| Finolex Industries-Micro Irrigation Is The Strength, Not Just PVC Pipes If the PP Chabria led management moves with alacrity, Finolex Industries may turn out to be the biggest multi-bagger of CY11. To achieve this, they have to reduce debt and get rid of unwanted landed to free up resources that can then be pushed into micro irrigation projects....food security is a key issue for resurgent India and Finloex must take the lead. 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. This Finolex-Israeli joint venture has moved up from just providing pilot projects to full scale commercial cultivation based upon the drip irrigation technology pioneered by Israeli companies over the past 4 decades that has helped green the deserts that surround Israel. Commercial successes have been amply demonstrated in the dry and semi arid areas of Vidharba, Ratnagiri and Solapur. A scaled up adoption across the nation will push agriculture to new heights in the wastelands of Rajasthan, Saurashtra, massive parts of Orissa and Andhra, and finally into the dry parts of Tamil Nadu. If all goes well Finolex Plasson will be as big and as crucial an industrial dynamic that few could ignore in Agrarian India which has traditionally favoured pouring billions into massive capture of free flowing water through putting up dams and barrages on rain fed rivers. 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). 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. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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