UNIVERSAL CABLES LIMITED

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1 Independent Equity Research ELECTRICAL EQUIPMENTS BSE Scrip Code: CMP Rs Feb 2012 Wide product portfolio Universal Cables Limited (UCL) has a range of products including Low Voltage (LV), Medium Voltage (MV) and EHV Power Cables upto 400 kv grade and PVC and Rubber Insulated Power Cables upto 11 kv grade. This enables the company to cater to a wide range of customer requirements. In November 2010, UCL hived off its optic fibre business in Goa to BFFOL. This enabled UCL to specialize and solely focus on its power cable business. Healthy outlook due to growth in power sector but near-term concerns remain CARE Research believes that outlook continues to be healthy for the power sector and hence the electrical equipment sector, considering the focus of the 12 th plan ( ) to be on power capacity addition. However, near-term concerns like raw material availability and poor financial health of State Electricity Boards (SEBs) remain. Key concerns Strong competitive environment in the sector Fluctuations in the prices of raw materials such as aluminium and copper Valuations UCL is currently trading at trailing P/E and EV/EBITDA multiples of 6.2x and 6.5x, respectively. 1

2 CARE Background UCL originally incorporated as Hindustan Woollen Mills in 1945, was promoted by Mr M. P. Birla and later renamed to its present name in The company is engaged in manufacturing of power cables and capacitors for the power industry. The power cables of the company are sold under the brand UNISTAR. The company manufactures a range of cables -- Low voltage (LV), Medium Voltage (MV) and Extra High Voltage (EHV) as well as capacitors, and provides turnkey engineering, procurement and construction (EPC) solutions. UCL has also tied-up with Viscas Corporation, Japan (Power Cable Alliance of Furukawa & Fujikura) for sourcing newgeneration cable jointing accessories for 220 KV and above. Operations HISTORY AND BACKGROUND The company has a manufacturing plant at Satna (MP). UCL has adopted Vertical Continuous Vulcanisation (VCV) process at this plant in technical collaboration with the World Leader in Cable technology, Furukawa Electric Co. Ltd., Japan. The technical collaboration covers cable designing, manufacturing, laying, jointing, testing and installation. UCL also has a land measuring 26,000 sq meters in Goa. The land was given to UCL on long-term lease by Goa Industrial Development Corporation. This land in turn was given by UCL to Andrew Corporation on lease till UCL plans to use the land for its own purpose by shifting the winding wire unit from Satna to Goa. Further, the company plans to start full-fledge winding wire unit to cater to the current market in India. UCL: Capacity and Production Installed Capacity Units FY09 FY10 FY11 Electrical Cables Wires, Conductors, Strips of all types KM 11,500 12,750 14,000 Optical Fibre FKM 1,500,000 1,500,000 1,500,000 Capacitors MFD Pcs 1,000 1,000 1,000 Capacitors LT & HT KVAr 1,500,000 1,500,000 3,000,000 Electrical Panels Pcs Production Units FY09 FY10 FY11 Electrical Cables Wires, Conductors, Strips of all types KM 4,093 4,966 5,002 Optical Fibre FKM 1,335,049 1,127, Capacitors MFD Pcs Capacitors LT & HT KVAr 1,384,803 1,368,657 2,672,870 Electrical Panels Pcs Effective Capacity Utilisation FY09 FY10 FY11 Electrical Cables Wires, Conductors, Strips of all types (%) Optical Fibre (%) Capacitors MFD (%) Capacitors LT & HT (%) Electrical Panels (%) Source: Company and CARE Equity Research 2

