COMPANY UPDATE RETAIL EQUITY RESEARCH FINOLEX CABLES Ltd Electrical Equipments BSE CODE:500144 NSE CODE: FINCABLES Bloomberg CODE: FNXC:IN SENSEX: 38,312 Buy Rating as per Midcap 12 Months investment period CMP Rs. 550 TARGET Rs. 644 RETURN 17% 3 rd September, 2018 Tax woes impacts profitability... 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. Q1FY19 revenue and EBITDA grew by robust 17% & 18% YoY respectively, but PAT declined by 11% YoY owing to higher tax expenses. EBITDA margin improved by 10bps YoY to 16.4% led by lower cost. Led by higher demand from communication cables and gradual pick-up in construction sector, we expect revenue growth momentum to continue. However, we lower earnings estimates by 8.3% & 8.5% for FY19 & FY20 to factor in higher tax rates. We expect earnings to grow by 13% CAGR over FY18 FY20E. Considering the earnings downgrade, we value FCL s core business at P/E multiple of 19x (21x earlier) on FY20E and value FCL s investments in Finolex Industries at Rs75 to arrive at SOTP price target of Rs644 and upgrade to BUY from Accumulate. Revenue growth strong... Q1FY19 revenue grew by 17% YoY, led by pass through of higher copper prices coupled with strong growth in Electric cables revenue which grew by 12% YoY. Overall revenue growth from Electrical Cables was 12% YoY. Electrical Wires volume grew by 10% YoY and Power Cables grew by ~20% YoY. Though the revenue growth in communication cables was flat YoY, however there was a healthy volume growth in the segment primarily led by a 20% growth in Optical Fiber Cables. Management is confident that the ongoing government programs to improve broad band connectivity and related technologies will continue to drive growth in this segment. Going forward, with stabilisation of GST impact, reduction in tax rates, higher growth from optic fibre and gradual pick-up construction sector will drive revenue growth. We factor a revenue growth of 15% CAGR over FY18-FY20E. EBITDA margin improves...higher tax expenses impacts Gross margins declined by 123bps YoY to 26.9% largely due to higher raw material cost. Owing to supply shortage of copper in domestic markets, the requirements are met through imports which were costly impacting Q1 gross margins. While EBITDA margin improved by 10bps YoY to 16.4% led by lower employee and administrative expenses. But PAT declined by 11% YoY to Rs90cr due to higher tax expenses, as Roorkee facilities tax exemption period has expired. Consequently, tax provision for the current quarter was higher at 35.4% versus 21.3% in Q1FY18. Going ahead with stabilisation of GST volumes are expected pick-up, while pass through of higher copper prices, EBITDA margins are likely to improve. We raise our EBITDA margin estimates by 30bps & 40bps to 15.1% & 15.4% and factor EBITDA to grow by 16.4% CAGR over FY18E-20E. However, we lower our EPS estimates by 8.3% & 8.5% for FY19E & FY20E to factor in higher tax incidence going forward. Valuations Despite downgrade in earnings we continue to remain positive on FCL in the long term given its strong brand recall & expanding product portfolio. However, considering the earnings downgrade, we value FCL s core business at P/E of 19x (21x earlier) on FY20E and FCL s investments in Finolex Industries at Rs75 to arrive at SOTP price target of Rs644 and upgrade to Buy from Accumulate. Company Data Market Cap (cr) Rs. 8,412 Enterprise Value (cr) Rs. 8,306 Outstanding Shares (cr) 15.3 Free Float 44% Dividend Yield 0.4% 52 week high Rs. 750 52 week low Rs. 511 6m average volume (cr) 0.01 Beta 0.8 Face value Rs. 2 Shareholding (%) Q3 FY18 Q4 FY18 Q1 FY19 Promoters 37.3 37.3 37.3 FII s 6.8 6.9 6.2 MFs/Institutions 20.4 20.9 21.8 Public 18.4 17.9 17.8 Others 17.1 17.0 16.9 Total 100.0 100.0 100.0 Price Performance 3 Months 6 Months 1 Year Absolute Return -20.1% -22.5% 1.8% Absolute Sensex 9.4% 13.5% 21.8% Relative Return* -29.5% -36.0% -20.0% *over or under performance to benchmark index 900 700 500 300 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Standalone (Rs.cr) FY18A FY19E FY20E Sales 2,815 3,251 3,723 Growth (%) 15.1 15.5 14.5 EBITDA 422 489 572 Margin (%) 15.0 15.1 15.4 PAT Adjusted 358 392 458 Growth (%) 13.4 9.6 16.7 Adj.EPS 23.4 25.7 29.9 Growth (%) 13.4 9.6 16.7 P/E 23.5 21.4 18.4 P/B 3.8 3.3 2.8 EV/EBITDA 19.7 17.0 14.5 ROE (%) 17.6 16.5 16.5 D/E 0.0 0.0 0.0 Anil R Analyst FCL Sensex Rebased
