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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.

* H1FY24 revenue grew by 13.5% YoY, while PAT grew by 28% YoY, largely led by healthy volume and higher other income.

* EBITDA grew by 40% YoY, led by better scale and 230bps YoY expansion in margins on account of a fall in input costs.

* Healthy construction activities are driving the volumes in wires and cables segment while higher government capex is driving power cables, which is expected to continue going forward.

* As input costs have largely stabilized, EBITDA margins will gradually improve going forward, supported by higher volumes.

* Given a healthy balance sheet, strong cash flows, and a healthy earnings outlook of 19% CAGR over FY23–25E, we reiterate our positive stance on FCL.

* We value FCL’s core business at a P/E multiple of 21x on FY25E and value FCL’s investments in Finolex Industries at Rs.126 to arrive at a SOTP price target of Rs.1,108 and maintain Accumulate rating.

Revenue growth healthy..

Revenue increased by 13.5% YoY in H1FY24, driven by healthy 17.3% YoY growth in the electric wire business. Electric wire volume grew by healthy double-digit growth. Further retail penetration and continued demand from real estate and infra led to strong growth in electric volumes. Communication cable segment growth declined by 7% YoY due to a sharp drop in fiber prices and product dumping from China, Indonesia, and Vietnam. Further optic fiber volumes were impacted by the delay in government tenders for BharatNet phase 3. Within the communication cables segment, metal-based product line volumes were stable. However, we anticipate volumes from this segment to pick up in H2FY24, given the government's ambitious target of Rs1.4 lakh cr. Further, with the imposition of countervailing duties, we expect a gradual price recovery in the upcoming quarters. Volume growth in the appliances sector was impacted by inflationary pressures as well as subdued consumer sentiment. We expect revenue to grow by a 15% CAGR over FY23-FY24E.

EBITDA margins expands...

In H1FY24, gross margins improved by 180ps YoY to 22%, led by a fall in input prices and healthy volumes. EBITDA grew by 55.3% YoY, and margins expanded by 230bps to 12.1%. Supported by a sharp increase in other income, PAT grew by 28% YoY to Rs.298cr. Going ahead, capacity utilization, led by stable demand from infra & construction, will drive earnings. We expect the EBITDA margin for FY24-FY25E to be in the range of 12.4%. We expect PAT to grow by 19% YoY over FY23-25E.

Valuations

We expect healthy volume in real estate and construction to drive growth. While RM prices have largely stabilized, we anticipate margins to normalise from hereon. We remain constructive on FCL’s prospects given its expanding presence, brand recall, clean balance sheet, and strong cash flow generation. We value FCL at a P/E of 21x on FY25E, value FCL’s investment in Finolex Industries at Rs.126 with a target price of Rs.1,108, and maintain Accumulate rating

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