3 Production capacity utilisation of Electrical cables, wires, conductors and strips can be less due to these capacities mentioned in KM (kilometres) which only denotes length and the diameter of the cables is not specified, hence it usually happens that the capacity utilization is less than 100%. Industry Segments The primary industry segments for UCL are: 1) Cables 2) Capacitors and 3) Optical Fibres. Cables: The cables segment can be divided into: EHV Power Cables: The company manufactures underground power transmission cables in this segment. The company has also installed two state-of-the-art vertical continuous vulcanizing (VCV) lines, with technology from Furukawa Electric Co., Ltd. The company has also successfully conducted the rigorous one-year long duration prequalification test on 220kV cable system at an International Laboratory, certified by world renowned KEMA, Netherland. The company is now preparing grounds for venturing into the 400kV segment. Rubber Cables for Special Applications: The company caters to industries like heavy industry and original equipment manufacturers (OEMs) in segments like renewable energy, railways, steel plants, petrochemical plants, cement plants, oil rigs and coal mining for their special requirements. MV and LV Power Cables : These cables are typically used for general-purpose application, are especially advantageous for use in steel plants, power station wiring, and chemical plants, under water wiring, mines for power distribution, control and instrumentation circuits. MV cables are also used in power transmission & distribution, Railways, fertilizers, Petro-chemical plants, submarine and under-water power transmission Capacitors: The company manufactures HV and LV capacitors along with special duty capacitors and Automatic Power Factor correction panels (APFC) panels, typically used consists of Power Factor Controller, Switchgears, Capacitors, Reactors, Meters, Lamps etc. UCL has been supplying these Panels all over India to all types of Industries, Buildings, Electric companies, and Government departments etc. Optical Fibre: In a strategic move, UCL had entered into a Joint Venture Agreement with Furukawa Electric Co., Ltd., Japan (FEC), consequent to which Birla Furukawa Fibre Optics Limited (BFL), was incorporated. BFL was formed with the aim of accelerating both the partners strategic plans for manufacturing world-class products through state-of-the-art facility and plans to further invest and grow in this region. During the year, the company has transferred/sold off its Optical Fibre business-related assets at Goa to BFL, pursuant to the Joint Venture Agreement executed by and between the company and FEC. As a result of transfer of Optical Fibre business-related assets to BFL, the company has not produced any Optical Fibre since the month of November With the growing trend in the demand of optical fibres, the UCL remains very optimistic about the prospects of BFL and 3

4 CARE thereby, of generating value from its investment in BFL. UCL: Peer comparison Universal Cables Uniflex Cables Finolex Cables Havells India (FY11) Units Net operating income Rs. Crores ,062 5,636 EBITDA Rs. Crores 53 (7) PAT Rs. Crores 27 (29) Growth in net operating income % (0.0) NA EBITDA Margin % 9.9% NA 8.0% 10.3% PAT Margin % 3.3% NA 4.2% 5.4% RoCE % 10.1% NA 8.6% 16.6% RoE % 8.9% NA 11.6% 42.7% Price/Earnings (P/E) Ratio times 6.2 NA Price/Book Value(P/BV) times Enterprise Value (EV)/EBITDA times 6.5 NA Source: CapitalLine and CARE Equity Research 4

5 CONSOLIDATED FINANCIAL PERFORMANCE AND ANALYSIS Total operating income remains flat in FY11 Total operating income reduced marginally from Rs.539 crore in FY10 to Rs.535 crore in FY11, mainly due to lower contribution from the optical fibre segment. Profitability margins slip in FY11 The EBITDA and the PAT margins for the company slipped by about 280 bps and 170 bps respectively in FY11 over FY10 on account lower margins in the cables business along with UCL hiving off its optic fibre business in November EPS down in line with decline in PAT in FY11 Net profit for the company reduced by about 34% in FY11 over FY10. Even the EPS decreased in tandem with the Net Profit and recorded a reduction of about 34% in FY11 over FY10 mainly due to negative contribution from Optical Fibre segment which was on a restructuring path and reduced margins in the cables segment. UCL: Consolidated Financial Performance (FY07-11) (Rs. Crores) FY07 FY08 FY09 FY10 FY11 Net operating income EBITDA PAT Fully Diluted EPS* (Rs.) EBITDA margins 12.4% 10.9% 9.2% 12.7% 9.9% PAT margins 5.5% 3.3% 1.3% 5.0% 3.3% Source: Capitaline and CARE Equity Research 5

