[T.S.R:15927] Finolex Industries - Company Note - 'Pipeline to Growth'.

Finolex Industries Ltd – Company Note - 'Pipeline to Growth'.

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• A proxy to healthy rural and agriculture growth in India: Increase in MSP on leading agri-commodities has stimulated the disposable income of Indian farmers, which has led to an increase in investment in irrigation and plumbing requirements. Currently, ~80% of FIL's pipe sales are derived from the rural markets.

• Captive power plant to reduce cost and improve margins: The Company has commissioned a 43MW thermal plant, 50% of which would be used for captive purpose. FIL is expected to save around Rs. 25crs annually during FY11E. For the remaining 50%, the Company has entered into a grid contract with MSEB at Rs. 5 per unit. This will furthermore boost the income for the Company.

• Expansion to fuel further growth: FIL has increased its pipe manufacturing facility from 1,00,000 MT in FY09 to 1,40,000 MT in FY10. The Company plans to expand to approximately 1,95,000 MT by FY12E. Further it also increased its PVC fittings capacity from about 7,000 MT to 12,000 MT. FIL further plans to expand by another 14,000 MT by October 2010 so that it is ready to cope with the increased demand during the festive season.

• Option value – Real estate: FIL plans to sell off its Chinchwad land (78 acres) amounting to Rs. 0.75crs at book. According to our estimates, the market value of land should be about Rs. 133crs (Rs. 400 per sq.ft.) which amounts to Rs. 10.6 per share. (According to management estimates the land should be about Rs. 410crs @ Rs. 1200 per sq. ft. amounting to around Rs. 33 per share).

• Buoyant growth expected in Micro Irrigation sector: The management estimates Finolex Plasson Industries Ltd. (micro irrigation co. where FIL holds 46%) turnover to grow by 67% to Rs. 250crs with an operating margin of 30% in FY11E.

• Valuations: Strong rural outlook, expanding capacities, cost reductions and option value from real estate provide a significant upside to the stock. According to Bloomberg estimates, FIL is trading at 8x FY11E EPS estimate of  Rs. 14.2 and 6.6x FY12E EPS estimate of Rs. 17.4. At a P/E of 10x for FY11E EPS, we derive a target price of Rs. 142 per share with around 24% upside from the CMP. Detailed note and our valuation estimates would follow soon.

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