2QFY2012 Result update | Power Cables

November 14, 2011

Finolex Cables
Performance highlights
Y/E March (` cr) Net sales EBITDA EBITDA (%) PAT 2QFY2012 499 40 8.0 20 1QFY2012 461 34 7.5 20 % chg (qoq) 8.3 15.6 50bp (2.4) 2QFY2011 491 42 8.5 19 % chg (yoy) 1.7 (4.0) (48)bp 4.2

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Power Cables 541 0.7 64 / 35 40,419 2 17,119 5,148 FNXC.BO FNXC@IN

`35 `51
12 Months

Source: Company, Angel Research

For 2QFY2012, Finolex Cables (Finolex) reported a 1.7% yoy increase in its top line to `499cr. The companys operating profit declined by 4.0% yoy to `40cr. OPM declined by 48bp yoy but improved by 50bp qoq to 8.0%. PAT came in at `20cr, up 4.2% yoy, but declined by 2.4% qoq. Going ahead, the business outlook remains positive, given the growth prospects in user industries and higher sales from the high-tension (HT) cables plant. Sales increase and margins dip: Finolex reported a 1.7% yoy increase in its top line to `499cr. The main electrical cables segment reported strong growth of 19.4% yoy. However, the other two segments, communication cables and copper rods reported declines of 22.4% and 16.5%, respectively. Despite a decline in OPM and operating profit, PAT increased by 4.2% yoy to `20cr (`19cr), while PAT margin increased by just 10bp yoy to 4.0% (3.9%). The increase in PAT was largely on the back of higher other income and lower tax rate, which was somewhat offset by higher forex loss during the quarter. Other income increased by 12.7% yoy to `17cr (`15cr), while tax rate declined to 21.4% in 2QFY2012 from 35.9% in 2QFY2011. Exceptional items, which included forex losses, increased by 36.2% yoy to `16cr (`12cr). Outlook and valuation: We remain positive on the companys prospects going ahead, given strong growth in user industries, which are showing no signs of abating. Higher sales from the HT cables plant and start of production at the EHV plant would further boost the companys growth. However, in view of the companys limited ability to effectively pass on copper price fluctuations, we have revised our OPM estimates for FY2012E and FY2013E downwards to 8.0% and 8.5%, respectively. Overall, we expect sales to grow at a 7.2% CAGR over FY201113E, while PAT is expected to post a CAGR of 22.6% over the same period. At the CMP, the stock is trading at 4.1x its FY2013E EPS. We maintain our Buy rating on the stock with a revised target price of `51 (`59).

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 35.4 28.2 5.5 30.9

Abs.(%) Sensex Finolex Cables

3m 1.7

1yr (15.1)

3yr 82.4 55.4

(12.2) (41.2)

Key financials
Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA Margin (%) FDEPS (`) P/E (x) P/BV (x) RoE (%) RoACE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010E 1,619 20.7 58 12.2 3.8 9.4 0.8 9.3 17.1 0.3 2.5

FY2011E 2,036 25.8 87 50.6 8.4 5.7 6.2 0.8 12.8 13.6 0.3 3.1

FY2012E 2,081 2.2 84 (2.8) 8.0 5.5 6.4 0.7 11.2 12.6 0.2 2.7

FY2013E 2,341 12.5 130 54.4 8.5 8.5 4.1 0.6 15.6 15.3 0.2 1.9

Sharan Lillaney
+91 22 3935 7800 Ext: 6811 [email protected]

Please refer to important disclosures at the end of this report

Finolex Cables | 2QFY2012 Result update

Exhibit 1: 2QFY2012 performance

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`)
Source: Company, Angel Research

2QFY2012 499.0 387.8 77.7 17.2 3.5 54.2 10.9 459.2 39.8 8.0 5.2 9.7 16.6 41.5 (16.4) 25.1 5.0 5.4 21.4 19.7 4.0 15.3 1.3

1QFY2012 460.7 365.1 79.3 16.4 3.6 44.7 9.7 426.3 34.5 7.5 4.3 9.8 6.4 26.7 (1.9) 24.8 5.4 4.6 18.5 20.2 4.4 15.3 1.3

% chg (qoq) 8.3 6.2 4.9 21.2 7.7 15.6 50bp 20.7 (1.3) 159.2 55.5 1.3 17.2 (2.4) (43)bp (2.4)

