Paramount Communication - Belongs to Lucrative Industry

[Sarthak_Jain]

Company Background:

Paramount Communications Limited, established in 1955, specializes in a comprehensive range of cables including power cables, telecom optical fiber cables, railway signaling cables, and house wires. Operates two advanced manufacturing plants located in Khushkhera (Rajasthan) and Dharuhera (Haryana).Experienced significant financial challenges from FY09 to FY18, primarily due to the global economic crisis and the acquisition of AEI Cables in the UK.

Financial Performance:

Q2 FY25 Results:
Revenue from operations: ₹356 Cr, up 41% from ₹252 Cr YoY.
EBITDA: ₹33.6 Cr, margin of 9.38% (up from ₹23.2 Cr, margin of 9.13% YoY).
Profit After Tax (PAT): ₹20.3 Cr, a growth of 4.3% from ₹19.5 Cr YoY.
Domestic sales of wires and cables: ₹254 Cr, growing 38% YoY.
Export sales: ₹102 Cr, a 49% increase from ₹69 Cr YoY.

First Half FY25 Results:

Revenue from operations: ₹677 Cr, an increase of 46% YoY.
EBITDA: ₹63.5 Cr, up 52% YoY, with a margin of 9.31%.
PAT: ₹45.6 Cr, a growth of 34% YoY.

Growth Strategy:

The management anticipates a CAGR of 25%-30% over the next five years, driven by strong market demand and expansion in the US market, which is expected to contribute around 40% of total revenue.
The company has successfully raised ₹274 Cr from investors over the past two years and has become debt-free as of September 30, 2024.

Market Dynamics:

The Indian cable industry is growing at approximately 14%, with strong demand in power, railways, telecom, and exports.
Paramount has exported cables to over 25 countries, with significant revenue from the US market, achieving exports of ₹400 Cr in FY23 and ₹271 Cr in FY24.
The company has established a strong distributor network in the US, which has expanded from 2 to 8 distributors since FY20.

Operational Insights:

Capacity and Utilization:

The company consumed 10,757 tons of metal in H1 FY25, reflecting a growth of 53% YoY, indicating strong capacity utilization.
The pending order book as of October 1, 2024, stands at ₹619 Cr, with domestic orders at ₹427 Cr and export orders at ₹192 Cr.

Working Capital Management:

Working capital days have improved from 137 days to 109 days in H1 FY25, although still higher than industry peers.
The company is focused on reducing working capital days through improved liquidity and operational efficiency.

Challenges and Headwinds:

The company faced challenges in maintaining PAT growth due to the introduction of tax liabilities after years of accumulated losses.
The management expects PAT growth to stabilize post the current financial year as tax implications normalize.
The company is cautious about potential fluctuations in raw material prices and their impact on margins, especially given the competitive landscape and existing duties on exports to the US.

Future Outlook:

Paramount is optimistic about regaining its position as a leading player in the Indian cable industry, focusing on operational efficiencies and market expansion.
Plans for future growth include potential Greenfield projects or acquisitions to further enhance capacity beyond the current plants, which are projected to achieve revenues of approximately ₹1,800 Cr post-capex.

Product Mix and Market Position:

The management indicated that while power cables currently constitute a significant portion of sales, the product mix is subject to change based on market demand and margin considerations.
The company remains committed to maintaining high product quality and customer satisfaction, which has been pivotal in retaining market share during challenging periods.

Disclaimer - Invested at current levels. The company has not seen much growth despite growth in revenues and profits.

[Sourav1]

As per the management guidance in the Q2 FY 25 con call, management is looking confident about their growth plan.

Disclaimer: Tracking.

[Dheeraj_Chitkara]

Recently added this to my portfolio as part of the “electification them” . Their fixed assets are up 30% this year. Order book is around 550 crores. Profits this qtr dipped a bit, but expecting growth to regain strength as govt capex sees an uptick.

[Sourav1]

Due to the past year losses company is getting income Tax Benefit to setup the losses with profit. Management said in the call that for the Coming 3 qtr there will be Sales and EBITDA growth but PAT will remain flat.

[Dheeraj_Chitkara]

Yes, that’s right. Company was in trouble for a long time post the 2008 collapse. Management is very optimistic of them being able to take advantage of the sectoral boom and targeting a 30% cagr for the next 4-5 years.

[Sarthak_Jain]

Does anyone know why Promoters and FII are selling when there is growth?
Is there any specific reason or regulatory issue?

[Souresh_Pal]

Seems like they got the share by preferentials

[HarshVijay]

So why would they sell then? Is it mandatory?

