Stock Pick From The Petrochemical Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a leading Polyvinyl Chloride (PVC) pipe manufacturing company.

Finolex Industries - A Promising Pipeline

HERE IS WHY

• Brent crude prices (a key input for its raw material) have moved lower, and would help improve the margins for the company in the June 2012 quarter.
• The demand from micro irrigation projects after a shortfall in monsoon this year would boost its PVC pipes business.
• The capacity expansion would help the company to meet the growing demand.

The economic scenario is not very comfortable right now. Adding woes to the already painful scenario is the disappointing monsoon. Amid all this gloom, Finolex Industries is a company that we believe would perform well despite this poor scenario.

So, what are the factors that will help Finolex to improve its performance? Lower brent crude prices in the June 2012 quarter would improve its performance and help it report a good set of numbers. Further, a shortfall in the monsoon would increase the demand for PVC pipes due to increased micro irrigation needs, which bodes well for the company. Its ongoing capacity expansion activities would also help it to serve the growing demand in a much better manner. Last, but not the least, Finolex has consistently been a dividend paying company, with the current yield standing at a solid five per cent.

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Let us first go through the history and business of the company. Finolex Industries was incorporated way back in 1981, and since its inception, the company is engaged in the Polyvinyl Chloride (PVC) pipe manufacturing. Further, in 1992, it undertook a backward integration and since then, it is also into the production of PVC resin. Within a span of 30 odd years, the company has become India’s largest PVC pipes manufacturer and the second largest PVC resin manufacturer.

As regards the company’s business, it operates broadly in three segments – PVC pipes, PVC resin and the sale of power. Around 52 per cent of its revenue comes from PVC pipes, 46 per cent from PVC resin and a meagre two per cent comes from the sale of power.

Finolex has a captive power plant of 43 MW. For FY12, it generated a total of 268318 MW of power, of which, after adjusting for inter-divisional sales at around 46 per cent, the total power generated provides it with an average realisation of more than Rs 4 per unit. The rates are expected to stay high, with the demand for power being advantageous for the company.

In the PVC pipes segment, Finolex’s PVC pipes are majorly used in irrigation. We feel that the current shortfall in monsoon would enhance the demand for PVC pipes, thereby benefitting the company. The company has a pan-India presence, which helps it to reach the remotest area of the country. Its margins are expected to go up, with raw material prices having declined over the last quarter.

Another factor which will help the company is its capacity addition, which will enable it to meet the growing demand from the industry. Finolex had undertaken capacity expansion of 70000 MT for PVC pipes. Of this, around 20000 MT has already become operational in FY2012, while the remaining 50000 MT is expected to be completed in this fiscal. This addition will take its total PVC pipes capacity to around 193000 MT by the end of FY13.

The company’s June quarter numbers are not out as yet. However, we believe that Finolex would post decent numbers with improved margins. For FY12, it posted a topline of Rs 2099.78 crore and a bottomline of Rs 75.15 crore.

On the valuations front, the stock is available at a PE multiple of 10x, which should be considered fair. One can enter the counter with a long-term horizon.