SOTP Valuation Particulars Segments FY20 EPS Valued at P/E Holding discount Value/Share (Rs) FCL Standalone Core Business Rs 30.0 19x - 569 Finolex Industries FCL holds 32.4% Rs 32.5 11x 20% holding discount 75 Total Value per share 644 Financials Profit & Loss Account (Rs cr) Q1FY19 Q1FY18 YoY Growth % Q2FY18 QoQ Growth % Sales 791 674 17.4 796 (0.4) EBITDA 130 110 18.0 115 12.5 EBITDA margins 16.4 16.3 +10bps 14.5 +190bps Depreciation 10 12 (17.6) 10 (1.3) EBIT 120 98 22.2 106 13.8 Interest - - - 1 - Other Income 20 31 (35.8) 24 (14.9) PBT 140 130 8.0 128 9.5 Tax* 50 28 79.3 46 7.8 Share of profit from Associate - - - - - Exceptional - 7 - - - Reported PAT 90 109 (17.4) 82 10.5 Adjustments - (7) - - - Adj PAT 90 102 (11.3) 82 10.5 No. of shares (cr) 15.3 15.3-15.3 - EPS (Rs) 5.9 6.7 (11.3) 5.4 10.5 Change in estimates Old estimates New estimates Change % Year / Rs cr FY19E FY20E FY19E FY20E FY19E FY20E Revenue 3,286 3,797 3,251 3,723 (1.1) (1.9) EBITDA 486 571 489 572 0.6 0.2 Margins (%) 14.8 15.0 15.1 15.4 +30bps +40bps PAT 428 500 392 458 (8.3) (8.5) EPS 28.0 32.7 25.7 29.9 (8.3) (8.5)
Standalone Financials Profit & Loss Account Balance Sheet Sales 2,360 2,445 2,815 3,251 3,723 % change (3.6) 3.6 15.1 15.5 14.5 EBITDA 339 371 422 489 572 % change 30.4 9.6 13.7 15.9 17.0 Depreciation 58 48 44 46 52 EBIT 281 323 379 443 520 Interest 9 4 1 - - Other Income 64 100 127 143 173 PBT 336 419 504 586 694 % change 27.8 24.7 20.3 16.1 18.4 Tax 88 103 146 193 236 Tax Rate (%) 26.0 24.7 29.0 33.0 34.0 Reported PAT 249 316 358 392 458 Adj* - - - - - Adj PAT 249 316 358 392 458 % change 41.2 26.9 13.4 9.6 16.7 No. of shares (mn) 15.3 15.3 15.3 15.3 15.3 Adj EPS (Rs) 16.3 20.7 23.4 25.7 29.9 % change 41.2 26.9 13.4 9.6 16.7 DPS (Rs) 1.9 1.9 1.9 1.9 1.9 CEPS (Rs) 20.1 23.8 26.3 28.7 33.3 Cash 219 201 106 99 107 Accounts Receivable 126 124 175 187 224 Inventories 329 462 499 568 655 Other Cur. Assets 515 653 768 1,051 1,357 Investments 294 302 514 544 549 Gross Fixed Assets 486 515 554 609 689 Net Fixed Assets 432 414 408 417 445 CWIP 3 8 5 12 13 Intangible Assets - 1 1 - - Def. Tax (Net) (24) (19) (35) (37) (40) Other Assets - - - - - Total Assets 1,894 2,147 2,441 2,841 3,310 Current Liabilities 259 253 209 239 272 Provisions 13 17 37 45 51 Debt Funds 26 1 1 - - Other Liabilities - - - - - Equity Capital 31 31 31 31 31 Reserves & Surplus 1,565 1,847 2,163 2,527 2,956 Shareholder s Fund 1,596 1,877 2,194 2,558 2,987 Total Liabilities 1,894 2,147 2,441 2,841 3,310 BVPS (Rs) 104.3 122.8 143.4 167.2 195.3 Cash flow Net inc. + Deprecation. 307 364 402 438 510 Non-cash adj. 24 (42) (6) (6) (6) Changes in W.C (55) (64) (133) (51) (91) C.F.O 276 259 262 382 413 Capital exp. (13) (36) (35) (61) (81) Change in inv. (135) (220) (212) (30) (5) Other invest.cf 20 55 9 9 9 C.F - investing (127) (201) (238) (83) (77) Investments - - (92) (277) (299) Issue/repay debt (25) (25) (0) (1) - Dividends paid (33) (46) (29) (29) (29) Other finance.cf (9) (4) (1) (0) (0) C.F - Financing (68) (76) (122) (306) (328) Chg. in cash 81 (18) (98) (7) 8 Closing cash 219 201 103 99 107 Ratios Y.E March FY16A FY17A FY18A FY19E FY20E Profitability. & Return EBITDA margin (%) 14.4 15.2 15.0 15.1 15.4 EBIT margin (%) 11.9 13.2 13.4 13.6 14.0 Net profit margin (%) 10.5 12.9 12.7 12.1 12.3 ROE (%) 16.7 18.2 17.6 16.5 16.5 ROCE (%) 17.3 17.5 18.0 18.3 18.4 W.C & Liquidity Receivables (days) 18.9 18.7 19.4 20.3 20.2 Inventory (days) 67.9 83.6 86.2 82.6 83.1 Payables (days) 15.2 19.1 24.1 28.8 28.2 Current ratio (x) 4.4 5.4 6.3 6.7 7.2 Quick ratio (x) 1.3 1.3 1.3 0.8 0.8 Turnover &Leverage Gross asset T.O (x) 4.9 4.9 5.3 5.6 5.7 Total asset T.O (x) 1.3 1.2 1.2 1.2 1.2 Int. coverage ratio (x) 31.4 75.4 - - - Adj. debt/equity (x) 0.0 0.0 0.0 0.0 0.0 Valuation ratios EV/Sales (x) 3.5 3.4 3.0 2.6 2.2 EV/EBITDA (x) 24.3 22.1 19.7 17.0 14.5 P/E (x) 33.8 26.6 23.5 21.4 18.4 P/BV (x) 5.3 4.5 3.8 3.3 2.8
