Finolex Cables Ltd - Q3FY14 Update, CMP Rs.77, Rating changed to HOLD, Target of Rs.78 - Sushil Finance

FINOLEX CABLES LIMITED - Q3FY14 RESULT UPDATE - CMP Rs.77, Rating changed to HOLD, Target of Rs.78

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

Key Highlights of Q3FY14 & 9MFY14 results

- Revenues grew by mere 5% YoY to Rs.5631 mn in Q3FY14 which was mainly on account of flattish growth in Electrical Cable Segment (ECS) (~85% of Revenue) due to severe slowdown in some of the key segments like Auto, Infra, Power & Industrials. Management retains its cautious view in near term while expects some revival post elections. Margins in ECS declined by ~100 bps YoY to 9.5% on back of higher advertising expenses during the quarter. However management expects sustainable margins of ~10-11% going ahead.

- Delay in ordering from Government coupled with lower off-take from Reliance led to disappointing performance of Communication Cable Segment (CCS) which de-grew by 13% YoY to Rs.398 mn. However management is confident of healthy growth (~12-15%) in CCS going forward. Lower utilization led to dip in margins which stood at ~8.0% v/s 11.8% in Q3FY13. However management expects margins to sustain at 11-12% going ahead.

- Operating profit grew by ~3% YoY while margins were stable at 8% YoY. However, on full year basis we expect margins to remain at ~10% over FY14-15E. Net profit grew by mere 2% YoY to Rs.245 mn while margins dipped marginally by 20 bps YoY to 4.3%.

- 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 (~19% YoY growth to Rs.454 mn), however has been disappointing on EBIT front with loss of Rs.19 mn in Q3FY14 (9MFY14 loss at Rs.51 mn v/s Rs.21 mn loss in 9MFY13). Mgmt expects few more quarters to achieve break-even in this segment.

- 9MFY14 Results:Revenues grew by ~4% to Rs.17,100 mn majorly due to decent growth in CCS & others segment. Operating profits grew by ~6% to Rs.1720 mn while margins stood at ~10%. Higher dividend income coupled with reversal in excess provision for derivative contracts (9MFY14 derivative profit of Rs.104 mn v/s loss of Rs.150 mn YoY) led to robust net profit growth of ~30% at Rs.1384 mn. EPS for 9MFY14 stood at Rs.9.0 v/s Rs.7.0 in 9MFY13.

OUTLOOK & VALUATION

Declining growth in ECS due to overall slowdown in economy remains a major concern in the near term which management expects to improve gradually post elections. Moreover, ordering delays from govt. may lead to subdued growth in CCS over the next 2-3 quarters. With elections round the corner & some stabilization time thereafter, we don't foresee any major growth uptick in ECS till Q4FY15 & hence we have downward revised our earnings estimate for FY15E by ~7% to Rs.11.7. Considering the subdued growth over the next 1 year, we expect the stock to underperform in the near term. We had initiated coverage on the stock on 27th Nov'12 at Rs.50 with an initial target of Rs.68 which we subsequently upgraded to Rs.78. However, considering the stock return over the last 1 year (~50%) along with likely underperformance in near term, we advice to book partial profits at this levels & re-visit the same at lower levels.

Source : Equity Bulls

Keywords