Finolex Industries

Gains in the ‘Pipe’line

Finolex Industries (Finolex) is the largest manufacturer of PolyVinyl Carbonate (PVC) pipes and the second largest PVC resin manufacturer in India. We expect the usage of PVC pipes to increase going ahead on the back of theheightened construction activity and increase in land irrigation in the country on account of the various government initiatives, which are targeted at improving land productivity. The construction-related investments in the country are expected to gather pace hereon wherein it is poised to increase from Rs2,150bn in the last two years (2005 to 2007) to over Rs3,000bn over the ensuing two years. Finolex is also in the process of setting up a captive power plant (CPP) to reduce its operating costs.

CPP to aid Margin expansion: The manufacture of PVC is a power intensive process. Finolex is in the process of setting up a 43MW CPP in Ratnagiri, Maharashtra. The CPP would be commissioned in two phases with the first phase of 22MW capacity getting on-stream by March 2008 and the second phase of 21MW getting commissioned by March 2009. Total capital expenditure for the plant is estimated at Rs200cr. This CPP would lower the company's manufacturing cost per tonne of PVC by approximately Rs600. It would help shore up the Operating Margins to 15.0% by FY2010 from 12.2% in FY2007. Further, excess power generated at the CPP would be sold to the state electricity board which will generate additional revenues for Finolex.

Capacity expansion to support Topline: Finolex currently has a capacity to manufacture 2,60,000 metric tonnes (MT) of PVC and 69,600MT of PVC pipes p.a. It is in the process of expanding its production capacity of PVC pipes to 1,00,000 p.a., which is expected to be commissioned by March 2008. Global demand for PVC-based products continues to be robust and domestic demand is in excess of the production capacity. The demand for PVC pipes and fittings has also registered substantial growth backed by a good monsoon and booming construction industry. Various initiatives by the government to increase the reach of irrigation and drinking water supplies are providing further boost to the demand for PVC pipes and fittings.

Windfall from sale of land at Pune: Finolex has about 80 acres of land at Pune, which has the potential for residential and commercial development. We estimate that Finolex would be able to realise Rs550-600cr from the sale of this land. These proceeds could be used to support the a company's capacity expansion plans. We have factored in the sale of land in our estimates at a conservative value of Rs500cr. Our Target Price includes Rs40/share from the sale of land.

Port could unlock value in the future: We believe that Finolex is also looking at Port development as a future business opportunity. Finolex currently has a captive jetty, which would be extended to outside players. Potential revenues could be up to Rs400cr per year. We have currently not factored in the business from the port in our estimates.

Outlook and Valuation
Finolex has excellent market potential in the PVC pipes space, which it is capitalising on by expanding its production capacity at an appropriate time. Finolex is also venturing into Power generation (with a CPP) along with the Port business, which would enhance its OPM’s substantially. The 14.5% holding in Finolex Cables is another embedded value in the company. This translates into approximately Rs250cr of investments, which translates into approximately Rs20 per share for Finolex Industries. We expect Finolex's Net Profit to grow at a CAGR of 26% on the back of a 20% CAGR growth in Net Sales over FY2007-10E coupled with Operating Profit Margins expansion from 12.2% in FY2007 to 15.0% in FY2010. We Initiate Coverage on the stock, with a Target Price of Rs158.

----- With due apologies and full credits to Angel Broking