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Margins improves...optimistic growth outlook

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

• 9MFY24 revenue grew by 11% YoY, led by 14% YoY increase in wires. While communication cables segment de-grew by 8% YoY.

• EBITDA grew by 21% YoY, and EBITDA margins was up by 99bps YoY to 11.7%.

• Going ahead, robust construction activities will drive wires and cable volumes, while higher government capex will drive power cable demand. Further, the conclusion of the optic fibre tender in Q4FY24 will spur communication cable growth in FY25.

• As input costs have largely stabilized, EBITDA margins will gradually improve going forward, supported by higher volumes and an improved mix.

• Given a healthy balance sheet, strong cash flows, and a healthy earnings outlook of 18% CAGR over FY24E–26E, we maintain our positive stance on FCL.

• We value FCL’s core business at a P/E multiple of 18x as we roll forward to FY26E and value FCL’s investments in Finolex Industries at Rs.103 to arrive at a SOTP price target of Rs.1,019 and recommend to BUY.

Revenue growth to pick-up in FY25

9MFY24 saw a 11% YoY increase in revenue, driven by 14% YoY growth in the electric wire business, supported healthy volumes. However, the FCL volume mix favoured Auto B2B and agri sectors, while reduced contributions from construction wires and project-related discounts dampened growth. Management anticipates a return to normalized growth, buoyed by ongoing robust construction activity. Additionally, enhanced retail penetration and government infrastructure initiatives are poised to bolster electric volumes in the future. Conversely, the communication cable segment faced an 8% YoY decline due to Bharat-Net tendering delays. Meanwhile, volumes from private players remained subdued, compounded by a drop in fibre prices and heightened competition. The tendering process is expected to conclude in Q4FY24, with anticipated revenue realization starting from Q1 or Q2FY25 onwards. The FMEG segment grew by 16.2% YoY on account of an improvement in volumes. We anticipate FCL’s revenue to grow by a 15% CAGR over FY24E–FY26E.

Margins to improve

9MFY24, gross margins improved by 70bps YoY to 21.4%, despite 2.7% YoY increase in RM cost. EBITDA grew by 21% YoY on account of improved volumes. EBITDA margins improved by 99bps YoY to 11.7% led by lower cost, but lower than our estimates. Reported Net profit grew by 16% YoY to Rs.425cr. Going ahead, capacity utilization, led by stable demand from infra & construction, will drive earnings. We've revised down our EBITDA margin estimates by 60bps and 50bps for FY24E and FY25E respectively, to account for the EBITDA miss, resulting in a 9% reduction in our EPS estimates for the same period. We expect the EBITDA margin for FY24E-26E to be in the range of 12-12.5%. We expect PAT to grow by 18% YoY over FY24-26E.

Valuations

We remain constructive on FCL’s prospects given its strong brand recall, balance sheet, and strong cash flow generation. We value FCL at a P/E of 18x as we roll forward to FY26E, value FCL’s investment in Finolex Industries at Rs.103 with a target price of Rs.1,019 and recommend to BUY.

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