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Sowmya Sundar

The thrust on irrigation projects to drive growth.

FINOLEX Industries can be considered for investment as part of exposures to mid-cap stocks. At Rs 68, the stock trades at eight times its trailing 12-month per share earnings. Finolex,which makes PVC resins and pipes, would be a major beneficiary of the Government's thrust on irrigation and water management projects. The high PVC and stable raw material prices should ensure healthy profitability.

Business

Finolex has integrated backward into manufacturing polyvinyl chloride (PVC). It is the only integrated pipe manufacturer in India. Its peers depend on imports, and are hence, more susceptible to the volatile trends in PVC prices. The company derives 72 per cent of its revenues from PVC and the rest from pipes and fittings.

Demand drivers

PVC segment: The domestic demand for PVC has been growing at 10 per cent annum , while the global demand is rising at 4 per cent. India is still a net importer of PVC, offering domestic manufacturers potential for growth. The main demand drivers for PVC are the agricultural , housing, construction and infrastructure sectors. The agriculture segment accounts for about 40 per cent of the demand for PVC. The healthy growth prospects in the user segments and the demand - supply mismatch could lead to firm trends in PVC prices and operating margins.

Prices of PVC and the raw materials in making it — ethylene dichloride (EDC) and ethylene, which are imported — are linked to the trends in international crude prices. EDC prices have stabilised now, after a spike in mid-2003. As Finolex has entered into long-term contracts for the purchase of EDC, it has so far escaped the effect of the higher crude prices. Prices of the end product (PVC) are expected to remain firm, leaving room for margin expansion.

PVC pipes segment: The Central and State governments have been placing emphasis on speedy implementation of irrigation projects. This would lead to robust demand for PVC pipes. A number of ongoing sewerage treatment projects, and urban and rural water management programmes, could also expand the market for PVC pipes. The housing and infrastructure segments too are major users of PVC pipes.

Finolex has expanded its distribution network and also penetrated the northern markets. It has been strengthening its presence in the South and West. The company's joint venture with Plastro Passon of Italy, undertakes irrigation projects in several States. This association could enhance the scope for Finolex's participation in such projects and aid topline growth as the requirement of pipes would be sourced from it.

Finolex has turned in an impressive performance in the first quarter of FY 05; its earnings have more than doubled. The PVC segment recorded a 31 per cent growth in revenues. Demand for the pipes segment too was buoyant with a 21 per cent rise. Given the bright growth prospects, the valuation levels leave room for upside.

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