[Souresh_Pal]

What I have seen is stocks what we find very attractive the guys who got preferential shares at lower price tend to sell it by that time. Maybe those guys have better opportunities available due to better access to information. So what we find attractive is a sell candidate for them as they have found a better opportunity which is inaccessible to us

[niraj]

Nice initiative @Sarthak_Jain for starting this thread on Paramount comminications. You have covered most of the relavant points, however i would like to add few things which may add some value to your already detailed post.

I have been following this company from quite some time but the level of understanding i could gather was restricted to annual reports and investor presentations in the absence of earning calls. Company recently has done its first ever earning conference call post Q2 FY 25 results and the investors who attended the call, had asked relavant questions. Management tried thier best to give detailed reply to most of the querries, which helped me in developing a better understanding of the business.

MAJOR TRIGGERS

Company is growing quite fast and guiding for 25-30% growth for next 5 years. Execution is there to see and is reflected in the recent numbers. They currently have 02 plants (Rajasthan and Haryana). Current capacity with minor brownfield capex (optimisation and de bottlenecking) will cater for next 2 years of growth. Max capacity with these 02 existing plants will be 33000 tons of metal processing. It is to be noted that management is comfortable in terms of metal processing volumes when asked about capacity. H1 of FY 25 saw total metal processing of 10,700 tonnes. Sales growth in H1 was 40%, but the volume growth was even higher at 53%. Beyond two years, they need a major greenfield capex or an acquisition (third plant).

They have raised lot of equity capital in last 2 year to repay all of thier debts, cater for working capital requirements and future expansion. Expanding with equity capital is always better in a cyclical manufacturing industry because the next downcycle may kill you when you are not in a condition to service your debt obligations. A debt free company will always be better placed in handling a downcycle of few years without going bust.

They are working hard towards reducing thier working capital cycle. The larger peers have a large part of thier business in B2C segment, so they have the facility of retail channel financing through thier distribution network. Currently retail part for Paramount is quite small but growing. Once it achieves a desired size, even they should be able to attract channel financing which wil reduce thier working capital cycle.

Thier order book is consistently incresing. It could have been even larger but management dont want to book order beyond a delivery period of 04 months because of a fear of downcycle or a crash in commodity prices. This is because of thier previous experiences in the last downcycle. They had thier lessons and now know what is to be done.

NEW CAPEX
Now the final trigger is in place and the loop is complete. Today they announced in exchange filing that they have been alloted 30 Acres of land by Madhya Pradesh Industrial Development Corporation for thier third brownfield plant. This will help them to achive thier guided growth of 25-30% for next 05 years.
Regards.

Dusclosure: invested.

[vnktshb]

While its understandable that there wont be much YoY PAT growth in FY25 because company going from no tax to full tax, growth will be robust from FY26 onwards.

Stock appears the cheapest amongst wires and cables peers. See below:

Disclosure: Invested

[Mayank_Sehgal]

One thing that I am not sure about is the operating margins, They vary a lot and this needs to be considered before making any projections just based on the revenue.
Dynamic cables in their concall had guided for a stable 8-10% margins since they pass over the raw material price changes over to the customer ( hence the premium in valuation compared to paramount I think)
Paramount management did clarify that they don’t take long term delivery dates to control the raw material aspect but then the export revenue did suffer because of raw material cost too.

I have taken position here as I feel it is still a strong candidate for p/e re-rating.

Another company with still decent valuation is universal cables ( they don’t have con-calls so you will have to go only by management disccussion and analysis part in AR)

[ranvir]

Paramount Cables -

Q2 FY 24 results and Concall highlights -

Revenues - 356 vs 252 cr
EBITDA - 36 vs 23 cr ( margins @ 9.5 vs 9.1 pc YoY )
PAT - 20 vs 19 cr ( due normalised tax rate in current Q2 vs zero in Q2 LY )

Current order book stands @ 619 cr ( represents an order book for next 4-5 months )

Last 3 yr’s revenue CAGR stands @ 27 pc

Company’s product portfolio -

Power cables -

LT Power cables
HT Power cables
LT Aerial bunch cables
HT Aerial bunch cables
Control cables
Instrumentation cables

Telecom cables -

Optical Fiber cables
Jelly filled cables
Jumpers
FTTH ( fiber to the home )

Special cables -

Thermocouple
Solar cables
Railway cables
Fire Survival cables

Company’s manufacturing plants are located @ Khushkera ( Rajasthan ) and Dharuhera ( Haryana )

Breakup of Q2 revenues -

Power cables - 50 pc
Railway cables - 10 pc
Telecom cables - 2 pc
House Wires - 6 pc
Exports - 30 pc
Pipes and others - 2 pc

