Finolex Cables Ltd (Q3 FY15)

CMP Rs274, Target Rs352, Upside 28.5% 

• Earnings beat estimates with 56.1% yoy growth at Rs382mn against our estimate of Rs 334mn.
• Revenue growth remained muted as electrical cables segment failed to pickup
• Gross margins jumped 384 bps to 25.7%.
• Operating margin at 10.6% was higher than our expectation of 9.6%
• Maintain BUY with 2 year target of Rs352.

Result table

(Rs mn)	Q3 FY15	Q3 FY14	% yoy	Q2 FY15	% qoq
Net sales	5,821	5,631	3.4	6,368	(8.6)
Material costs	(4,037)	(3,784)	6.7	(5,058)	(20.2)
Sales & Distribution costs	(425)	(381)	11.5	(394)	7.8
Personnel costs	(226)	(213)	6.0	(237)	(4.6)
Stock in Trade	(287)	(615)	(53.3)	354	(181.1)
Other expenses	(230)	(195)	18.2	(232)	(0.7)
Operating profit	616	443	39.0	802	(23.2)
OPM (%)	10.6	7.9	271 bps	12.6	(201) bps
Depreciation	(144)	(127)	13.7	(141)	1.9
Interest	(33)	(35)	(5.7)	(33)	0.0
Other income	48	35	37.2	370	(87.1)
Exceptional Items	0	0	-	0	-
PBT	487	316	53.9	998	(51.2)
Tax	(105)	(71)	46.5	(208)	(49.8)
Effective tax rate (%)	21.5	22.6		20.9
Adjusted PAT	382	245	56.1	789	(51.6)
PAT margin (%)	6.6	4.3	222 bps	12.4	(583) bps
Extra ordinary items	0	0		0	-
Reported PAT	382	245	56.1	789	(51.6)

Source: Company, India Infoline Research
 
Earnings growth surprises   
Finolex Cables Ltd (FCL) Q3 FY15 earnings positively surprised with 56.1% yoy growth at Rs382mn against Rs245mn in Q2 FY14 inspite of muted growth of 3.4% yoy in net sales at Rs5,777.6mn which was below our estimate of Rs6,082mn. Demand in electrical cables division remained healthy with 11%/10% volume growth seen in electrical wires and power cables respectively. However, due to falling raw material prices, company had to undertake 7-9% price cuts resulting in tepid sales growth for the division that contributes 66% to total sales. Also, sales from copper rod division slumped 24.3% yoy which further impacted topline. Communication cables segment reported robust performance with a 35% yoy growth with healthy volume growth across all product lines. This segment contributed 7% to the topline during the quarter under review. Others segment which comprises of CFLs, LEDs, fans etc witnessed phenomenal jump of 48% yoy in sales and a significant improvement in PBIT. Q3 FY15 OPM stood at 10.6% v/s 7.9% in Q3FY14, a 271bps increment. PAT margins expanded 222bps yoy boosted by substantial PBIT margin improvement in the electrical cable segment and lower losses in ‘Other’ segment.
 

(Rs mn)	Q3 FY15	Q3 FY14	% yoy	Q2 FY15	% qoq
Segment Revenue
Electric Cables	4843	4700	3.1	5463	(11.3)
Communication Cables	538	398	35.0	518	3.8
Copper Rods	1263	1668	(24.3)	1850	(31.7)
Others	671	454	47.9	717	(6.4)
Total	7315	7220	1.3	8548	(14.4)
Less: Inter segment revenue	1495	1589	(5.9)	2180	(31.4)
Net Sales	5821	5631	3.4	6368	(8.6)
Segment PBIT
Electric Cables	626	445	40.8	805	(22.2)
Communication Cables	42	32	30.7	16	154.3
Copper Rods	7	13	(43.1)	14	(46.0)
Others	(6)	(19)	(70.1)	(6)	0.0
Total	670	471	42.2	829	(19.2)
Less: Unallocable Expenditure	150	120	25.3	(202)	(174.6)
PBIT	519	351	48.0	1031	(49.6)

Source: Company, India Infoline Research
 
Communication cables segment registers strong growth
Communication cables segment registered strong yoy growth with sales jumping 35%. PBIT margins for the segment contracted marginally to 7.8% v/s 8% in Q3 FY14. On a qoq basis, segment revenue remained muted while PBIT margins shoot up 459bps resulting in 154% increase in PBIT. The Rs2.7bn optic fiber cable order from the government is yet to begin as the company awaits the nod for delivering the goods. Revenue will be recognized once the delivery begins and will lead to significant improvement in the margin profile of the company.
 
Strong demand seen in ‘Others’ segment; New products to be launched
Others segment which comprises of CFLs, LEDs etc saw 47.8% yoy growth in sales and a significant improvement in PBIT. Loss for the segment reduced to Rs6mn against Rs19mn in Q3FY14. The company will be launching switchgears by the end of this fiscal. This segment will be the key growth driver for the company in the coming years.
 
Earnings to accelerate over FY15-17; Maintain BUY
We build in ~22% revenue and ~26% earnings cagr over FY15-17 in anticipation of pick in demand across all business segments during this period. While electrical cables should post double digit growth, communication cable segment is expected to clock 30%+ growth on account of commercialization of Rs2.7bn government order and securing new orders from the government. The ‘others’ segment is estimated to register a even higher growth rate of 50%+ as existing products start gaining traction and new products like switchgears are launched. We remain optimistic about the future prospects of the company and maintain Buy with 24-month target of Rs352.
 
Financial Summary

Y/e 31 Mar (Rs m)	FY14	FY15E	FY16E	FY17E
Revenues	23,590	25,495	30,852	37,698
Yoy growth (%)	3.9	8.1	21.0	22.2
Operating profit	2,482	2,739	3,431	4,330
OPM (%)	10.5	10.7	11.1	11.5
Pre-exceptional PAT	1,973	2,128	2,639	3,366
Reported PAT	2,077	2,128	2,639	3,366
Yoy growth (%)	43.0	2.5	24.0	27.5
EPS (Rs)	12.9	13.9	17.3	22.0
P/E (x)	21.0	19.5	15.7	12.3
Price/Book (x)	3.8	3.3	2.8	2.4
EV/EBITDA (x)	17.0	15.3	11.9	9.2
Debt/Equity (x)	0.1	0.1	0.1	0.1
RoE (%)	19.5	17.9	19.1	20.7
RoCE (%)	20.8	20.2	22.3	24.3

Source: Company, India Infoline Research