Finolex Cables (FCL) has reported its 2QFY2016 numbers which are below our
estimates. The top-line declined by 4.9% yoy to Rs605cr. The decline is on
account of lower commodity prices which were passed on, resulting in lower
realizations. The raw material cost declined by 178bp yoy to 72.1% of sales but
the same was negated by 59bp yoy increase in employee cost to 4.3% of sales
and 131bp yoy increase in other expenses to 11.1% of sales. This resulted in
the EBITDA margin contracting by 12bp yoy to 12.5%. Other income during the
quarter declined by 24.4% yoy to Rs28cr. As a result, the net profit declined by
17.8% yoy to Rs65cr against Rs79cr in the same quarter of the previous year.
Revival in capex cycle to drive growth: The growth of the company is closely
related to revival in the capex cycle of the industries catered to. The company
has evolved into an electrical equipment company from a wire and cables
company by enhancing its product portfolio with entry into new product
segments. This is expected to drive earning of the company in the coming
years. With the government’s increased focus on industrial and infrastructure
sectors, FCL is well placed to reap benefits of the same. However, in the near
term the outlook is subdued with no visible signs of pick-up.
Higher tax rate to dent profitability, recommend Neutral: We expect the
company’s top-line and EBITDA to post a 8.5% and 15.2% CAGR over
FY2015–17E to Rs2,883cr and Rs345cr respectively with EBITDA margin at
12.0% in FY2017E. However, benefit of low material cost and interest outgo is
expected to be offset by higher tax rate which will dent profitability. As a result,
the bottom-line is expected to post a modest CAGR of 4.3% for the same
period to Rs217cr. We recommend a Neutral rating on the stock as it trades at
fair valuations of 18.2x its FY2017E earnings.

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