Buy Finolex Cables; target of Rs 97: Padmakshi Financial

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Buy Finolex Cables; target of Rs 97: Padmakshi Financial

Padmakshi Financial Services is bullish on Finolex Cables and has recommended buy rating on the stock with a target of Rs 97 in its April 06, 2011 research report.

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Padmakshi Financial Services is bullish on Finolex Cables and has recommended buy rating on the stock with a target of Rs 97 in its April 06, 2011 research report.

"Finolex Cables currently operates at ~ 50% capacity across all its product lines. The unutilized capacity will enable FCL to take advantage of operating leverage when demand picks up. FCL has very little debt on the balance sheet (Debt:Equity 0.4x), leaving ample scope to leverage if demand picks up due to likely triggers of 3G spend or SEBs spend on power cables expansions."

"We expect the company's operating income to grow at 29% and 22% yo- y for FY11 & FY12E respectively to Rs 2217 crore. and Rs 2706 crore, mainly backed by growth in the electrical cables segment and a shift to the increased use of optic fiber. Further, we expect the derivatives losses to decline from Rs 45 crore. in FY11 to Rs 25 crore. in FY12 and Rs 5 crore. in FY13 thereby increasing the EBITDA margins to 12% in FY13E from 8.2 % in FY11E. With improving business prospects, the company is likely to adopt its previous dividend policy which will lead to higher dividend payout from FY11. We expect the company to pay 25% of its profit as dividends in FY11 and 30% in FY12 and FY13 leading to regular flow of returns for the investors."

"Finolex has entered into a joint venture (JV) with J-Power Systems Corporation of Japan to strengthen its power cable segment. The joint venture company with 49% ownership interest would offer complete turnkey services in Extra High Voltage (EHV) cables up to 500 KV capacities in India and abroad. Along with the services in EHV, Power Cables and Accessories (Jointing Kits) would be supplied by FCL which would increase their top line. We expect the company to achieve turnover of Rs 300-400 crore in next two years. At the CMP of Rs 50, the stock is trading at a P/E of 5x and EV/ EBIDTA of 3.9x its FY12E numbers. We expect ROE to improve from 5% in FY10 and 12% in FY11 to 18% in FY12 on back of robust profitability. As a base case scenario, not considering that the company passes out the rise in copper prices, with an estimated forward P/E of 10, we recommend a 'BUY' with a price target of Rs 97," says Padmakshi Financial Services research report.

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To read the full report click on the attachment