Finolex Cables - Time to play the underdog - Ambit

Finolex's revenue growth and EBIT margins in the cables business has exceeded its peers, given its balanced institutional and retail client mix, widespread manufacturing footprint and largest dealer network (vs peers). Whilst Finolex's RoCEs at 17% over the last three years were lower than its peers' 24%, we expect RoCEs to increase, given no losses from derivatives, likelihood of increase in dividend payout and entry into high-margin products such as switchgears. Valuation at 5.8X FY15 consensus eps is highly attractive given RoCE expansion through its 'Superbrand' extension into newer markets/products, Rs. 9bn worth investments and no more focus on treasure business.

Competitive position: STRONG Changes to this position: POSITIVE

Finolex: Best-placed in our competitive matrix

In our cables and wires competitive mapping scorecard, Finolex ranks the best amidst its listed peers, given its highest revenue, diversified customer base (equally split between retail and institutional market), widespread manufacturing footprint and largest dealer network. Moreover, Finolex's brand recall is the highest in south India, which is the largest organised market (~35% of the total market), owing to preference for quality products.

Forex loss no longer an overhang

Finolex lost ~Rs. 3bn (33% of FY13 net worth) since FY08 due to forex derivative losses. If the company had not incurred these losses, the average RoCE in FY08-13 would have increased to 16.1% vs the actual 11.5%. Given that the outstanding derivatives position as on March 2013 is NIL, RoCEs from FY14 onwards are likely to improve. Annualising the FY14 PAT of Rs. 1.3bn implies an RoCE of ~19.2% vs 15.9% in FY13.

Multiple levers to increase RoCE

No exposure to exotic options, likelihood of an increase in dividend payout in FY14 and FY15 (since FY10 Finolex cut its dividend payout to less than 20% vs more than 35% over FY03-08 given the forex losses) and entry into highmargin products like switchgears are likely to be RoCE-accretive in the future. Havells, an established player in switchgears, earns an EBIT margin of more than 30% in switchgears vs 9% in cables and wires.

Poised for a rerating

Based on FY15 P/B, Finolex is trading at a 78% discount to its peers despite inline expected EPS CAGR (with peers) of 21.5% over FY13-15 and FY15 ROE of 17.1%. Its FY15 book value stands under-reported given the market value of its investments at Rs. 6.8bn (50% of market cap) vs cost of Rs. 1.5bn. Cash conversion is strong at 67 days in FY13 as compared to peers' 97 days.

Why is the stock trading at such a steep discount?

Finolex's management has shied away from investors over the past four years given the uncertainty over forex losses. As this is now in the past and as the management is becoming investor-friendly (through conference calls and investor meetings), we reckon a P/E rerating can happen quickly. If the management delivers on consensus earnings estimates for FY14, then the stock would likely be rerated.

Source : Equity Bulls

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