Finolex Cables: Accumulate for the long term on any weakness
Considering its industry prospects and the management’s execution capabilities, we expect the company to grow at a steady rate of 14-15 percent for the next couple of years.
June 06, 2018 / 10:46 AM IST
Finolex Cables, the manufacturer of electrical and telecommunication cables, reported a steady performance for the fourth quarter of FY18. Healthy double-digit topline growth led to higher operating income as margins expanded moderately year-on-year (YoY). The company appears to be on a sustained growth trajectory. We expect the performance to continue in the coming year as well.Steady business performance
For Q4 FY18, sales increased 12 percent YoY to Rs 796 crore led by strong volume growth across key business segments. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 14 percent YoY to Rs 115 crore. Despite input cost pressures, operating margin were better YoY due to change in product mix. However, profit after tax (PAT) grew only 8 percent YoY on account of higher tax payment.
During FY18, the electric cable segment posted moderate revenue growth of 6 percent on the back of increased agriculture demand. Government and telecom contracts for fibre optic cables drove revenue growth of 29 percent in the communication cables business. Demand for copper rods was very strong throughout the year and revenues grew 76 percent compared to last year.
The company has entered the retail segment with the launch of fans, switchgears and water heaters last year. The management is working on its distribution network to be able push products across sales channels. It has also increased its advertising spends to enhance brand visibility in the consumer retail segment. This, however, is a small segment and will take at least couple of years to have a meaningful impact on financials.Robust industry outlook
The government has initiated ‘Power for All’ and ‘Pradhan Mantri Sahaj Bijli Har Ghar Yojana – Saubhagya’ campaigns to improve electricity connectivity across India. This presents a huge opportunity for Finolex as India has over four crore households without electricity.
The outlook for Finolex Cables looks robust as TechSci Research expects the optical fibre cables market in India is grow at a compounded annual growth rate of around 13 percent between 2016 and 2021. Under the BharatNet project, the government aims to double the existing optical fibre network in the country from about one million to two million km. Telecom players are also investing heavily in IT infrastructure to cater to the growing demand of internet services.Valuation and recommendation
Considering its industry prospects and the management’s execution capabilities, we expect the company to grow at a steady rate of 14-15 percent for the next couple of years. We advise long term investors to accumulate Finolex on any weakness.For more research articles, visit our Moneycontrol Research page