6 CARE EXPANISONS, NEW INITIATIVES AND CONCERNS Expansion plans and initiatives Till date, UCL has been using weld-type Aluminum Corrugation Line for applying corrugated aluminum sheath on Cables, especially in-case of EHV Cables. The feed material for metallic sheath is aluminum tape, which is expensive. To reduce cost and cater to customer requirements, UCL plans to adopt seamless continuous extrusion type corrugation technology. The company intends to develop 33 kv grade Low smoke zero halogen (LSOH) elastomeric cable with low temperature characteristics and development of automatic power factor improvement control and relay panels with thyristor & vacuum switching system for 11 kv phase. Key concerns The company is exposed to competition from various players in the industry in the LV and MV cable market with very few players in EHV market. The sales to all customers (viz State utilities and private industries) are based on the tender route wherein majority of the contracts are fixed-price contracts. The fixed-price contracts expose the company to the adverse movement in the raw material prices. 6

7 SECTOR OUTLOOK Sector outlook The Indian Power Cables industry has grown at a healthy rate in the past few years on the back of strong demand from the power sector. The industry is generally cyclical in nature; however, the demand trend during the period of economic slowdown remained robust driven by strong demand from the power sector. Power cables are mainly used in all the segments of the power sector generation, transmission and distribution. The industry can be segmented into three segments - low voltage (LV), medium voltage (MV) and high voltage (HV) category - depending upon the intensity of power. LV cables have a capacity up to 1.1 KV and predominantly use PVC insulation and jacketing. MV cables voltage is in the range of KV and generally uses PE as well as PVC. HV cables capacity is beyond 11 KV and exclusively uses PE. The LV, MV and HV power cables have continued to register consistent growth due to large investments in the industrial segment. This is specifically true for XLPE underground cables used for MV and HV applications. LV cables are used for tertiary distribution of power (mainly from substation to buildings) and also for housing wires. HV cables continue to be used in non-conventional energy sector, steel plants, cement plants, mining, ship building and heavy engineering sectors. The industry is highly competitive due to fragmented nature of the industry and import threat from low-cost manufacturing destinations such as South-East Asia and Asia Pacific regions. The industry can be broadly categorized as a capital, highly fragmented and technology intensive in nature. Raw-material forms the major cost component in the power cables industry, accounting for roughly 65% of total income. Raw-material costs consist primarily of aluminium ingots, aluminium rods, degasser, silicon, magnesium, coverall, XLPE, PVC compound, copper, galvanized steel strips and steel poles. The industry has been governed by various government policies in the form of taxes, investment policies and regulations. The government has de-licensed the cable industry and making it eligible for automatic approval for Foreign Direct Investment up to 100 per cent of the equity capital employed. The industry is also affected by developments in the Indian power sector, which is primarily dependent on sustained economic development in India, government policies relating to infrastructure development and budgetary allocations by the government to these sectors. The Indian Power Cables industry is growing at a healthy rate in the past few years on the back of strong demand from the power sector. Cross-linked polyethylene (commonly known as PEX or XLPE) demand has grown at a CAGR of 25.2% from 26.5k kms in FY06 to 81.4k kms in FY11. The power cables industry is generally cyclical in nature, however, the demand trend is expected to remain robust on expectation of strong activities in the power sector. Going ahead, CARE Research forecasts the industry to continue to grow in the range of 15-16% due to inadequate power 7

