Finolex cables ltd

Finolex as an organization loosing its moats factor to its competitor due to family dispute…Due to brand name of Finolex created by Prahlad & Kishan they are hanging in the market as Big Guys. New entrants like Sterlite, polycab, V-Guard started making dent. You can see it visibly in next 3-4 quarters…

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Hi tried reading your blog but the link is corrupted i guess. Could you please share a fresh link

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Interestingly with the current market cap of nearly 4500Cr(approx), the core business is available for around 2500 - 3000 Cr ( 32% holding in Finolex Industries + cash on BS ) . Market is punishing too much for the lack of growth. With economic revival , growth will definitely come back because of the brand value and recent diversification into FMEG. Only question is when will that happen.
Disclosure : Top holding(18%)

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After adjusting for the cross holding in Finolex Industries, they are also sitting on 1000+ Cr of cash on the standalone balance sheet. The operating business is now available at < 1500 Cr , operating PAT of 250 Cr per annum.

This is as deep value as anything can get but the current market mood does not care about value, nor is it too enthused about the fight between the cousins. On a long enough time frame this will can pay off very well but the stock is likely to test one’s patience for some more time.

Disclosure: Invested, one of the very few value bets that I am willing to take in today’s market purely because of how much of a no brainer it is going by the numbers.

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Talking from the opposite side of the camp… I would raise the following concerns…

  1. why is the growth slowing when peers like polycab are growing comfortably at 15%…
  2. are there any signs of erosion of market share…
  3. what is the road map for growth…
  4. if there is any roadmap, why are the fixed assets not reflecting them…
  5. why is capex= depreciation since 3-4 years…
  6. when there is no growth why is cfo going down from North of 300 crores to last year 150 odd crores…
  7. assuming there won’t be any growth even a pe of ten says it will take ten years to get back the cmp from earnings… Not tracking finolex cables…Interested to know your views

@Hao-ming You are spot-on. The growth is stagnant/slow because management is not aggressive at all. Compared with PolyCab/KEI , I see very less number of ads on finolex products as indicated by their advertising expense. But my bet is on the brand value and economic revival. The current price is cheap if we factor-in a growth of 8% which is possible with the brand name provided our GDP growth picks up. It might take a long time, but this stock is definitely not for growth pickers.

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Below are my responses to the best of knowledge:

  1. why is the growth slowing when peers like polycab are growing comfortably at 15%: Many moving parts in it. Finolex is a leader in house wires (retail dependent) and also having notable exposure to optical fibres. Both the segments going through slowdown (real estate slowdown and delay in 5G auctions). Polycab and KEI are also prominent in institutional segments i.e EHV cable etc and enjoying advantage of orders from govt and infra companies. Further, being a financially conservative companies, non-aggressive marketing campaign in comparison to polycab and KEI also creating subdued growth for Finolex. Understood from past concalls that company has mapped total customer touch points across India and attempting to bring them under its coverage gradually.
  2. are there any signs of erosion of market share: Polycab has 18% share in overall wires and cable segment, KEI has 9%. Unable to find for finolex.
  3. what is the road map for growth: Could not find any guidance.
  4. if there is any roadmap, why are the fixed assets not reflecting them: Capacity utilisation plays a deciding role in growth. Setting up of factories only doesnot decides company’s fate. Low capacity utilisation coupled with high operating cost is detrimental for margins.
  5. why is capex= depreciation since 3-4 years…: Most likely it is maintenance capex. Due to slackening demand, company not ramping up capacities aggressively.
  6. when there is no growth why is cfo going down from North of 300 crores to last year 150 odd crores: Due to rise in working capital requirement i.e rising inventories etc.
  7. assuming there won’t be any growth even a pe of ten says it will take ten years to get back the cmp from earnings… Not tracking finolex cables…Interested to know your views: There are two legs of PE growth: re-rating and earning growth. Sadly company is suffering on both the fronts. PE is only an indicator of company’s valuation. One needs to take comprehensive view of company’s fundamentals as well before deciding to take position.
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With 5g rollout around the corners, this looks interesting. In ofc space this is an ethical company, rest all have ethical issues ( like aksh optifiber), or high debt ( like sterlite tech ).

5g would call 5x ofc as compared to current ofc penetration, as only 20% of today’s cables are ofc based and 5g can only work with ofc.

Current revenue of company - 13.5% comes from ofc space, although it is low compared to overall. They are at 75% capacity and plan to do capex for additional 60% increase. So they can increase their revenue proportion from ofc. They have a huge opportunity ahead if they act aggressive.

Need to evaluate the presence and pie size in ofc for other competitor like polycab .

Disc : recently added 2.5% in portfolio with 5g story as opportunity for next 5 years in mind

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BE AWARE PROMOTERS are LOCKING HEAD with each other!!
“Mr. P G Pawar, Mr. Mahesh Viswanathan, Mr. M.L Jain and Mrs. Shruti Udeshi, Directors had offered themselves for reappointment at the last AGM held on 18th September 2019.All the resolutions proposed at that AGM were passed by requisite majority. However, two major corporate shareholders namely: Orbit Electricals Private Limited holding 30.7% and Finolex Industries Limited holding 14.5% aggregating to 45.2% of the paid up share capital of the Company voted against each of the resolutions for their respective re-appointments. Both the aforesaid major corporate shareholders are under the management control of Mr. Prakash Chhabria one of the promoters of the Company who is currently in dispute with Mr. D K Chhabria, another promoter who is in management control of the Company which explains the reasons for such negative votes being cast by those companies. A contention has been raised that these votes were cast contrary to the mandate under their constitutional documents/ contractual commitments, and these are the subject matter of challenge before the Court(s) and the matter is thus sub judice.”

Source AR 2019-20, Page 26

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The debt-free company has good fundamentals in spite of family disputes.
Having a good FMEG product range also 5G opportunity.
Seems undervalued compared to its peers (Polycab) in each valuation aspect.

Does it eligible for rerating soon?

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The owners seems to be reconciling and putting their disputes behind. In the recently concluded AGM,there was no cross voting, all resolutions passed with requisite majority. The company has around 2000 crs of cash in books at MCAP of 7500 crs. How many companies in India have that kind of war chest for acquisitions . The management is extremely conservative and honest. They helped their dealers during covid by expanding the discounts. If anyone has heard Mr. Deepak Chabaria during concalls,he comes across as a very humble man and knows each and every aspect of finolex . He has taken care than even during the family fued “Finolex” brand is not tarnished. As a 70 year old man he in in sync with the current trends hiring Kiara and Kartik as brand ambassadors instead of ageing so called megastars.

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FINCABLES_29092022113739_54AGMgistofProceedings.pdf (523.8 KB)

Earnings-Call-Transcript-dated-11Nov-2022.pdf (314.3 KB)

Fiber optic turnover has jumped 100% during the last qtr primarily due to orders from Bharti and Jio. . Current price for fiber optic cable is 3.6/km which is at par with international prices. The subdued profits are due to share of loss of associates(finolex industries). Overall the company is quite communicative about results and is not shying away from sharing uncomfortable facts, nor they are over-promising . The management dispute seems to be over although Mr. Deepak Chabaria did not answer a direct question related to it. The sudden move after the AGM,of almost 25-30% the market seems to be sensing resolution. Interesting trivia—Mr. Prakash Chabaria is the son-in-law of Mr. Gopichand Hinduja. Hinduja’s themselves have lately resolved all their disputes.

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Q2-INVESTOR PRESENTATION.pdf (2.8 MB)

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