Recommendation Summary (last 3 years) Dates Rating Target 850 750 650 550 450 350 250 150 50 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Source: Bloomberg, Geojit Research 5 th November, 2013 BUY 77 13 th November, 2013 BUY 81 17 th February, 2014 BUY 87 9 th May, 2014 ACCUMULATE 173 11 TH August, 2014 HOLD 196 20 th May, 2015 ACCUMULATE 286 04.March,2016 ACCUMULATE 262 31 May, 2016 ACCUMULATE 392 17 August, 2016 ACCUMULATE 456 17 February 2017 ACCUMULATE 498 06-June-2017 HOLD 543 13-Novomber-2017 ACCUMULATE 699 06-March-2018 ACCUMULATE 769 03-September-2018 BUY 644 Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% -10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review. General Disclosures and Disclaimers CERTIFICATION I, Anil R, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit. COMPANY OVERVIEW Geojit Financial Services Limited (hereinafter Geojit), a publically listed company, is engaged in services of retail broking, depository services, portfolio management and marketing investment products including mutual funds, insurance and properties. Geojit is a SEBI registered Research Entity and as such prepares and shares research data and reports periodically with clients, investors, stake holders and general public in compliance with Securities and Exchange Board of India Act, 1992, Securities And Exchange Board Of India (Research Analysts) Regulations, 2014 and/or any other applicable directives, instructions or guidelines issued by the Regulators from time to time. DISTRIBUTION OF REPORTS This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Geojit will not treat the recipients of this report as clients by virtue of their receiving this report. GENERAL REPRESENTATION The research reports do not constitute an offer or solicitation for the purchase or sale of any financial instruments, inducements, promise, guarantee, warranty, or as an official confirmation of any transaction or contractual obligations of any kind. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. We have also reviewed the research report for any untrue statements of material facts or any false or misleading information. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. RISK DISCLOSURE Geojit and/or its Affiliates and its officers, directors and employees including the analyst/authors shall not be in any way be responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Investors may lose his/her entire investment under certain market conditions so before acting on any advice or recommendation in these material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. This report does not take into account the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved). The price, volume and income of the investments referred to in this report may fluctuate and investors may realize losses that may exceed their original capital. FUNDAMENTAL DISCLAIMER We have prepared this report based on information believed to be reliable. The recommendations herein are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. The stocks always carry the risk of being upgraded to buy or downgraded to a hold, reduce or sell. The opinions expressed are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. This report is non-inclusive and does not consider all the information that the recipients may consider material to investments. This report is issued by Geojit without any liability/undertaking/commitment on the part of itself or any of
