Finolex cables ltd

Stock Opportunities
1

FINOLEX CABLES

Cmp 55 market cap 844 crores, book value 58

Finolex Cables was established in 1967 and is the flagship company of finolex group. It is one of Indiaâs largest manufacturer of electrical and communication cables. Its cables are used in applications such as automobiles, lighting, cable TV, telephone to computer cables and industrial applications touching most people in their daily lives.

It has added electrical switches and CFL lamps to its repertoire and its plants are located at Pimpri (Pune), Urse (Pune) and Goa and Uttarakhand.

The problem the company faced was due to expansions it did with debt and forex debts. This led to forex losses which has been affecting the bottomline . As per the chairman, this forex issue is going to be finished by fy 13 after which there will be no more forex write offs. The chairman also mentions that debt has substantially reduced from internal accruals.

The company intends to focus on better financial performance, better asset utilization, cost control and reducing debt which should lead to healthier balance sheet going forward.

FINANCIALS

After making losses in fy 09, the company has embarked on a profitable growth track.

Year

09

10

11

12

H1 fy 13

H1 fy 12

Sales

1352

1615

2033

2061

1104

960

NP

-35

58

87

98

40

82

Debt

295

274

269

156

146

154

Looking at statement of accounts for sep 12 results, company has current investments of 35 crores and cash of 45 crores.
Effectively company has net debt of 66 crores as on sep 12. Debt equity ratio is mentioned as 0.19.

Company has posted half yearly eps of 5.4 per share.

Book value 57, no of outstanding shares are 15 crores of Rs 2 each.

Promoter holding 35.65%, no pledging.

INVESTMENT ARGUMENT:

Finolex Cables is a company which after having suffered losses in fy 09 is coming back on track and showing strong profits and with forex issues likely to be out of the way after fy 13, bottomline is likely to be boosted due to it.

Company is a market leader in electrical cables segment which has shown strong growth.

It is developing new products to boost its products portfolio. It developed speaker wires and other products like CFL lamps, T5 tube lights and fittings.

It is the only cable company to enjoy Superbrand status. With a superior brand image, it is selling its products in overseas markets as well.

Company has shifted a major part of its manufacturing facilities to Roorkee plant which offers excise and income tax benefits.

Higher contribution from Extra High Tension cables and start of production at its Extra high voltage plant is expected to boost profitability further.

Based on H1 fy 13 results, company can post fy 13 EPS of close to 10 for and based on current market price is available at attractive valuations. Company is available at close to book value. It also holds 32% in finolex inds whose market cap is around 1000 crores.

TECHNICALS

The chart of the company shows strong uptrend with the stock breaking out of an uptrending channel and currently forming a flag pattern with pattern target of 75 plus if pattern plays out.

Attached chart has some observations put in.


3 Likes
2

acknowledgement-- this company was brought to my notice by omprakash- an enthusiastic valuepickr.

thanks om.

1 Like
3

disc: have taken a position in this stock.

4

Hitesh bhai,

If I am not mistaken, this is sort of turnaround play. Just curious after seeing low 10+% ROE figure.

5

yes subash it is a turnaround sort of play. Here they story is mainly about margin improvement going forward due to removal of forex losses and reduction of debt and higher contribution from extra high tension cables. Plus the roorkee plant and its tax benefits.

6

Disclosure: Initiated long-positions at 55

Below are certain pointshighlightedfrom the latest AR

JOINT VENTURES :Corning and Finolex Optical Fibre Private Limited

The marketing JV with Corning of USA was established and an investment of Rs. 0.5 million was made. The JV will market Optical Fibre to cable makers within India and it is expected that the JV will commence its operations in the upcoming fiscal.

Technology Absorption:

…

Form for disclosure of particulars with respect to Absorption, Research and Development (R&D)

1). Specific areas in which the Company is pursuing R & D efforts:

Following new cables have been designed, developed and type approvals obtained/successfully launched in the market:

…

(iii) Optic Fibre Cable with 144 fibres developed with cost effective design.

…

3). Future plan of action:

)- To develop cost effective Mini Optical Fibre Cable.

)- To develop CAT7 LAN cables with higher bandwidth.

)- To develop cost effective FTTH Optic Fibre Cables.

)- Optical Fibre Cables at 30,211 KM as compared to 37,116 KM in the previous year.

)- Optic Fibre at 273,130 fibre kilometers as compared to 779,740 fibre kilometers in the previous year.

Sales: Communication cables (including Excise Duty) at Rs.1,420 million as compared to Rs.2,042 million in the previous year.

