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Communication cables drag profitability
Finolex Cables Q4 FY19 results were a mixed bag. Topline growth of 3.4% yoy was lower than our expectations largely on account of disappointment from communication cable segment (-15.4% yoy). Optic fiber cable volumes were lower as there was delay in orders from government and private telecom companies demand remained sluggishness. Electrical segment revenue growth of 6% yoy was marginal lower than our estimate of 7% yoy growth. The miss came in from decline in power cables sales due to lower consumer demand, liquidity crunch and general elections. Electrical wires (ex- power cable) sales volume grew healthy at 18% yoy. Other communication products sold through dealer network witnessed volume growth of 15% yoy. All the new product in FMEG segment saw 10% yoy growth. Management stated that the GST positive effect is currently visible in the company’s revenue growth in various segment. Finolex EBITDA margin in Q4 FY19 expanded 85bps yoy to 15.3%, but lower than our estimate. The miss was again on the communication cables front with margin at 10.9% against our est. of 14.7%. This was due to decline in high margin optical fiber volume sales.
In FY19, Finolex recorded 9.3% yoy revenue growth, driven by healthy volume growth in all the product lines, except for power and optic fiber cables. New product line i.e. Fans, switchgear and water heaters witnessed good growth. Increased promotional expenses coupled with expansion of dealer network would led to robust growth in FMEG products revenue over FY19-21E. We believe growth over the next two years would be led by new product introduction, strong demand for optic fiber and increase in contribution from FMEG products. We expect revenue CAGR of 11% over FY19-21E with OPM of ~15.2%. We reiterate our Buy rating on the stock with price target of Rs.600.
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