2QFY2011 490.6 385.8 78.6 14.2 2.9 49.1 10.0 449.1 41.5 8.5 4.5 10.1 14.8 41.6 (12.1) 29.5 6.0 10.6 35.9 18.9 3.9 15.3 1.2

% chg (yoy) 1.7 0.5 21.3 10.3 2.2 (4.0) (48)bp 15.4 (4.2) 12.7 (0.1) (15.0) (49.3) 4.2 10bp 4.2

1HFY2012 959.7 752.9 78.4 33.7 3.5 98.9 10.3 885.4 74.3 7.7 9.6 19.5 23.1 68.3 (18.4) 49.9 5.2 10.0 19.9 39.9 4.2 15.3 2.6

1HFY2011 983.7 783.0 79.6 29.8 3.0 89.7 9.1 902.6 81.1 8.2 8.6 19.9 20.6 73.3 (15.7) 57.6 5.9 15.7 27.3 41.9 4.3 15.3 2.7

% chg (2.4) (3.8) 12.8 10.2 (1.9) (8.5) (51)bp 12.0 (2.0) 11.9 (6.9) (13.4) (36.7) (4.7) (10)bp (4.7)

Segment-wise performance
The electrical cables segment reported strong 19.4% yoy growth in sales, driven by higher realization and higher contribution from the HT cables plant. However, the segments margin declined by 142bp yoy to 11.8% (13.2%), with EBIT coming in at `49cr (`46cr). The communication cables segment posted a decline of 22.4% yoy in the top line, with sales of `36cr (`46cr), as there was a considerable reduction in the number of tenders invited for the segment. The situation is expected to remain this way for some time. As a consequence of lower sales, the segments margin fell by 999bp yoy to 7.4% (17.4%). The copper rods segment reported a 16.5% yoy decline in its top line to `263cr (`315cr) during the quarter. The segments EBIT came in at `0.9cr and its margin stood at 0.3%. The others segment registered a 27.4% yoy decline in sales to `36cr (`49cr). A sizeable part of the decline was due to inter-segment sales. Management is considering to close down the PVC sheet manufacturing facility, owing to its low contribution to sales and the fact that there have been a number of technological improvements in the product in the industry, which will take some effort to catch up with. The others segment reported loss of `3cr at the EBIT level in 2QFY2012 compared to `1cr loss in 2QFY2011.
November 14, 2011

Finolex Cables | 2QFY2012 Result update

Exhibit 2: Segment-wise performance

Y/E March (` cr) Total Revenue A) Electrical Cables B) Communications Cables C) Copper Rods D) Others Total Less: Inter-Segmental Revenue Net Sales EBIT Margin (%) A) Electrical Cables B) Communications Cables C) Copper Rods D) Others
Source: Company, Angel Research

2QFY2012 1QFY2012 2QFY2011 % chg (qoq) % chg (yoy) 412 36 263 36 747 248 499 11.8 7.4 0.3 (7.3) 376 35 286 50 747 286 461 9.9 4.4 0.7 (2.3) 345 46 315 49 756 265 491 13.2 17.4 (2.0) (1.5) 9.7 3.3 (8.2) (28.3) 0.0 (13.4) 8.3 187bp 296 bp (39) bp (493) bp 19.4 (22.4) (16.5) (27.4) (1.2) (6.5) 1.7 (142) bp (999) bp 233 bp (574) bp

Sales improve by 1.7% yoy

Finolex reported a 1.7% yoy improvement in its top line to `499cr. The companys main electrical cables segment reported strong growth of 19.4% yoy. However, the other two segments, communication cables and copper rods reported declines of 22.4% and 16.5% yoy, respectively. Going ahead, we expect the companys sales to grow, given the positive outlook in user industries and higher contribution to sales from the HT cables plant.