**
**

The two Optic Fibre draw towers were shut down for upgradation during the second half of the year â major modifications were carried out to these towers, which will vastly improve productivity and yields going forward. The shut down resulted in lower levels of fibre production during the year under review. Both the towers have since become operational in the financial year 2012-13

I alternatively believe the Optic Fibre Segment will have a larger say in the turnaround play as highlighted by below points:

1). Government’s drive to expand the broadband connectivity to Rural India

2). FTTH Broadband connectivity: Providing business class bandwith/speeds to consumers, as evident by the growing popularity of cost-effective 25 MBps plans provided by Beam-Fiber(Hyderabad) and ACT TV(Bangalore) which is far less expensive and value for money than the current 4G LTE Plans from Airtel(5-15 MBps, mostly on the lower side).

http://www.clickonf5.org/14748/airtel-4g-lte-india-comparison/

http://www.beamtele.com/index.php?option=com_content&view=article&id=149&Itemid=104

3). Turnaround from Telecom sector, which will move towards FTTH long-term rather than the current options.

Case in point: Google’s 1 GBps trials in Kansas.

4). Improved its performance in the export market during the year under review. Focus has been brought in the developed European markets for marketing Communication Cables, namely Fibre Optic Cables. Efforts have also been made to add more customers in the Middle â East and African markets. Another reason why this segment is crucial, as it has played a vital role in resolving the Forex issues(highlighted by Hiteshji).

Views invited

1 Like
7

Hi Hitesh,

On similar line with Finolex (turnaround play), your thoughts on Panecea Biotec (can turn in short time)and PSL Ltd (will take time: depends on Government policies on pipelines).

Thanks,

Om

8

Trying to search for the holes in the story - a few points from my side.

Finolex is not a superbrand anymore. After getting the awards for three sonsecutive terms (from 2004 to 2008), they were not included in Superbrand category in the latest edition of December 2012. [Source:http://www.superbrandsindia.com/consumer_4th_2012.html]

Remuneration to Executive Directors: 8.5 Cr out of a NP of 98 Cr - A small red flag.

Increase in NP in FY12 is mainly because of 7.92 Cr of MAT Credit entitlement, which was not available in FY11. Otherwise PBT in FY12 was only 109.3 Cr as against 107.2 Cr for FY11.

Revnue from traded goods decreased to 2151 Cr in FY12 from 2155 Cr in FY11 despite increase in Sales Incentives to 104 Cr from 82 Cr. Advertisement and Publicity expenses increased tp 104 Cr from 77 Cr.

As much as 82% of the revenue is from Electrical Cables - Hence betting on the Broadband boom expected in the country is not very promising. And the gains in optical fibre cables segments get nullified by the de-growth in Jelly Filled Telecom Cables - which are primarily used in landline telephony (a dying market).

For digging deep into the story, I tried to compare the segment-wise revenue in past 5 quarters. Since they have two primary segments (Elect. and Communication Cables, I have simplified the analysis by ignoring other segments).

Q2-12 Sales PBT Gross Margin %Sales
Elect. Cables 4123 485 11.8% 92.0%
Commun. Cables 358 26 7.3% 8.0%
4481
Q3-12
Elect. Cables 4172 453 10.9% 91.1%
Commun. Cables 406 25 6.2% 8.9%
4578
Q4-12
Elect. Cables 5059 640 12.7% 93.2%
Commun. Cables 370 38 10.3% 6.8%
5429
Q1-13
Elect. Cables 4563 552 12.1% 92.4%
Commun. Cables 376 29 7.7% 7.6%
4939
Q2-13
Elect. Cables 5141 626 12.2% 91.5%
Commun. Cables 479 92 19.2% 8.5%
5620

The Inferences:

The assumption that they are targeting Communication Cable market is not true. The %age of sales for both segments is almost constant.

The good performance of Q2-13 is primarily on account of improved gross margin in Communication Cable segment. If you look closely in past quarter, it doesn't appear to be a permanent trend. This sudden improvement in gross margin needs to be explored further - if it is a permanent feature, then the story is good.

Their are no traces of improved efficiencies in Elect. cables segment, which earns most of their revenues.

Critique Invited.
9

Hello Manish,

I agree that the Broadband boom is a long-term bet(at leastanother 3 yrs minimum), and more hurdles needs to be removed from the Policy front.

Also, as you have rightly pointed out Communication cable segment is currently a small pie in the product mix. IMHO based on the latest AR, it suggests that the company is looking to increase the size of this pie…

But, for me the near-term impact from the Optic-Fibre segment will come form:

1). Joint Venture with Corning (of Gorilla Glass fame) in marketing optic fibre cables to Indian market where the brand reputation of Corning can have an impact in sales, that is of course assuming the product is among the best.

Will know more about this when this year’s AR gets released.

(Could possibly explain the surge in margins in Q2FY13, where this JV was set to become operational in FY13 as stated in the AR)

2). More focus on exporting/marketing of optic fibre cables to the EMEA market.

I see this as a deep value pick (5 yr horizon - with an indirect play on the telecom turnaround), unless i am wrong in presuming that Hiteshji had selected this as a mispricing bet.

10

The numbers of FInolex look good. They are beginning to turnaround their business as Hitesh is suggesting. What I could not get from their ARs is their source of copper and how they deal with the volatility in copper prices? Can anyone through any light on this?

