Finolex Cables - Q2FY14 Update - CMP Rs.67, Rating Changed to ACCUMULATE, increased Target of Rs.78 - Sushil Finance

Finolex Cables Ltd. (FCL) has reported slightly disappointing set of numbers on the revenue front for the quarter ended Sept'13 which were below our expectations. We interacted with the management and following are the key highlights which are summarized below:

Key Highlights of Q2FY14 & H1FY14 results

- Revenues grew by mere 1% YoY to Rs.5931 mn in Q2FY14 which was mainly on account of flattish volume growth in Electrical Cable Segment (ECS) (~85% of Revenue) which de-grew by ~1% to Rs.5084 mn. Slowdown in some of the key segments like Auto, Infra, Power & Industrials led to this bleak performance of ECS. Management remains cautious in near term while expects some revival from FY15 onwards. Margins in ECS improved by ~200 bps to 14.5% on back of better product mix & focus on high-yielding orders. However management expects the margins to remain sustainable at 11-12%.

- Communication Cable Segment (CCS) has delivered better than expected volume growth of ~25% in Q2FY14 wherein the segment grew by 11% YoY to Rs.531 mn. With likely higher spending by Govt. & private players like Reliance etc., management expects the segment to post similar healthy growth going ahead. Margins in CCS stood at ~15% (sustainable ~12-13%).

- Better segmental profitability led to operating profit growth of ~9% YoY in Q2FY14 with margin improvement of ~100 bps to 12.9%. However, on full year basis we expect margins to remain at ~10% over FY14-15E. Sharp rise in dividend income from finolex industries coupled with reversal of excess provision on derivative contracts (Rs.104 mn) has led to strong growth in net profits which increased by ~39% YoY to Rs.800 mn with NPM at 13.5% v/s 9.8% in Q2FY13.

- Increasing captive consumption of Copper Rods (CCCR) has resulted in lower contribution from this biz. Being conservative, we have not factored in any major contribution from this biz in our earnings estimates going forward. Others segment (incl. Switches & CFL's) has been doing fairly well on top-line (~58% YoY growth to Rs.690 mn), however has been disappointing on EBIT front with loss of Rs.19 mn in Q2FY14. Mgmt expects few more quarters to achieve break-even in this segment.

- H1FY14 Results:Revenues grew by ~4% to Rs.11,469 mn majorly due to healthy growth in CCS which grew by ~17% to Rs.1005 mn. Operating profits grew by ~7% to Rs.1278 mn while margins improved marginally to ~11%. Higher dividend income coupled with reversal in excess provision for derivative contracts (H1FY13 derivative loss at Rs.125 mn) led to robust net profit growth of ~38% at Rs.1139 mn. EPS for H1FY14 stood at Rs.7.4 v/s Rs.5.4 in H1FY13.

OUTLOOK & VALUATION

Declining growth in ECS due to overall slowdown in economy remains a concern in the near term. However improving performance of CCS coupled with likely gradual improvement in overall economic scenario from FY15 onwards could get growth back on track for the company. Strong Operating Cash-flows (~Rs.1.3-1.5 bn), net-debt free status, healthy return ratios coupled with likely higher dividend payout reflects the strong fundamentals of the Company. Hence, considering the growth prospects, we recommend 'Accumulate' on the stock with a revised target price of Rs.78.

Source : Equity Bulls

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