Mumbai: Finolex, the largest producer of PVC pipes in India, is planning to go for a brown-field expansion for an additional capacity of 150,000 tpa over the next three years to capitalise on the upturn in demand. After the expansion, its total PVC capacity will be 280,000 tpa, which will help it to meet the rising global demand.

The capital expenditure per tonne for the new capacity addition will be 40 per cent lower than the cost of its 130,000 tpa capacity set up in 1994, reducing the production cost per tonne by 3 per cent on an aggregate capacity.

Of the Rs 500-crore investment, Rs 350 crore will be through debt, taking the company''s long-term debt-equity ratio from 0.12:1 in July 2003 to 1:1 post-expansion, the company officials said at a conference organised by ICICI Securities.

Given a healthy demand growth in addition to 10 per cent of the domestic demand being met from imports, Finolex forecasts the domestic PVC industry capacity utilisation rates to remain high at 102 per cent in FY06E despite IPCL''s 200,000-tpa and Finolex''s 150,000-tpa expansion.

Finolex is likely to be a significant beneficiary of demand acceleration in PVC pipes driven by good monsoons this year, the report added. Low-cost brown-field expansion will reduce costs, thus maintaining margins. Finolex''s return on capital employed has improved from 8.5 per cent in FY00 to 14.7 per cent in FY03 despite a fall in PVC import duty from 45.4 per cent to 36 per cent during the same period.

According to a study by rating agency ICRA, global PVC operating rates are forecast to rise from 84 per cent in 2002 to 94 per cent in 2005E on the back of a strong demand and less capacity additions driving up margins.

The Indian demand for PVC already exceeds supply with industry capacity utilisation rates forecast to be stretched at 109 per cent. PVC is a global commodity prone to cyclical fluctuations. Finolex is the only Indian company vertically integrated from PVC to PVC pipes, allowing it to enjoy superior and stable margins and volumes.