Why is Finolex Inds. falling/rising?

Recent Price Movement and Market Context

Finolex Industries has been on a downward trajectory over the past week, with a weekly loss of 1.30%, contrasting with the Sensex's modest gain of 0.56% during the same period. The stock has also underperformed over longer horizons, falling 6.05% in the last month while the Sensex rose 1.27%. Year-to-date, the stock has declined sharply by 28.95%, whereas the Sensex has appreciated by 9.68%. Over the past year, Finolex’s shares have dropped 33.41%, significantly lagging the Sensex’s 8.43% gain. Even over three and five years, the stock’s returns of 12.57% and 41.85% respectively fall well short of the Sensex’s 37.12% and 94.13% gains.

On the day of 28-Nov, the stock underperformed its sector by 0.77%, marking its third consecutive day of losses and a cumulative decline of 3.33% over this period. Intraday, the share price touched a low of ₹177.4, down 2.1%. Notably, Finolex is trading below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages, signalling sustained bearish momentum.

Investor Activity and Liquidity

Despite the price decline, investor participation has increased, with delivery volumes on 27 Nov rising by nearly 50% compared to the five-day average, reaching 4.84 lakh shares. The stock’s liquidity remains adequate, supporting trade sizes of approximately ₹0.29 crore based on 2% of the five-day average traded value. Institutional investors have also marginally increased their stake by 0.63% over the previous quarter, now holding 18.04% of the company’s shares. This uptick in institutional interest suggests some confidence in the company’s fundamentals, given their typically rigorous analysis.

Financial Performance and Valuation

Finolex Industries boasts a low average debt-to-equity ratio of zero, indicating a debt-free balance sheet which is a positive attribute in terms of financial stability. The company’s operating cash flow for the year stands at ₹382.68 crore, its highest recorded figure, while quarterly profit before tax excluding other income surged by an impressive 623.68% to ₹108.35 crore. Quarterly profit after tax also grew robustly by 203.8% to ₹123.56 crore. These figures highlight pockets of strong operational performance despite the stock’s weak price action.

Return on equity (ROE) is moderate at 8.1%, and the stock trades at a price-to-book value of 1.9, suggesting a fair valuation. Moreover, the stock is currently priced at a discount relative to its peers’ historical averages. However, the price-to-earnings-to-growth (PEG) ratio is elevated at 23.1, reflecting a disconnect between earnings growth and valuation, which may deter some investors.

Despite these positive financial indicators, the company’s long-term growth remains a concern. Operating profit has declined at an annualised rate of 1.49% over the past five years, signalling challenges in sustaining profitability growth. This sluggish growth trajectory is mirrored in the stock’s underperformance relative to the BSE500 index over the last three years, one year, and three months.

Conclusion: Reasons Behind the Decline

The recent decline in Finolex Industries’ share price is primarily attributable to its sustained underperformance against market benchmarks and sector peers. Despite some encouraging quarterly profit growth and a strong cash flow position, the company’s long-term operating profit contraction and below-par returns have weighed heavily on investor sentiment. The stock’s consistent trading below all major moving averages further underscores the prevailing bearish trend.

While institutional investors have marginally increased their holdings, suggesting some confidence in the company’s fundamentals, the broader market appears cautious. The elevated PEG ratio and the stock’s failure to keep pace with benchmark indices over multiple timeframes contribute to a lack of enthusiasm among investors. Consequently, Finolex Industries continues to face selling pressure, reflected in its recent price falls and underwhelming performance metrics.

Investors should weigh the company’s improving quarterly profits and strong cash flow against its long-term growth challenges and relative underperformance before making investment decisions.

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