Finolex Industries

Finolex Industries' capex plans and higher cash earning ability make it an attractive bet for long-term investors

 

WITH completion of its key capex projects, Finolex Industries appears stronger than ever to face future challenges. The company is set to enter a phase with high cash generating capacity and holds large land parcels that could be either developed or sold off. The steady growth in its core business and expected growth in dividends in the coming years appear attractive for long-term investors.

BUSINESS:

Finolex Industries is India's only integrated PVC pipes and fittings manufacturer with 140,000 tonne per annum (tpa) capacity and 260,000 tpa capacity of polyvinyl chloride (PVC) polymer. The company is also in drip irrigation business through its JV company Finolex Plasson. FIL has PVC manufacturing plants in Ratnagiri with an open sea jetty for importing raw materials. Half the PVC capacity is based on vinyl chloride monomer (VCM) route, while the other half uses ethylene and ethylene dichloride (EDC) as raw materials. FIL's pipes capacity is spread across two plants — Ratnagiri and Urse near Pune.

GROWTH DRIVERS:

The demand for company's pipes and fittings is growing. There are a number of government schemes that encourage micro and drip irrigation. Minimum support prices and Rural Employment Guarantee Scheme are further adding to the demand. Out of the pipes capacity, the company has commissioned 40,000 tpa capacity by FY10 end. It has plans to add another 50,000 tpa capacity by FY12. It also has completed its 43 mw thermal power plant at Ratnagiri, which is double the capacity it needs for captive consumption. Thus, apart from cost saving on energy, the company will have earnings from merchant sale of electricity going forward. It has 78 acre of free land in Chinchwad near Pune and over 600 acre in Ratnagiri that could either be sold off or utilised for expansions. FIL looks to set up 30 mw gasbased power plant in Chinchwad and amended the objects clause in memorandum of association last year. All these initiatives are expected to take FIL from its investment phase to a high cash generation phase going forward.

FINANCIALS:

After 10 consecutive years of profits, the company reported losses in FY09 due to fluctuations in the raw materials and PVC prices. However, FY10 has been much better for the company as it posted its highest-ever annual profits of Rs 132.3 crore — that too after writing off Rs 54 crore on forex loss. It has a history of strong operating cash flows and has never missed a dividend in the past 10 years. FIL has announced dividend of Rs 3 per share for FY10, which translates in a payout of around 30% — substantially lower compared to
average payout of 52% for the past 10 years.

VALUATIONS:

The scrip is trading at priceto-earnings multiple (P/E) of 7.8 based on its earnings for FY10. Other players from the plastic processing industry, such as Supreme Industries, Jain Irrigation, Tulsi Extrusion, Kisan Mouldings, are all trading in P/E range of 7 to 31. FIL's dividend of Rs 3 per share translates in dividend yield of 3.6%. The company is likely to close FY11 with profits of Rs 172 crore and pay dividend of Rs 4 per share. On the current market price this works out to a forward P/E of 5.9 and forward dividend yield of 4.8%.