Saturday, 25 May 2013

Finolex Cables - Wired for a Turn Around

Finolex Cables is a lading manufacturer of electrical and communication cables. It also sells copper rods. The company has about 15-16% of market share in both electrical and telecommunication cables segments.
  • FCL offers the full range of optical fibre cables.
  • It has backward integration to produce both Copper and PVC insulation material
  • Only cable company to hold the  consumer Superbrand  status.
  • The Pune manufacturing operations would be consolidated at the Urse site. This will help further improve the cost competitiveness in the Low Duty Electrical Cables offered by your Company.
  • Expansions at the Roorkee facilities will double capacity at a total expense of 100cr.
  • Co has a JV with J-Power Systems (which is itself a JV between Hitachi  Cables  and  Sumitomo  Electric  Industries, Japan  who  are  the  world  leaders  in  the  Extra High Voltage Electrical Cables technology, to produce cables in the range of 66KV to 500 KV.
  • The marketing JV with Corning was established will market Optical Fibre to cable makers within India. Corning is the creator of optical fibre and has the largest market share in the world for them.
  • In March 2012, the Company repaid an External Commercial Borrowing of JPY 3.5 billion which was originally drawn in 2007. The loan was repaid in full and on time out of internal accruals and without resorting to either a roll over or substitute loans.

Future Growth Prospects (Medium to Long term)
Govt of India is making efforts to connect India’s vast rural areas through internet connectivity.
Last 4 yrs the communication cables business has seen a degrowth as telcos have not invested in network infrastructure.

The National Broadband Plan:  The Government of India has approved a scheme for creation of the National Optical Fiber Network (NOFN) for providing Broadband connectivity to 250,000 panchayats on 25th October 2011. The project is estimated to involve more than 100,000 km of optical cable routes and US$ 4 billion in funding.

Defense network:  A large scale Optical Fiber Cable (OFC) network project that has been delayed is the defense network which was expected to get underway. India’s telecom commission has also approved additional funding as requested by BSNL for building the fiber network. The proposal envisages a network to be laid out over 60,000 km to provide connectivity for 129 army, 162 air force and 33 navy stations. The proposal for the pan-India OFC is currently being processed and it will be to the tune of $ 1.3 billion.

Mobile Infrastructure:  Today almost 95% of India’s mobile base terminal stations are connected through microwave which is not able to support the bandwidth explosion. It is expected that the transition to fiber as the connecting medium for the nation’s backhaul network will begin in the next 1-2 years leading to an added fiber demand in the country.

Derivate Losses coming to an end
The company had entered into forex derivatives in FY2007 and made huge losses in FY08 and FY09.  The company has been writing off the losses consistently since then. These contracts are to end in the current fiscal, as per the Management. With closure of these contracts and losses thereof, the profit margins are expected to improve.

Valuations
2013 saw a healthy growth in PAT (& EPS) after a couple of years of stagnation. Net Profit was around 145 cr (up from 98 cr in 2012), growing nearly 48% on the back of a modest top line growth of 9%.
 
FY14 is likely to wind up with a PAT of between 165-180 cr and a EPS of between 11-12. I am expecting a slight PE expansion from around 5 now to 8. 

The probable target is close to Rs 90 in a year's time which is close to 80% up from here. Even without the PE expansion a 20%-25% return is a reasonable bet in my opinion.

Disclosure: I am invested in Finolex Cables and have a vested interest in the stock. Please do your due diligence before investing. This is NOT a recommendation to buy or sell the stock.

1 comment:

  1. Thanks Abhishek for this analysis...Given that the margins are expanding, any improvement to overall electrical infra in the country either by govt or consumers will benefit them. My concern has been its low ROE but its slowly getting better. Conservatively i would value at Rs 62 for operations +12 in cash = Rs 80 per share.

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