Widely read:
Finolex Industries has for the most part of its past made money selling PVC resins. That business now pales in front of the opportunities opening up in PVC pipes. Finolex has changed track to focus on pipes and has become the largest PVC pipe manufacturer in the country. Here are what will drive its fortunes ahead:
The opportunities in pipes. PVC pipes are increasingly being used in agriculture. They are replacing the traditional galvanised iron (GI) and lead pipes. PVC pipes have a number of advantages: they are lightweight, easy to handle and transport, corrosion-resistant, fire resistant and have a longer life than GI pipes. To top it all, PVC pipes are upto 25 per cent cheaper.
Change in strategy to hold company in good stead. Finolex changed its strategy from that of a resin supplier to an end-product PVC pipe manufacturer. This opened up a wide ranging opportunities. Finolex has grabbed 28 per cent of the organised market for PVC pipes in India.
Opportunities in unorganized market. Around half of the 1.5 million tonne PVC pipe market is unorganized and fragmented. This is prime hunting ground for organized players who bring with them consistent quality and a distribution network unorganized competitors cannot match. Finolex has an added advantage: that of brand recognition.
Increasing usage in real estate. Just like in the farms, PVC pipes are steadily replacing GI pipes in buildings. It is common now to replace a faulty GI pipe with a PVC one. PVC pipes are also used in water pipes, waste water pipes and electrical casings.
Risks. With 70 per cent of its revenues derived from agriculture, Finolex's revenues are linked to monsoons. Then there is the risk of volatility in raw material prices. EDC (ethylene dichloride), a derivative of crude is the key ingredient. Though crude prices have softened in the last couple of weeks, Finolex's profitability remains linked to its movement.
Outlook and valuation. The trend of PVC pipes replacing traditional GI and lead pipes both in agriculture and in real estate is likely to continue. Even in the hinterlands, only around 45 per cent of the total cropped area is irrigated. That means PVC pipe manufacturers like Finolex still have a lot of business to capture. Finolex trades at 0.5 times its PEG ratio. Buy.
This article was originally published on January 08, 2015.
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