Finolex Cables (FCL) has posted an impressive set of numbers for 4QFY2016
on the margin and the bottom-line front. The standalone top-line for the
quarter grew by 3.4% yoy to Rs681cr. Electrical cables volumes grew by 12% yoy
while that of Communications cables grew by more than 20% yoy, during the
quarter. The raw material cost declined by 933bp yoy to 65.4% of sales while
employee and other expenses increased by 59bp yoy and 166bp yoy to 4.4%
and 13.9% of sales, respectively. On account of the better operational
performance, the EBITDA margin expanded by 708bp yoy to 16.4%. Further, a
significantly higher other income and better than expected margins lifted the bottom-line.
Revival in capex cycle to drive growth: The growth of the company is closely
linked to the revival in the capex cycle of the industries it caters 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 like switch gears and fans which should start contributing
meaningfully to the top-line in FY2018E. This is expected to drive earnings 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.
Outlook and Valuations: We expect the top-line to post a CAGR of 12.5% while
the bottom line is expected to grow at 6.9% CAGR over FY2016-18E. The
company has consolidated the earnings of its associate Finolex Industries (in
which it holds 32.4%) and other joint ventures. We have valued the company
on its standalone business at 17.0x its FY2018E earnings (valuing it at
Rs298/share) and have assigned a discount of 50.0% to market value of its
holdings in Finolex Industries (Rs53/share). We believe that the current price
captures the fair value of the stock and hence we have a Neutral view on the stock.
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