8 CARE supply and distribution infrastructure. The eleventh five year plan ( ) is targeted at enhancing India s power transmission capacity through the addition of 60,000 ckm (circuit kilometre), transmission lines with a capacity of 37,000 MW (megawatt) by March The scope of opportunity will be even wider in the twelfth five year plan ( ) with an investment of Rs.2,40,000 crore earmarked during the period. The cables industry is highly competitive due to the fragmented nature of the industry and import threat from low-cost manufacturing destinations such as South-East Asia and Asia Pacific regions. Imports account for 20.7% of domestic industry sales in FY11 and has grown at a rate of 19.4% over the past five years. On the contrary, high entry barrier and high operating rate of domestic players are viewed positively for the industry. The entry barrier is high for the new players due to fragmented, capital and technological-intensive nature of industry. In addition, there has been very limited consolidation amongst the major players in the industry due to tendency of cable companies to grow organically. The industry is prone to changes in government policies in respect of taxes, investment policies and regulations. The industry is also affected by developments in the Indian power sector, which is primarily dependent on government policies and government budgetary allocations to the power sector. The industry is subject to taxes and other levies imposed by the governments in India. At present, the industry is suffering from unfavourable duty structure as imports account for roughly 20% of total domestic demand. On the investment policy front, the government has delicensed the cable industry and made it eligible for automatic approval for Foreign Direct Investment up to 100 per cent of the equity capital employed. However, the industry continues to remain dominated by domestic players as foreign players have not made any significant investment in this sector in the past. 8

9 CONSOLIDATED FINANCIAL SUMMARY Rs. Crores FY07 FY08 FY09 FY10 FY11 Income Statement Net operating income EBITDA Depreciation and amortisation EBIT Interest PBT Ordinary PAT (After minority interest) PAT (After minority interest) Fully Diluted Earnings Per Share* (Rs.) Dividend, including tax * Calculated based on ordinary PAT on Current Face Value of Rs. 10/- per share Balance sheet Net worth (incl. Minority Interest) Debt Deferred Liabilities / (Assets) Capital Employed Net Fixed Assets (incl. Capital WIP) Investments Loans and Advances Inventory Receivables Cash and Cash Equivalents Current Assets, Loans and Advances Less: Current Liabilities and Provisions Total Assets Ratios Growth in Operating Income 29.1% 6.1% -2.3% -0.6% Growth in EBITDA 12.8% -10.2% 35.1% -22.8% Growth in PAT -21.4% -59.4% 287.7% -34.4% Growth in EPS -22.3% -59.6% 296.8% -34.7% EBITDA Margin 10.9% 9.2% 12.7% 9.9% PAT Margin 3.3% 1.3% 5.0% 3.3% RoCE 14.5% 10.7% 15.9% 10.1% RoE 10.5% 4.1% 14.7% 8.9% Debt-Equity (times) Interest Coverage (times) Current Ratio (times) Inventory Days Receivable Days Price / Earnings (P/E) Ratio Price / Book Value(P/BV) Ratio Enterprise Value (EV)/EBITDA Source: Capitaline,and CARE Equity Research 9

10 CARE DISCLAIMER DISCLOSURES Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. This report has been sponsored by the Bombay Stock Exchange (BSE). DISCLAIMER This BSE sponsored report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain or from sources considered reliable. However, neither the accuracy nor completeness of information contained in this report is guaranteed. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report can be construed as either investment or any other advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this report or data herein. CARE specifically states that it or any of its divisions or employees do not have any financial liabilities whatsoever to the subscribers / users of this report. This report is for personal information only of the authorised recipient in India only. This report or part of it should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied for any purpose. Credit Analysis and Research Limited proposes, subject to receipt of requisite approvals, market conditions and other considerations, to make an initial public offer of its equity shares and has filed a draft red herring prospectus ( DRHP ) with the Securities and Exchange Board of India (the SEBI ). The DRHP is available on the website of SEBI at as well as on the websites of the Book Running Lead Managers at and Investors should note that investment in equity shares involves a high degree of risk and for details relating to the same, see the section titled Risk Factors of the DRHP. [ This press release is not for publication or distribution to persons in the United States, and is not an offer for sale within the United States of any equity shares or any other security of Credit Analysis and Research Limited. Securities of Credit Analysis and Research Limited, including its equity shares, may not be offered or sold in the United States absent registration under U.S. securities laws or unless exempt from registration under such laws. ] Published by Credit Analysis & REsearch Ltd., 4th Floor Godrej Coliseum, Off Eastern Express Highway, Somaiya Hospital Road, Sion East, Mumbai CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this product. This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner without prior written permission of CARE Research. 10

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