Exhibit 3: Sales trend

600 500 400 422 464 493 491 513 461 461 499 90 80 70 60 50 40 30 20 10 0 (10) (20)

(` cr)

300 200 100 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Sales (LHS)
Source: Company, Angel Research

yoy Growth (RHS)

November 14, 2011

2QFY12

(%)

Finolex Cables | 2QFY2012 Result update

OPM declines yoy to 8.0% but improves sequentially

The companys OPM declined to 8.0% in 2QFY2012 from 8.5% in 2QFY2011. However, OPM improved by 50bp qoq. This qoq improvement in OPM can be attributed to lower raw-material cost. Going ahead, however, we expect the companys margin to improve from the current levels.

Exhibit 4: OPM trend

60 50 40 7.1 10.8 8.0 8.5 9.9 7.5 7.5 8.0 12 10 8

(` cr)

20 10 0 46 33 40 41 51 34 34 40

4 2 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

EBITDA (LHS)

OPM (RHS)

Source: Company, Angel Research

PAT comes in at `20cr

Finolex had reported a loss in 4QFY2010. Barring that, the companys PAT has been reasonably high, despite continuing forex losses. For 2QFY2012, the companys PAT reported decent yoy growth to `20cr. Going ahead, as forex losses taper off and sales increase further, we expect the companys PAT to increase from the current levels.

Exhibit 5: PAT trend

30 25 20 15 12 23 19 26 20 20 20

(` cr)

10 5 0 (5) (10) (5)

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

November 14, 2011

2QFY12

(%)

30

Finolex Cables | 2QFY2012 Result update

Investment arguments
Poised for high growth going ahead: Finolex is poised to register robust growth over the next few years, owing to strong growth in the existing LT cables segment and entry into the HT and extra high voltage (EHV) cables verticals. In the LT cables segment, we expect organized players to gradually gain market share as their distribution reach expands and customers increasingly demand high-quality and branded wires. Entry into the HT cables segment gives accessibility to the generation and distribution segment, where the market opportunity is estimated at `37,000cr over the next 10 years. Tax benefits from Roorkee plant to help in the companys turnaround: The company has shifted a major chunk of production to its Roorkee plant, which avails excise duty and income tax benefits. Owing to this, we expect excise duty and tax rates for the company to remain low at 12% and 22.0%, respectively, in FY2013E. The company has further increased the capacity of this plant by 50%. Proximity to the growing north Indian markets and tax benefits availed by this plant are expected to boost the companys turnaround. Major capex already undertaken: Finolex has already incurred the major capex required to register growth over the next 45 years. Thus, on account of high operating leverage and strong sales growth, we expect the company to increase its net profit to `130cr in FY2013E from `87cr in FY2011.

Outlook and valuation

We remain positive on the companys prospects going ahead, given strong growth in user industries, which are showing no signs of abating. Higher sales from the HT cables plant and start of production at the EHV plant would further boost the companys growth. However, in view of the companys limited ability to effectively pass on copper price fluctuations, we have revised our OPM estimates for FY2012E and FY2013E downwards to 8.0% and 8.5%, respectively. Overall, we expect sales to grow at a 7.2% CAGR over FY201113E, while PAT is expected to post a CAGR of 22.6% over the same period. At the CMP, the stock is trading at 4.1x its FY2013E EPS. We maintain our Buy rating on the stock with a revised target price of `51 (earlier `59).

November 14, 2011

Finolex Cables | 2QFY2012 Result update

Profit and loss statement

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY09 1,502 160 1,342 1,342 (3.1) 1,240 1,058 24 53 103 102 (30.2) 7.6 39 63 (47.2) 4.7 32 51 62.5 82 (38.7) 112 (30) 5 (35) 82 (2.3) (2.3) FY10 1,727 108 1,619 1,619 20.7 1,422 1,221 28 59 113 197 93.5 12.2 37 160 153.5 9.9 19 24 14.6 165 102.5 76 89 32 35.4 58 107 3.8 3.8 FY11 2,211 176 2,036 2,036 25.8 1,864 1,619 34 65 147 172 (12.7) 8.4 39 133 (16.7) 6.5 17 26 18.3 142 (14.3) 34 107 20 19.0 87 115 50.6 4.3 5.7 5.7 50.6 FY12E 2,287 206 2,081 2,081 2.2 1,914 1,655 38 66 154 167 (2.8) 8.0 40 128 (4.1) 6.1 15 30 21.3 143 0.7 34 108 24 22.0 84 111 (2.8) 4.1 5.5 5.5 (2.8) FY13E 2,660 319 2,341 2,341 12.5 2,141 1,855 39 74 173 200 19.5 8.5 42 158 24.0 6.8 11 32 17.7 179 25.4 12 167 37 22.0 130 139 54.4 5.6 8.5 8.5 54.4

