ICICIDirect - Research Report - Finolex Industries (Buy: Rs 68.50, Target: Rs 95)

Finolex Industries (FININD)Price: Rs 68.50
Target: Rs 95OUTPERFORMERFinolex Industries,

India's second largest polyvinyl chloride (PVC)manufacturer, is well placed to capitalise on the demand-supply mismatch inthe domestic PVC industry. It is also planning to foray into the real estatebusiness by developing its 78 acres of land at Chinchwad, outside Pune. Weinitiate coverage on the company with an OUTPERFORMER rating.Demand-supply mismatch: PVC producers in India are currently in a sweet spotas there has been a shift from excess supply to shortage in the last fewyears. For the period 2001-06, capacity addition grew at a CAGR of just 2%,whereas demand continued to surge in double digits at a CAGR of 11%. Thishas resulted in firm PVC prices and high capacity utilisation rates fordomestic manufacturers.Capacity expansions, cost reduction initiatives: Finolex has doubled its PVCresin capacity to 260,000 tpa and is in the process of expanding its PVCpipes capacity from 65,000 tonnes to 85,000 tonnes. It is also undertakingInitiatives like setting up of a 43 MW captive power plant and convertingits jetty into an all-weather jetty, which will expand margins goingforward.Real estate foray to stabilize earnings: The company has 78 acres of land inChinchwad, which it plans to monetize in partnership with a developer. Ithas been in negotiations for the last one-year and we expect an announcementfrom the company shortly. We expect the company to go for a lease modelwherein its share of the income would be Rs 72 crore per year.Valuations: We have used the sum of parts methodology to arrive at a fairvaluation for Finolex Industries. We estimate the value of its core PVCbusiness at Rs 58 per share, value of its 14.5% shareholding in FinolexCables at Rs 12 per share and value of its real estate business at Rs 25 pershare. Our target price works out to Rs 95 per share, which offers a 39%upside from the current price of Rs 68.50.

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