Current break up of branded : unbranded sales of Cables and Wires in India @ 72 : 28. By FY 27, this is expected to go to 80 : 20

Current power generation capacity in India @ 405 GW, expected to go to 620 GW in 2027. Most of the incremental capacity is expected to come from renewable sources which is expected to go up from 80 GW currently to 190 GW by 2027

Globally, the cables and wires industry is expected to grow from $ 290 billion to $ 430 billion by 2029

Other tailwinds for the company’s business include -

National housing mission
Continued growth in Railways, Metro and Highway networks
Projects to enhance inter-regional grid connectivity
Emerging industries and their ecosystems

The whole wires and cables Industry grew by 14 pc each in last 2 yrs in India

Currently, company exports to over 25 countries across EU, Africa, Australia and US. It took them 5 yrs of extensive approval process to enter the US mkt

Company raised 275 cr from investors ( via equity infusion ) in FY 24 and paid all their dues to ARCs. Company is now debt free

Paramount intends to grow its topline @ a CAGR of 25 - 30 pc over the next 5 yrs with a major thrust on US mkts

In Q2, domestic sales were @ 258 cr, up 38 pc ( led by power cables that grew by 80 pc ). Export sales were @ 69 cr in Q2, grew by 49 pc

H1 financial outcomes -

Revenues - 677 vs 463 cr, up 46 pc ( volumes grew by 53 pc YoY )
EBITDA - 63 vs 42 cr, up 52 pc ( margins @ 9.3 vs 8.9 pc YoY )
PAT - 45 vs 34 cr, up 32 pc

Domestic sales in H1 @ 487 vs 311 cr, up 57 pc

Export sales in H1 @ 190 vs 152 cr, up 25 pc

Capex incurred in H1 @ 27 cr. Capex incurred LY was 62 cr

Out of a total of 677 cr of sales, B2C sales in H1 were at 56 cr ( ie less than 10 pc of sales ). As this goes up steadily, their working capital requirements shall keep coming down

As a matter of rule, company doest commit to / take in orders with deliveries beyond 4 months as they don’t want to take on the risk of metal price volatility

The massive infra build up across the economy + the thrust on renewable energy + kicking in of private capex is keeping the demand for power cables at buoyant levels

In US, company has tied up with a number of distributors ( a total of 8 distributors ) on both coasts. These distributors then sell their products to retail customers. Their US business, that way is far more granular

The success that the company in enjoying in US mkts is a big positive for them as the US mkt is far bigger than domestic mkts

For growth beyond FY 26 ( ie revenues > 1800 cr ), company is planning to put up a Greenfield facility. Its at drawing board stage right now

This year, company intends to clock 500 cr of export sales. They have done 190 cr done in H1

Company is at a disadvantage wrt countries like South Korea, Vietnam, Cambodia which pay zero import duties vs 5 pc paid by the company in the US mkts. However, if the new administration imposes a uniform 10 pc kind of tariffs on all counties, Paramount Cables stands to gain

Disc: bought recently, biased, not SEBI registered, not a buy / sell recommendation

[vj2084]

Any take on competitiveness and company’s ability to maintain growth from export segment in terms of duties, tariffs and Fx. I understand current differential duty structure is unfavorable for India. Demand situation from US market may be soft for now and that’s why management is also taking steps towards this. Share of revenue from Domestic market has been increasing and expected to continue in medium term. Growth capex coinciding with softening in demand (export) may keep pressure on forecast for FY25/FY26. Valuation gives comfort though.

[nelskj]

I see that free cash flow is negative. Is that a matter of concern ? Also can someone throw some light on negative inventory and working capital changes.

[rahulshares]

Cash flows are positive in H125 as per the Investor presentation.

Thanks for starting this thread, this does looks a very promising bet.

One strange which I observed Preferential issue of around 33crs to non promoters (only one investor) happened at 22rs in August 2024. — (Edit - This was due to old warrants issued back in 2023 which have now been converted to Equity)

Few months back in June 2024, Preferential issue of INR 83cr to to non promoters (only one investor) happened at 66rs.

At what prices have promoters infused capital in last few years?

[rahulshares]

As per the past filings, the company is in the process of launching a 400cr QIP issue. This is quite positive as I believe the promoters have realized their past mistake and wont go for debt fueled expansion and are okay diluting rather than go for high debt fueled capex.

[as0067]

Isn’t equity costlier than debt?

[Sourav1]

Not at all, after taking debt if it impact your business and takes more than 10 years to turn around then its better to dilute the stake. Staying in the game is most important.

[Sourav1]

Free cash is negative because company paid back its debt as well as, doing small capex to improve its operational efficiency.