November 14, 2011

Finolex Cables | 2QFY2012 Result update

Balance sheet
Y/E March SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Inventories Debtors Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 762 346 416 40 314 316 28 86 144 58 171 144 914 802 384 419 29 280 415 37 86 221 71 193 222 950 839 422 417 17 245 536 21 105 281 129 207 329 1,009 860 462 398 17 255 559 32 105 289 134 215 345 1,015 903 504 400 18 255 623 30 117 325 151 246 378 1,050 31 566 596 296 22 914 31 613 643 275 32 950 31 687 717 260 31 1,009 31 753 784 200 31 1,015 31 859 889 130 31 1,050 FY09 FY10 FY11 FY12E FY13E

November 14, 2011

Finolex Cables | 2QFY2012 Result update

Cash flow statement

Y/E March Profit before tax Depreciation (Inc.)/ Dec. in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY09 (30) 39 141 51 5 93 (125) 3 (4) 51 (75) 8 4 (16) (11) 7 21 28 FY10 89 37 (81) 24 32 (10) (29) 34 1 24 30 (21) 11 21 (11) 9 28 37 FY11 107 39 (106) 26 20 (7) (25) 35 (19) 26 18 (15) 13 1 (27) (16) 37 21 FY12E 108 40 (11) 30 24 82 (21) (10) 30 (1) (60) 18 7 (71) 10 21 32 FY13E 167 42 (30) 32 37 110 (44) (12) 32 (25) (70) 25 8 (87) (1) 32 30

November 14, 2011

Finolex Cables | 2QFY2012 Result update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/E (on basic, reported EPS) P/CEPS P/BV Dividend yield (%) Market cap. / Sales EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROCE (Post Tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC ROE Turnover ratios (x) Asset Turnover (Gross Block) Asset Turnover (Net Block) Operating Income / Invested Capital Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.5 0.2 1.4 1.9 0.4 0.2 0.8 8.5 0.4 0.3 1.1 7.6 0.3 0.2 0.7 8.3 0.1 0.1 0.3 14.3 2.1 4.3 2.8 52 22 48 46 2.1 3.9 2.9 41 15 44 41 2.5 4.9 3.1 45 18 36 56 2.4 5.1 2.9 50 23 36 56 2.7 5.9 3.2 48 22 35 58 6.8 15.4 (5.7) 17.1 18.2 9.3 13.6 16.2 12.8 12.6 13.9 11.2 15.3 16.9 15.6 4.7 118.0 2.8 15.4 13.1 0.2 15.9 9.9 64.6 2.9 18.2 4.2 0.2 21.4 6.5 81.0 3.1 16.2 5.3 0.2 18.9 6.1 78.0 2.9 13.9 5.2 0.2 15.6 6.8 78.0 3.2 16.9 5.2 0.1 18.1 (2.3) (2.3) 0.2 0.2 39.0 3.8 3.8 6.2 0.6 42.0 5.7 5.7 8.2 0.7 46.9 5.5 5.5 8.1 1.0 51.3 8.5 8.5 11.2 1.4 58.1 165.2 0.9 0.6 0.4 0.4 4.9 0.5 9.4 9.4 5.7 0.8 1.7 0.3 0.3 2.5 0.5 6.2 6.2 4.3 0.8 2.0 0.3 0.3 3.1 0.5 6.4 6.4 4.4 0.7 2.8 0.3 0.2 2.7 0.4 4.1 4.1 3.1 0.6 4.0 0.2 0.2 1.9 0.4 FY09 FY10 FY11 FY12E FY13E

November 14, 2011

Finolex Cables | 2QFY2012 Result update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Finolex Cables No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 14, 2011

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