Analyst Corner – Finolex Cables: Reiterate ‘buy’; PT of Rs 600, target PE at 18x

Key takeaway: FNXC’s Q1FY22 beat JEFe, driven by robust sales growth of +79% YoY. Revenue has been growing at a sturdy pace over past three qtrs, indicating improving offtake. Electrical category is the key catalyst (83% of mix), and could benefit from upswing in housing cycle & capex investments. EBIT margin in appliances stays positive. We broadly retain FY22-24e EPS. We view FNXC as a SMID Value Pick; FY23e PE at 15x seems undemanding, at discount to peers. Buy; PT at Rs 600.

Revenue Traction: FNXC’s Q1FY22 was a beat to JEFe. Earnings growth (+58% YoY) was driven by strong revenue traction of +79%. Sales have been consistently growing at a robust pace over past three quarters. Despite gross margin dip (-290 bps YoY), EBITDA margin expanded by 125 bps to 10.4%, alluding to better operating leverage (higher volumes) and cost control. FNXC mgmt has indicated earlier that a temporary transition from target-based schemes to actual invoices led to higher discount of 8% (vs. 6% earlier) impacting gross margins. This shift is in view of the pandemic and FNXC could likely revert to normal practices, post steady-state resumption.

Electrical Cables: This is FNXC’s mainstay category, with 83% of sales — comprises construction wires (60-65% of mix), auto, agri, and industrial (flexible) cumulative at 25%. Power cables (mainly B2B) is ~10%. In Q1FY22, this segment posted sales growth of +68% YoY, with EBIT margin at 10.8% (+290 bps). In volume terms, Electrical Wires grew by +7%, whereas Power Cables posted +23% growth. Going ahead, we foresee this segment to benefit from an upswing in housing cycle, and capex investments. We estimate Electricals revenue at +12% CAGR over FY21-24.

Communication Cables: This segment posted ~3x revenue growth in Q1, with +240bps expansion in EBIT margin to 2%. While Optic Fiber Cable volumes grew by +290%, volume of metal-based products rose by +71%. Over past few quarters, revenue and margins in this category decelerated, impacted by subdued offtake from telcos, and sharp fall in fibre prices globally. However, over the medium-term, this segment could benefit from 5G roll-out in India, translating into higher demand. We foresee gradual sales revival at +7% CAGR over FY21-24.

New Products / Appliances: This segment is presently < 5% of sales. In Q1, it posted healthy revenue growth of +68%, though EBIT margin dipped to 3.1% (-100 bps), likely impacted by rise in commodities.

Outlook, Value Pick: We slightly tweak FY22-24 EPS, broadly retaining EPS. Over FY21-24e, we pencil FNXC’s sales/PAT at +12%/25% CAGR, aided by improving margin in Electricals, traction in margin-accretive Appliances, new launch (PVC Conduits) and capex commissioning. Note that FY21 was a weak base (EPS dip of 30% YoY). FNXC’s present valuation at 15x/13x PE on FY23/24 appears undemanding, given its strong franchise, focus on margin-accretive Electrical category and a robust B/S. Reiterate ‘buy’; PT of Rs 600 (vs. Rs 590). Retain target PE at 18x, broadly in line with FNXC’s historical 5-year average. We view FNXC as a robust SMID
Value Pick.

Key risks: Demand slowdown, weak traction in new products. A key monitorable is the family tussle within the Finolex group (as reported in the media).