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EBITDA margins steady...growth outlook positive...

Finolex Cables Ltd (FCL) is India's largest manufacturer of electrical (80% of revenue) and telecommunication cables (16%). FCL has a wide distribution network with a high brand recall.

* Q2FY22 revenue & PAT grew by 45% & 117% YoY, supported by healthy growth across all segments.

* Gross margin declined by 400bps YoY, but fall in EBITDA margins was limited to 10bps YoY to 12.8%, owing to cost rationalization.

* Overall, demand scenario improved largely due to pent-up demand, revival in construction activities and improvement in consumer sentiments.

* H2FY22E performance is expected to better given better vaccination drive and sharp rebound in economic activities.

* We continue to maintain positive stance on FCL, given its clean balance sheet, strong cash flows and healthy earnings outlook of 28% CAGR over FY21-23E.

* We value FCL’s core business at P/E multiple of 17x on FY23E and value FCL’s investments in Finolex Industries at Rs.149 to arrive at SOTP price target of Rs.663 and recommend to “Accumulate”.

Revenue growth picks-up

Q2FY22 revenue grew by 46% YoY led by strong growth in electrical wires by 46% on account of pent-up demand and revival in construction demand. Revenue from new products within the FMEG sector grew by 98% led by better traction and improvement in distribution foot print. All the products in the Fans, water heaters, Lamps & switchgears witnessed strong traction. Revenue from communication cables grew by 37% YoY, while volume growth in Optic Fiber Cables was 80% on lower base. Overall, revenue growth was supported by higher realisation due to increase in input cost. Going ahead, with increase in vaccination coverage, lower risk in spread of Covid-19 and strong demand from construction activities, we expect H2FY22E revenue growth will better, despite high base. FCL entry into the room heater segment with a new range of high-performance room heaters with six variations ranging from 400W to 2500W. The communication cables segment continues to be impacted by delays in big orders from both the Government & private Telecom Companies. On the other hand, on a medium to long term basis, launch of 5G will lead businesses to ramp-up their IT infra leading to higher spending in digitization and OFC cables, which is expected drive FCL’s communication cables business. We expect revenue to grow by 13% over FY21-23E.

EBITDA margins steady...

Gross margins declined by 400bps YoY to 23.4% on account of delay in pass through of higher input cost. However, fall in EBITDA margin was limited to 10bps YoY to 12.8% on account better cost control. EBITDA grew by 45% YoY to Rs.120cr. The interest expenses declined by 17% YoY and other income increased by 395% YoY. Consequently, PAT grew by 117% YoY to Rs.150cr. We expect PAT to grow by 28% over FY21-23E.

Valuations

Given strong vaccine coverage, lower risk to spread and sharp rebound in economic activities, we expect revenue growth to pick-up. FCL’s strong brand recall, expanding product portfolio, clean balance sheet and strong cash flow generation, gives confidence. We value FCL at P/E of 17x on FY23E and value FCL’s investment in Finolex Industries at Rs.149 with a target price of Rs.663 and recommend to “Accumulate”.

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