Finolex Industries - Long Term Compounding Story

Q2 FY18 concal. My notes -

  • Q4/Q1 are big qtrs for this company whereas Q2/Q3 are slower.
  • PVC prices usually go down from Nov/Dec till January. Yearly phenomenon.
  • Looking for very aggressive volume growth. Discounts will continue even in H2 this year. So margins may remain suppressed.
  • PVC business maintenance shutdown happens every 2-3 years.
  • CPVC division (850 SKUs/850 dealers). CPVC pipe volume qoq moved from 900 to 1200 and in case of fittings from 126 tonnes to 247 tonnes.
  • Capex of 250 cr (120 cr already incurred). Full impact for this will be seen in 2019-2020.
  • Pipe utilization @70/75%.
  • 1 billion USD target for 2020 is an optimistic guidance.
  • Average PVC/EDC spread in Q2 was 737 and now it is close to 700 (As on Nov 14th).

Reasons for lower EBITDA-

  1. The PVC resin plant was under planned maintenance shutdown for about 3 weeks in Q2 FY18 resulting in lower production as compared to Q2 FY17, though sales including captive were almost the same as the inventory was reduced. The total impact of this was about 6 Cr. During Q2 FY18 18% of production was through the VCM route compared to 3% during Q2 FY17, which resulted in higher RM cost.

  2. PVC EDC spread was also lower compared to Q2 FY17 and the impact was about 12 cr.

  3. The captive power plant was also shut due to maintenance. Impact ¬ 6.5 cr.

  4. The pipes and fittings was down ¬11.5 cr and this is basically because the moderation in the sales realization for the pipes and fittings continued during Q2 FY18.

My take -
Mgmt insisted pipe demand has recovered very well post GST but to me it looks like GST has been a spoilsport as far as margins are concerned. Some of it is due to shutdowns, but majority of it has been due to higher RM prices and discounts. Mgmt said they are trying to play the volume game to utilize additional capacity and thus have to offer discounts. If the demand is good, one does not need to offer discount to push extra sales in my opinion. Volume growth led by higher realizations should result in improved profits. On the contrary, margins have plummeted in this qtr. Regarding margin deterioration in PVC resins, that is owing to spreads and higher RM.

This looks like a good story as far as volume growth is concerned. But mgmt didn’t offer any guidance whatsoever regarding EBITDA/margins, etc. Crude dependence is heavy and sharp fluctuations can make/break the bottomline.

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