ICICI Securities Is Bullish On This Small Cap Stock, Suggests Buy For 37% Returns

ICICI Securities has given a "Buy" rating to Finolex Industries Limited in its recent report published on October 25 with a target price of Rs 181 apiece. With the given target price by the brokerage, the stock has a strong potential upside of 37% from its current level in the next 12 months.

Finolex Industries has reported EBIDTA loss of ~Rs1.43bn due to steep fall in PVC prices (~23% decline QoQ) in Q2FY23. The major drag came from PVC resin segment which saw EBIT losses of ~Rs1.1bn as the company had high cost carried over raw material inventory from earlier quarters (as its jetty remains closed during monsoons when RM prices fell). The pipe segment witnessed EBIT losses of Rs476.3mn in Q2FY23 due to falling PVC prices. During the quarter, pipe volumes grew 6.8% YoY (3-yr CAGR of 7.2%).

Stock Outlook & Returns

On NSE, the stock is trading at Rs 132.85 per share, 0.86% down from its previous close. Today it opened at Rs 134.70 per share. The stock's 52-week low is Rs 121.50 recorded on 22 September 2022 and the 52-week high is Rs 244.50 recorded on 25 October 2021, respectively. Finolex Industries is a small cap Plastics - pipes & fittings company having a market cap of Rs 8,239.93 crore.

The stock has witnessed a fall in the share price of 4.39% in the past 1 week. In the past 1 month, the stock also fell by 4.32%, giving a negative return. It has given 41.35% negative return over the past 1 year. Whereas, in the past 3 years, it gave 8.2% positive returns on investments. However, in the past 5 years, it has given 6.24% negative returns.

Pipe volume grew 6.8%

FNXP's Q2 pipe volumes grew 6.8% YoY (3-yr CAGR of 7.2%) whereas PVC resin segment grew 3.9% YoY. The growth in pipe segment volumes was led by agri segment which grew 16% YoY (~63% of total pipe volumes). For Q2, FNXP reported revenue decline of 13.1% YoY (3-year CAGR of 17.7%) as realisation declined 29.2%/16.5% YoY (-28.8%/-13.9% QoQ) in PVC resin / PVC pipe segment due to fall in PVC prices. With PVC resin prices declining closer to pre-covid levels, demand is likely to revive in pipe segment going ahead from both agri and non-agri markets.

 

Profitability impacted due to sharp fall in PVC resin prices

FNXP reported EBIT loss of ~Rs1.64bn primarily due to fall in PVC resin prices (~23% QoQ) as the company had high cost carried over inventory. "We believe there has already been a significant fall in PVC prices in H1FY23 and thus, going ahead (from Q4) when prices stabilise profitability should normalise. Also, as the company jetty has become operational (which closes every year in monsoons) it will likely benefit from the purchase of new raw material where cost is lesser and thus likely to see normalised profitability. We model FY24E/25E PVC resin/pipe EBIT of ~Rs15/9.5 Rs/kg, in line with the historical normalised profitability," the brokerage has said.

Valuation and view

FNXP has seen sharp decline in profitability on sharp correction in PVC prices but is able to withstand it due to robust balance sheet. "We expect profitability to improve going ahead as 1) PVC prices stabilise and 2) volumes improve due to lower RM prices. Maintain BUY with SoTP-based rolled over Sept'23 target price of Rs181, " the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.