its entities. We may have issued or may issue on the companies covered herein, reports, recommendations or information which is contrary to those contained in this report. The projections and forecasts described in this report should be evaluated keeping in mind the fact that these are based on estimates and assumptions and will vary from actual results over a period of time. The actual performance of the companies represented in the report may vary from those projected. These are not scientifically proven to guarantee certain intended results and hence, are not published as a warranty and do not carry any evidentiary value whatsoever. These are not to be relied on in or as contractual, legal or tax advice. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. JURISDICTION The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. Distributing/taking/sending/dispatching/transmitting this document in certain foreign jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe any such restrictions. Failure to comply with this restriction may constitute a violation of any foreign jurisdiction laws. Foreign currencies denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. Investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. REGULATORY DISCLOSURES: Geojit s Associates consists of privately held companies such as Geojit Technologies Private Limited (GTPL- Software Solutions provider), Geojit Credits Private Limited (GCPL- NBFC Services provider), Geojit Investment Services Limited (GISL- Corporate Agent for Insurance products), Geojit Financial Management Services Private Limited (GFMSL) & Geojit Financial Distribution Private Limited (GFDPL), (Distributors of Insurance and MF Units).In the context of the SEBI Regulations on Research Analysts (2014), Geojit affirms that we are a SEBI registered Research Entity and in the course of our business as a stock market intermediary, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership*: Geojit confirms that: (i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein. (ii) It/its associates have no actual beneficial ownership greater than 1% in relation to the subject company (ies) covered herein. Further, the Analyst confirms that: (i) he, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company. (ii) he, his associates and his relatives have no actual/beneficial ownership greater than 1% in the subject company covered 2. Disclosures regarding Compensation: During the past 12 months, Geojit or its Associates: (a) Have not received any compensation from the subject company; (b) Have not managed or co-managed public offering of securities for the subject company (c) Have not * received any compensation for investment banking or merchant banking or brokerage services from the subject company. (d) Have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company (e) Have not received any compensation or other benefits from the subject company or third party in connection with the research report (f) The subject company is / was not a client during twelve months preceding the date of distribution of the research report. 3. Disclosure by Geojit regarding the compensation paid to its Research Analyst: Geojit hereby confirms that no part of the compensation paid to the persons employed by it as Research Analysts is based on any specific brokerage services or transactions pertaining to trading in securities of companies contained in the Research Reports. 4. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that the I Anil R Research Analyst(s) of Geojit have not served as an officer, director or employee of the subject company 5. Disclosure regarding Market Making activity: Neither Geojit/its Analysts have engaged in market making activities for the subject company. Please ensure that you have read the Risk Disclosure Documents for Capital Market and Derivatives Segments as prescribed by the Securities and Exchange Board of India before investing. Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom, Kochi-682024, Kerala, India. Phone: +91 484-2901000, Website: www.geojit.com. For investor queries: customercare@geojit.com, For grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com. Corporate Identity Number: L67120KL1994PLC008403, SEBI Stock Broker Registration No INZ000104737, Research Entity SEBI Reg No: INH200000345, Investment Adviser SEBI Reg No: INA200002817, Portfolio Manager: INP000003203, Depository Participant: IN-DP-325-2017, ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226