Stock Fundamentals

Wired for growth

Parvatha Vardhini C | Updated on January 24, 2018 Published on February 08, 2015

Strong business prospects and captive sourcing of key inputs are positives



The market rally of the last year has seen the price of Finolex Cables triple. A manufacturer of wires and cables used for industrial and domestic purposes, the stock has moved up on expectations of greater demand, once economic growth recovers.

Despite the run-up, valuations appear reasonable in comparison to bigger and more diversified peers. At the current market price of ₹252, the stock trades at 19 times its trailing 12-month earnings. This is much cheaper than the 32 times that Havells, which also makes wires and cables, but has a bigger consumer electronics presence, trades at.

Investors with a one-two year perspective can buy the Finolex Cables stock.

Ride on recovery

Finloex Cables derives about 80 per cent of its revenue from wires and cables. Its products are used in electrification of industrial establishments, power distribution, applications such as pumps, motors, consumer goods, batteries, UPS and in automobiles.

After the slowdown of the last one-two years, several factors support a recovery in the economy. For one, macroeconomic indicators such as the Index of Industrial Production (IIP) and the Purchasing Managers’ Indices point to strengthening demand for products and services and increasing capacity utilisation at industries.

This will provide an impetus to industrial capex spends. Reform measures in infrastructure sectors, such as power, will also help. Automobiles, too, are experiencing a cyclical upturn in sales. Further volume growth here will be supported by the cooling off of inflation and the beginning of interest rate cuts. Construction and housing activity will gain from these factors as well. Finolex Cables will be a direct beneficiary of these trends.

The company has made inroads into more lucrative segments such as switches, CFL and LED lighting in recent times. These account for less than 5 per cent of the revenue currently.

But the company is well poised to expand its presence in the segment, given its wide distribution network and strong brand recall.

Finolex Cables also plans to start making industrial switch gears shortly. These value-additions to the product line will improve realisations and margins.

Support from telecom

With products such as LAN cables, V-SAT cables and optic fibre cables, Finolex has a small presence in the communications space as well.

This segment brings about 5-10 per cent of revenue. The government’s focus on bettering rural connectivity through the National Optic Fibre Network (NOFN) project bodes well for the company. It won an order for ₹200 crore under this project in 2014. With recent efforts by the Government to speed up the project, more orders may come in. Besides network expansion by existing and new telecom players, increasing mobile data usage and the roll-out of 4G services should also spell good times for optic fibre cables.

Backward integration

For the six months ended September 30, 2014, the company’s sales grew 5 per cent to ₹1,198 crore and net profit by 7 per cent to ₹114 crore, over the first six months of 2013. Operating margin was at around 11 per cent in both the periods.

Finolex enjoys high margins of around 12 per cent in electric cables, thanks to its backward integration. Copper rods, the main input for wires and cables, are manufactured in-house. While a majority of the production is for captive use, a small portion is sold outside as well. The company plans to cut down on this though, since the margins on outside sales are unattractive. The company also obtains other raw materials such as PVC insulation for wires and other PVC compounds from group companies such as Finolex Industries, giving it a cost advantage.

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