FNXP posted a stellar FY21, with sales/PAT development at +16%/+125% y-o-y and all-time higher op-margin at 28.6% (+1,360bps y-o-y). Favourable PVC/EDC spread aided Resin margin. Pipes Ebit/ton is regularly expanding y-o-y more than 7 quarters now, led by larger Plumbing mix (37% of Pipes sales). Factoring in Q4 beat, we raise FY22-24e EPS by 15%+. But in FY22, we count on PVC rates to soften and estimate op-margin to revert to normalised 17-18% more than FY22-24. Retain Buy PT at Rs 198.
Impressive FY21, in spite of disruption: FNXP posted its highest-ever income and op-margin in FY21. Even on a 2-yr basis more than FY19-21, PAT clocked a stellar CAGR of +44%. Such powerful overall performance was mostly led by sharp rise in PVC resin, supporting FNXP margins. Pipes market makes it possible for a pass-by way of of volatility in raw supplies – therefore increasing PVC rates usually entail inventory gains, which led to expanding margins.
FNXP is backward integrated into manufacturing of PVC resin. Hence, a far better PVC/EDC spread augurs nicely for FNXP, esp. Resin. Q4 typical PVC/EDC spread stood at $877/MT, a sharp improvement y-o-y ($574/MT in Q4FY20).
Pipes profitability enhancing: Ebit/tonne in Pipes & Fittings has been regularly expanding y-o-y for the previous 7 quarters now. Key drivers are larger traction in Non-Agri Mix (margin-accretive), Fittings volumes development (larger margin), and development in CPVC mix. CPVC is a higher-margin segment in Pipes, albeit at a low base (< 10% of Pipes mix). Despite a difficult FY21, CPVC volumes grew by +4% y-o-y to 9,635 MT.
Business update: With onset of monsoons, agri-pipes demand in Q2 is seasonally weaker than Q1. FNXP cited that Non-Agri is gaining traction in current quarters and demand is far better than Agri Pipes now (even in Apr-May). In reality in Q4, whilst agri demand dipped by -14% y-o-y, Plumbing grew by +22%. This has helped FNXP improve its Non-Agri Mix to 37% of sales mix (30% earlier). Plumbing is a margin-accretive, retail-focused segment, therefore larger mix could bode nicely for FNXP’s income. FY22 capex anticipated at ~Rs 1 bn, though Pipes capacity expansion would mainly rely on the demand situation.
Outlook: Q4/FY21 was a powerful beat to JEFe. However, PVC and EDC getting international commodities, their volatility is a essential monitorable and therefore we do not foresee peak FY21 margins to sustain. In FY22, we count on PVC rates to soften from peak FY21 levels. We count on FY22 EPS to dip -31% y-o-y.
Retain Buy: Over FY20-24e, we estimate FNXP’s income/PAT CAGR at +14%/+21%, whilst sustaining a robust B/S (net liquid investments at Rs 8.2 bn as of Mar’21). Retain Buy on FNXP with revised PT of Rs 198 (vs. Rs 160). Maintain target PE at 20x, broadly in line with hist 5-yr avg. Valuation seems undemanding at ~18x/16x PE on FY23/24e. Key dangers: Sharp fall in PVC/EDC spread could influence margins, demand slowdown.