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This Mid Cap Plastic Stock Has 50% Upside, Buy Says Edelweiss Post Q3 Results

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Edelweiss Broking Ltd, a brokerage firm, has issued a buy call on Finolex Industries Ltd's stock. As of 9:52 a.m. IST on January 28, the stock is trading at a market price of Rs. 172.55, and the brokerage has set a target price of INR 258. The brokerage expects to hit its target price from the current market price, resulting in a 50 percent gain for shareholders.

 

Q3FY22 results of Finolex Industries Ltd (FIL)
 

Q3FY22 results of Finolex Industries Ltd (FIL)

The brokerage has said in a report that "FIL's pipes and fittings sales grew 14.6% YoY (vs Apollo - up 49% YoY, Supreme - up 0.7% YoY), led by the significantly higher realisation of 34.9% YoY (vs Apollo - 36% YoY, Supreme - 35% YoY) despite volume de-growth of 15.0% YoY (vs Apollo - up 9% YoY, Supreme - down 26% YoY). The pipes and fittings segment has been on the growth trajectory since Q2FY20, reporting higher realisations over several quarters (realisation increased to INR177.0/kg in Q3FY22). Revenue from CPVC pipes remained flat sequentially due to a 9% QoQ rise in realisation and an 8% QoQ fall in volume. EBIT margin for the pipes and fittings business declined 590 bps YoY to 6.6% (vs 6.4% in Q2FY22) despite higher realisation."

Edelweiss has further added that "FIL's resin business de-grew by ~8% YoY on account of 35.8% YoY decline in volumes, despite 43.5% YoY growth in realisation. The segment reported a 750 bps contraction in EBIT margin to 28.0% as average PVC resin prices remained extremely volatile in Q3FY22. The average PVC resin price was USD1,514/MT in Q2FY22; it rose sharply to USD1,753/MT in Q3FY22 and fell sharply to USD1,500/MT in January 2022. During the quarter, polyvinyl chloride (PVC)- ethylene dichloride (EDC) spreads improved ~4% YoY to USD795/MT (vs USD790/MT in Q2FY22). However, after Q3FY22, spreads fell sharply to USD580/MT, in January 2022."

Buy With A Target Price of INR 258

Buy With A Target Price of INR 258

According to the brokerage "FIL reported a weak set of numbers in Q3FY22, after a very strong Q2FY22. This was attributed to declining in volumes resulting from destocking at the dealer/distributor level due to fluctuation in PVC resin prices and COVID's 3rd wave as well as extended rainfall-impacted Agri pipe demand. FIL's pipe EBIT per kg increased 13% QoQ to ~INR 11.7/kg in Q3FY22, indicating favourable product mix."

Edelweiss has further claimed in its research report that "We continue to maintain our positive view on the company because of a) expected improvement in Agri pipe volume on account of favourable base and demand pick up, as deferment of demand for a consecutive third season seems unlikely; and b) improved traction in the plumbing pipe segment. The stock is currently trading at 15x of FY23E earnings. We maintain our 'BUY' rating on the stock with a revised target price of INR258/share, valuing the stock at 21x FY23E earnings."

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Edelweiss Broking. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Friday, January 28, 2022, 10:10 [IST]
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