This stock rewarded investors for 5 years like no other: What’s next is the question

NEW DELHI: Finolex Industries has been among a few multibagger stocks that have continuously surprised investors with sharp price appreciation.

The numbers are bound to raise your eyebrows: a 60 per cent rise in last one year, 151 per cent jump in 3 years or a 980 per cent spike in 5 years. Chances are this stock has rewarded investors like none ever. And that, even when company was hit hard by the demonetisation drive in November last year.

The PVC pipes & fittings company reported a 57 per cent jump in standalone net profit for March quarter at Rs 123.26 crore on Rs 1,016.35 crore sales, which grew 27 per cent.

Anil Whabi, Director-Finance at Finolex Industries, says the company is expecting better time as the market has picked up and PVC pipes are doing well.

With the impending GST taxation breaking the back of the informal sector, pipe is one of the many business segments where formal sector players are expected to see rapid market share gains.

So will the stock keep rewarding investors the same way?

Not everyone agrees the company is looking at a green future ahead. Some say volume growth and margin expansion will be muted in the forthcoming quarters.

Whabi says volumes are there, and weaker prices will help demand, which is anyway present. Recent government initiatives in both agri and non-agri segments such as Pradhan Mantri Krishi Sinchai Yojana, increased allocation for irrigation and micro-irrigation fund to boost business.

Besides, housing for all by 2022, smart cities and the AMRUT scheme would help growth in pipes for sanitation and plumbing in the housing sector. All put together, the pipe segment should see good volume growth year on year over the next few years irrespective of PVC prices.

HDFC Securities says the government push to agriculture and housing sectors, Finolex’s focus on increasing the share of non-agri demand in its revenue pie to 50 per cent from 30 per cent over the next four to five years, a ramp-up in higher-margin CPVC volumes and GST tailwinds could offer multiple rating triggers for the stock.

“Equipped with a strong brand, ability to backward integrate, a robust balance sheet and high return ratios, Finolex offers several years of compounding growth potential,” the brokerage said. It has a buy rating and a one-year forward target price of Rs 765 based on 25 times March 2019 EPS estimates.

The stock closed at Rs 606 on Thursday.

Brokerage JM Financial said in a note last month that it saw increased awareness of drip irrigation and brand recall for the company during a trip to rural India.
The government of India (GoI)’s Budget focus on agriculture and infrastructure building, GST implementation and effects of remonetisation should accelerate growth for the company, it said.

Not all brokerages are sanguine on the company's prospects and the stock.

Brokerage Equirus Securities said the expected PVC spread for the company at $160 per tonne in FY18 is higher than the 10-year average of $140 per tonne, but it would be lower than $224 per tonne reported in FY17.

“Normalisation of PVC spread should lead to muted Ebitda growth as the pipe segment would see low-teens volume growth and margin expansion. With muted earnings next year, the stock should remain range-bound,” the brokerage said.

It has an ‘add’ rating on the stock with a revised target price of Rs 616 based on 23 times March 2018 EPS estimate of Rs 26.6 (against earlier target of Rs 548 at 21 times PE).