and return on capital employed (ROCE). The company has a surplus PVC resin capacity of 270,000 MT and because of greater focus on this business earlier 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. The company expects to use the excess capacity of PVC resins for captive consumption of PVC pipes business.

Finolex Industries appears to be in a sweet spot, aided by multiple 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 going forward. 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.

The company 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 per cent of its revenues from west India, 30 per cent from south India, 20 per cent from north India and 10 per cent from east India. Going forward, it plans to expand in the north-east region, which will further boost its revenues. It is also expanding capacity from current 30,000 MT to 240,000 MT to cater to additional demand in its pipes business.

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 trim its balance sheet size. On the valuation front the stock discounts its trailing twelve month earnings by 14.39x. We recommend a buy on this scrip for a time horizon of one year with a price target of Rs.270.