key branded player which has 19% market share in the organized segment of 60% of pvc pipes. of the total addressable market of 1800k MT- Finolex has 280k MT capacity and volumes of 145k lakh MT- Supreme has 400k Mt capacity and volumes of 235kMt. With consequent two good monsoons hopefully and with govt. impetus for housing segment and GST implementation will lead to good tailwinds to the pvc pipes industry. Finolex also has captive PVC resin production which leads to good backward integration. Now with their tieup with lubrizol in feb 17, they have entered into the CPVC segment which has higher margins. Though currently at 4k MT they are planning to ramp up the volumes to 50k MT in 4 yrs. Also for pvc segment they are planning to add up 150k MT in three years for which they have earmarked 300 crores from internal accruals.
Regarding the rawmaterial (EDC,VC,Ethylene) part which constitute nearly 65-70% of sales, are mostly imported. The raw materials as they are derivatives of crude are at low prices leading onto improved margins for the industry. Regarding the raw material cost and the PVC EDC spread are cyclical the company doesnt have any control over that. The management improves the margins by value added prodcuts like fittings and other higher margin products. Also they have cash and carry model for pvc pipes leading on to low receivables period an exception for lubrizol products which they plan to give 30 day credit.
Finolex is a very dominant brand in the agri rural space and they are planning to use that leverage for the cpvc pipes too. The current composition of sales is 70% agri and 30% non agri, the management plans to increase the non agri to 50% as it have better margins.
Overall though still a commodity play with a sustained low crude levels and gross margins of 30% and shift from unorganized to organized sector play, they have good tailwinds going forward. Lubrizol tie up for CPVC lends some more branded high margin products to its kitty. But supreme industries has higher return on equity due to higher NFAT and higher leveraging. Despite higher NPM compared to supreme industries due to good product mix they got to sweat their assets more.
at pe ratio of 22 and earning yield of 6.7% it remains to be at undervalued in comparison to peer with supreme at 40 pe and astral at pe of 60.