Finolex Cables has a lot of steam left, even having run up quite a lot in the last one year, given its pricing power and strong branding
10-Jul-2015 •Mohammed Ekramul Haque
If you had invested in Finolex Cables a year ago, you would have doubled your investment. Does that mean that the stock has run its course?
Far from it, Finolex is a long-term winner. Known for its electrical cables that bring in about two-third of the revenues, Finolex's cables have higher copper content and are more expensive than competitors'. Given this apparent constraint in a more-or-less commoditised market, Finolex has reported 22 per cent CAGR revenue growth in this segment in the last five years. The high copper content notwithstanding, Finolex's pricing power and strong brand recall give it a segment margin of 13 per cent - one of the highest in the organised sector.
Finolex has its hands on other things. There is the copper rod business, where it sells copper rods and communications and optical fibre cables, and the CFL and LED segments that all consumer durable companies are falling over each other to enter. Finolex has yet to see any profit from the CFL and LED business so far. Another ace up its sleeve is the switchgear business that will put it head to head with industry giant Havells.
Finolex's high-quality business hides the fact that its fortunes are dependent on the state of the economy. Around half of the company's electrical cables are sold to the construction industry. The government's focus on housing for all is a big opportunity for companies like Finolex. Any revival in construction - more likely in tier 2 and tier 3 cities - should help keep demand up in the future. Other industries that it sells to include power, telecom and automobiles. The much-needed reforms in the power and distribution sector, which appear to be on track, are expected to send 15-20 per cent of total T&D investments to the cable industry.
The company took some flak following a 65 per cent decline (YOY) in PAT in Q4 FY15. This was on account of higher spending on sales and distribution, higher one-time costs, including those on depreciation and impairment charges, as also higher taxes on one-time gains. Cash generation from operations, though, remained robust at ₹300 crore, of which it utilised ₹96 crore to pare down its debt. The company has investments to the tune of ₹500 crore in its books at the end of FY15. Finolex trades at 18 times its TTM earnings. Earnings for the company were up 43 per cent in the last one year. Buy for keeps.
|TTM||5Y CAGR (%)|
|Market cap (₹cr)||3833||37.76|
|Net profit (₹cr)||199||28.09|
|EBITDA margin (%)||12.96||10.81|
|Net margin (%)||8.11||6.17|