Shares of Finolex Industries started to decline after hitting a 52-week high of ₹234 on November 20, 2021, and have since dropped of nearly 42% to close to a 52-week low of Rs. 132.95 last week.
However, Edelweiss is bullish on the stock and initiated a ‘buy’ call with a target price of ₹190/share, hinting at an upside potential of 43% from the stock's previous closing price.
For the September-ending quarter, the company reported a consolidated net loss of ₹95.4 crore as against ₹99.2 crore in the preceding quarter. The company reported a net profit of ₹233.2 crore in Q2FY22. The revenue came in at ₹980 crore in Q2 compared to ₹1,111.9 crore in the corresponding quarter of last year on account of a sharp decline in realization across segments due to a correction in PVC prices, said Edelweiss.
The company's gross margins dropped by nearly 3,490 basis points YoY to 9.4% and 2,340 bps QoQ on the back of a sharp correction in PVC prices against the high-priced inventory of raw materials and finished goods.
Sales of Pipes & Fittings dropped by 11% YoY on a 17% YoY decline in realisation, despite volume growth and a 7% YoY increase in realisation. However, Pipes & Fittings’ realisation fell 14% sequentially to ₹135.4 per kg in Q2FY23, following a peak of ₹177.0 per kg in Q3FY22, Edelweiss said.
Fittings revenue remained flat despite 3% year-on-year volume growth, while realisation fell 2% year on year. Revenue from CPVC pipes rose 36% YoY to a record level of ₹170cr, led by 11% YoY growth in volume and 22% YoY growth in realisation.
The brokerage said the company performance was severely impacted due to a sharp correction in PVC prices against the high-priced inventory of raw materials and finished goods. FIL posted modest volume growth in a seasonally weak quarter. It reported a sharp margin contraction in both segments, mainly due to a tightening in the PVC-EDC spread and inventory loss, it added.
As Q3FY23 is seasonally weak, Edelweiss expect margin pressure to continue in the near term and forecast FIL to report inventory losses in Q3FY23, though it reported a majority of inventory losses in Q2FY22.
With the normalisation of PVC prices, the brokerage anticipate the demand to improve, leading to volume growth. “We continue to maintain our positive view on FIL due to a higher exposure to the rural market, which is anticipated to perform better with the healthy monsoon, and expected traction in the Pipes & Fittings segment,” said the brokerage.
Nevertheless, the brokerage lowered its FY23E and FY24E estimates by 68% and 10%, respectively.
While another domestic brokerage firm, ICICI Securities, also maintained a 'bull' signal on the stock with a revised target price of ₹181/share from the earlier target price of ₹173.
The company has seen a sharp decline in profitability due to a sharp correction in PVC prices but is able to withstand it due to a robust balance sheet. "We expect profitability to improve going ahead as PVC prices stabilise and volumes improve due to lower RM prices," said ICICI Securities.
Finolex is a strong player in the agriculture pipe market and is expanding into the plumbing segment, too. It has a strong brand name with wide distribution and a robust balance sheet, said the brokerage.
ICICI securities stated some of the downside risks for the company, including lower-than-expected demand for agriculture pipes, a sharp fall in PVC-EDC spreads and a slowdown in the housing market, will adversely affect volumes in the plumbing market.
An average of 12 analysts polled by MintGenie have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.