Finolex Industries will continue to grow at a steady pace for the next couple of years as the management is seeing strong traction in high margin CPVC business, which registered 70 percent volume growth in Q1 FY19
Plastic pipe manufacturers continued to deliver decent growth in Q1 FY19. The government's push on agriculture, irrigation and infrastructure development has had a positive impact on organised players in the pipes sector. Performance of these companies is notable, amid muted real estate demand, the recovery of which should further propel growth. We discuss results of four major plastic pipe manufacturers - Astral Poly Technik, Supreme Industries, Finolex Industries and Jain Irrigation Systems
– that are trying to penetrate the market through brand development, new product launches and capacity expansion.Quarterly result snapshot
Astral Poly Technikreported June quarter sales growth of 18 percent year-on-year (YoY), due to higher volume sales from the piping segment and strong performance from the adhesive business. Operating profit surged 61 percent as margin improved 16 percent. The over 400 basis points margin expansion was mainly on account of backward integration and richer product mix, but this was slightly offset by higher employee costs.
Volume growth of 15 percent in the pipe business was aided by a low base as well as expansion of dealer network across India. Revenue from the adhesive business (adjusted for excise duties) grew at a rapid pace of 23 percent as the company witnessed strong traction in the domestic business (Resinova Chemie) as well as international business (Seal It Services).
In the quarter gone by, the company initiated commercial production at Ghiloth Plant (Rajasthan) after the successful completion of trial runs. However, production is limited to 2-3 products for the time being and will see a gradual ramp-up in coming quarters. The plant will cater to demand in western, northern and central regions. Expansion at Hossur (Karnataka) is on track and expected to come on-stream in coming months.
The management has maintained its volume growth guidance of about 15 percent, backed by both capacity expansion and better capacity utilisation. Higher contribution from Resinova Chemie and Seal It Services is expected to aid margin. The company also stands to benefit from backward integration in the pipes business.
Supreme Industries' Q1 sales were up 18 percent YoY, led by a combination of 8 percent volume growth and 7 percent growth in realisation. Industrial and consumer segments drove overall volume growth. Piping segment, which contributes more than 50 percent to revenue, reported low single-digit volume growth of 5 percent on account of slow demand from the agriculture segment. The packaging division reported a volume growth of 10 percent.
Earnings before interest, tax, depreciation, and amortisation (EBITDA) margin expanded YoY as the company witnessed an improvement in operating margin across all segments. The latter, however, contracted on a sequential basis due to decline in gross margin and higher other expenses.
The management has revised its FY19 volume guidance downwards to 10-12 percent from 12-15 at the start of the year. Operating margin are also expected to be around 15 percent for the full year.
Topline in Finolex Industries increased 13 percent to Rs 828 crore in Q1 FY19. Growth in revenue was driven by 9 percent jump in volumes from the pipes and fitting segment, but was slightly offset by 9 percent decline in poly vinyl chloride (PVC) resin volumes. The company benefitted from a sharp expansion in operating margin (up over 500 bps), resulting from increase in PVC-EDC (ethylene dichloride) spread on the back of inventory gains.
The management seems confident of double-digit volume growth and margin expansion in FY19. This will be mainly driven by the non-agriculture division. In FY19, the management is planning to launch new products in the non-agriculture division, which should drive its revenue share higher from 30 percent at present. On the capex front, it plans to add 30,000 million tonne of capacity every year by incurring an investment of Rs 30 crore.
Sales for Jain Irrigation jumped 25 percent YoY to Rs 2,092 crore. EBITDA increased 15 percent to Rs 270 crore. Growth in topline was led by the agro processing (up 39 percent), hi-tech (up 17 percent) and plastic (up 15 percent) divisions. Operating margin declined due to a sharp jump in raw material costs.
Interest expenses increased 17 percent to Rs 135 crore on account of additional debt, which was used to fund the $48 million acquisition of US-based micro-irrigation dealers: Agri-Valley Irrigation and Irrigation Design & Construction.
The management expects revenue growth in excess of 15 percent in the current fiscal. This will be aided by its agro processing division, which is likely to grow 25-30 percent in the current fiscal. The company had a low base in FY18 as sales were impacted by fire at its plant.Outlook and recommendationAstral Poly Technik has seen a strong run-up after its Q1 result and the stock is trading at a premium on the back of its historic track record, growing presence in the adhesive segment and earnings visibility. In contrast, Jain Irrigation trades at a significant discount due to the diversified nature of its business, leveraged balance sheet and lack of financial consistency.
Finolex Industries will continue to grow at a steady pace over the next couple of years as the management sees strong traction in high margin chlorinated polyvinyl chloride (CPVC) business, which registered 70 percent volume growth (from a small base) in Q1 FY19. Beside this, the expanded column pipes manufacturing capacity will start contributing to the topline and bottomline from FY19-end. Margin is anticipated to move higher, with increasing economies of scale and new product launches. We advise investors to accumulate Finolex Industries on dips from a long term perspective.Moneycontrol Research page