Finolex Cables Rating’ buy’; company priming for next phase of growth

We like FNXC’s focus on margin-accretive Electrical cables and inexpensive valuation. Buy

FNXC’s posted +17% y-o-y PAT despite March disruption in FY20. Its Annual Report delves deeper into FNXC’s focus points for driving the next leg of growth —distribution, new launches and capex. FNXC retains a robust B/S (net D/E at -0.3x) and good return ratios (16% RoE, 19% RoCE). Interim spike in March capital was due to lockdown and is likely to revert to normal in FY21e. We like FNXC’s focus on margin-accretive Electrical cables and inexpensive valuation. Buy

Volumes: Despite demand slowdown, falling RM (commodity prices) and Q4 COVID disruption, FNXC posted EPS growth at +17% y-o-y in FY20. Production volume split — (i) Electrical: 60,651 MT (-3% y-o-y); (ii) Communication: Metal Based at 7,773 MT (-4% y-o-y), Optic Fibre cables (60-70% of mix) at 1,295K FKM (-30%), impacted by slowdown in telecom sector (domestic public & private).

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New launches: In FY20, FNXC forayed into Industrial Switchgear — MCCBs, available in varying breaking capacities (63-800 Amps), with market size of Rs 20 bn. Also, FNXC launched a wide range of electrical accessories (door bell, extension box, spike guard, angle holders and batten holders).

Ad-Spend: FNXC has increased ad-spends to Rs 500 mn (1.6% of sales) in FY20 vs. Rs140 mn in FY16 (0.6% of sales). This augers well with New products (appliances).

Distribution: While FNXC’s communication cables is largely a B2B business, Electrical cables are sold to channel partners as well as institutional clients. In FY20, FNXC’s distributors stood at ~5K and retail touch-points at 50K (30K in FY19) — this is targeted at 150K over near term, by connecting to ~500 distributors (300 retailers for each). FNXC is growing reach in the North and East markets.

Capex: FNXC has retained capex outlook at Rs 2 bn over next 18 months. Ongoing projects: (i) Goa — Electrical Conduits facility likely to commission early next year ; (ii) Pune – Solar Cables by deploying electron beam accelerators — an advanced technology; (iii) Pune — installing a new line to make tinned copper and foray into instrumentation cables, with a view to strengthening backward integration.

Strong B/S, C/F: FNXC’s cash & investments stood at Rs 16.6 bn as of Mar’20 (Rs 14.3 bn in Mar’19). This amounts to Rs 109/share (~35% of CMP). Net D/E at -0.3x, RoE at ~16% and RoCE at ~19%. Important to highlight that despite disruption in Q4, operating C/F for FY20 improved to Rs 2.6 bn (Rs 1.5 bn in FY19).

Estimates, Buy: Over FY20-23e we estimate FNXC’s sales/PBT to clock 4%/7% CAGR with +150bps op-margin. While we remain mindful of near-term risks, risk-reward appears favourable at current PE of 14x/11x PE on FY21/22 — this, in context of FNXC’s strong franchise in cables & wires, focus on the margin-accretive Electrical segment and a robust B/S. Reiterate Buy with PT of Rs 415 (target PE at 15x). Key risks: Extended slowdown, weak traction in New Products, Comm. cables. A key monitorable is the family tussle in the Finolex group (as reported in media).

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