Finolex Industries Limited BSE Code: 500940 NSE Id: FINPIPE

CMP (BSE): Rs. 78.35

CMP (NSE): Rs. 78.40

Industry: Plastic Products

Finolex Industries Limited (FIL) was incorporated in 1981. FIL is the largest PVC pipe manufacturer in India. The pipes division of FIL is the first PVC pipe manufacturer in India to get ISO 9001: 2000 certifications. It is India's only integrated PVC pipes and fittings manufacturer with 140000 MTPA capacity and 260000 MTPA capacity of PVC polymer. The company is also into drip irrigation business through its JV company Finolex Passion.

It has two ultra modern plants at Urse(near Pune) and Ratnagiri. Its manufacturing plant at Ratnagiri has 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 material. FIL offers a wide range of PVC pipes and fittings, for diverse applications in agriculture, housing, telecom, industry, etc., ranging between 20 mm to 400 mm diameter. FIL also manufactures specialty pipes and fittings, namely SWR (Soil, Waste and Rain Water) as well as ASTM pipes and fittings for the construction Industry. The product range of FIL includes PVC-U Pipes and Fittings, PVC Resin and Chemicals. Within chemicals, FIL actively trades in Ethylene Di Chloride and Methanol and caters to various industries such as pharma, fertilizers, paints, laminations, amines, etc.

Within FIL's PVC Pipes Business the bulk of FIL's PVC pipe production is sold in the rural markets for agriculture and irrigation. In addition to this FIL has a vast network spread across the length and breadth of the country. FIL reach is present even to the remotest village where PVC pipe demand exists. FIL has successfully completed the expansion of PVC pipes manufacturing capacity from 100000 MTPA to 140000 MTPA. The full capacity has already started from this year. Due to the strong demand for the FIL's products, FIL is now contemplating further increase in PVC pipe capacity at a new location.

FIL's PVC Resin Business has a lot of opportunities in front of them. The domestic demand for PVC resin grew by almost 25% during FY 10 and has been growing since the last so many years. This is because of a net shortage that has been prevailing in India since years.The total imports of PVC resin into India grew to almost 800000 MT and is expected to grow in future. Even the international prices of PVC resin had been on a rise. Despite this, FIL has been able to maintain its margins because of its ability to pass the cost increase to the market fairly quickly.

FIL is quoting at a PE 7.34 in an industry where the average PE is around 17.11. Other players from the plastic processing company such as Supreme Industries, Jain Irrigation, Tulsi Extrusion, Kisan Mouldings are all trading in the PE range of 7 to 31. It is available at a price which is 1.65 times its book value. Though at a premium, it still appears cheap to me because of its growth prospects and growing demand of its products. Its EPS in FY 10 was Rs. 10.67 as compared to a loss of Rs.3.06 in the previous year, which is very impressive. However the loss in FY 09 was mainly due to the fluctuations in the prices of the raw materials, and this was the 1st tyme in the last 10 years that the company made any losses. The earnings of FIL has been growing at the rate of 33% CAGR for the last 5 years. This sounds very impressive. It is a regular dividend paying company. It has never missed a dividend in the last 10 years. Last year, it paid a dividend of Rs.3/, which brings the dividend yield to be around 3.83% at the current price which is quite good.

With the Indian economy poised to grow at 9.5 % in 2010-2011, the agricultural sector is also expected to show good improvement. In addition to this, the government is taking new initiatives in announcing progressive schemes for development in rural India that encourage micro and drip irrigation, due to which the demand is expected to be buoyant in the future and as FIL' products being largely sold in the rural markets, FIL too is set to grow. Out of the pipes capacity, FIL commissioned 40000 MTPA capacity in FY 10. FIL plans to add another 50000 MTPA capacity by FY 12. FIL 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, FIL will have earnings from the merchant sale of electricity going forward. FIL also has 78 acre free land in Chinchwad near Pune and over 600 acres in Ratnagiri that could either be sold off or utilized for expansions. FIL even plans to set up a 30 MW gas based plant in Chinchwad. All these initiatives are expected to take FIL from its investment phase to a high cash generation phase in the future. Hence its appears to be a good long term buy.

Happy Investing.