Also, KEI Industries, another major player in the cables segment is available, and incidentally a “Superbrand” in Dec 2012, is available at cheaper valuations, although it has much higher debt levels.

1 Like
11

Looks Like all Finolex group companyies doing well recent times. Becasue of LIC selling price was struggling to cross 65 !!!But Interestingly promotor group bought some of the qty from it !!!..I think that indicating bright future ahead !!!Worth to watch out

12

Analyst’s report from Sushil Finance dated Dec 2012

http://breport.myiris.com/SFSPL/FINCABLE_20121211.pdf

Snapshot of the Report:

"OUTLOOK & VALUATION

FCL being one of the leading players in the cable industry seems well placed to capture hugeopportunities considering the strengths & the industry in which the Company is operating.Derivative losses coupled with bleak performance by communication cable segment were themajor reasons for de-rating of the stock in past which in our view seems to have been overdone.However considering the sharp run-up in the price, we change our rating to HOLD with a targetprice of Rs.68 while maintaining our positive view on the stock. We have assigned a multiple of6.5x FY14E earnings which is lower than 3-year average of ~7.5x despite the worst getting overfor the company."

13
Finolex Cables net profit rises 75.04% in the December 2012 quarter
Sales rise 6.95% to Rs 528.07 crore

Particulars Quarter Ended
Dec. 2012 Dec. 2011 % Var.
Sales 528.07 493.76 7
OPM % 8.13 8.24 -1
PBDT 41.89 37.23 13
PBT 31.14 24.41 28
NP 23.98 13.7 75

Source: Capital Market

The board of Finolex Cables in its meeting on 13 February 2013 has approved setting up a captive 5 MW solar power plant at its manufacturing facilities at Urse, Pune at an estimated cost of Rs 40 crore.

14

PBT but including Other Income has increased by roughly 4 %, and Excluding Other Income has grown 15 % on a YoY Basis. I Just ran the QoQ and YoY numbers for the Cables business for Both Finolex and Havells, and it seems that the Cables Business is slowing down on a YoY comparion.

Bottom Line Improved due to Lower Exceptional Items, and Interest Expenses. Anybody has any idea onto how good of a traction are they getting with their expansion into North India ?

15

Hitesh bhai what is your take on results .Should we hold it ,entered around 55 levels

16

I think the results are quite good. dont know why the stock is getting butchered.

17

Hitesh sir

No need to worry about the fall in the share price…

some arbitragers were playing this counter at Rs. 54/55 for a short term gain of 10-15% around the results…but as share price fell the stop losses might have triggered… leading to a sharp fall…

one doubt here though as per the growth of the company we are surely seeing the changes in the results…

Do you expect market to recognize this within next 1-2 quarter…

1 Like
18

maverick,

I think if the company keeps up the momentum in results, I think stock price should improve right from march 13 results or in its anticipation.

The company used to have a dividend payout of around 30-40% back in early 2000 and subsequently the payout ratio reduced. Raising the dividends might improve the perception about the company.

From some research reports, it seems company may not go for too big capex in next few years and might be able to generate a lot of free cash – if that plays out it can hike dividends.

19

A recent news update from the Finolex blog-

http://www.finolexblog.com/finolex-and-kec-tie-up/

20

Hi,

Had a good look at Finolex Cables in the last few days. Would like others to throw some light on the below:

  1. The business is a low margin one and any small change in margins can inflate/deflate profit growth. And influencing margin and profits to a great extend is other income which was 15% of operating profit in 2012. This largely consists of div payout from Finolex Industries done in Sep quarter. March 2013 could give a decline in profit if the March 2012 other income performance of 9.4 Cr cannot be repeated. There is no div payout from Finolex ind in March Quarter.

  2. Tax rate for FY14 is a critical aspect. A brokerage report mentions that tax rate will increase from 10% in FY12 to 15% in FY13 to 28% in FY14. This will affect Net Profit Margin in FY14.

  3. Interest outflow has increased slightly in Dec quarter compared to Sep. The HY 2013 balance sheet mentions increase in long term debt by 22%. But investments have also increased from 18 Cr to 37 Cr. Clarity required to project FY14 interest outflow.

  4. March quarter net profit decline will also be aided by tax rate applied. There was -4% tax rate in March 2012 but most likely it should be +15% for March 2013

Overall I think the weak March quarter results (mostly a decline due to higher base) will dampen the sentiments further.

The company looks undervalued in historical terms and inspite of higher tax rates for FY14 is available at 4 times FY14 earnings if we assume a 15% growth in sales. And recovery of infra-power-other capex will give higher sales growth with improved margins. OPM improvement from 10 to 12% will change net profit growth from 9% to 34%!!!

Better entry point after March results + more clarity on tax rate, debt and other income will be great to decide on this.

Cheers

Vinod

1 Like