Upbeat prospects for Finolex Cables; investors enthused

Finolex caters to high-growth sectors such as construction, automobiles, power, industrials, and telecommunications. (AFP)
Finolex caters to high-growth sectors such as construction, automobiles, power, industrials, and telecommunications. (AFP)

Summary

  • The maker of electrical and telecom cables expects increased activity in the construction sector to boost demand for its products

Finolex Cables Ltd’s shares have gained 12% since the company’s meeting with analysts on 21 November. Finolex is widely viewed as a beneficiary of India’s focus on housing and capital expenditure. The company caters to high-growth sectors such as construction, automobiles, power, industrials, and telecommunications, which has buoyed the outlook for the maker of electrical and telecommunication cables given the increased activity in these sectors. Finolex’s focus on these key sectors perhaps also explains the 86% gain in the stock so far in 2023.

Construction wires account for more than 50% of Finolex’s sales, analysts at Jefferies India pointed out. Construction, which accounts for 65% of the electricals segment, has better margins, whereas the auto and power cables, each making up about 10% of the segment, have relatively lower margins, it added.

During the September quarter (Q2FY24) earnings call, Finolex highlighted increased activity in the construction sector, saying that could lead to better demand for its products. Typically, the second half of every year has always been better than the first as construction activity is stronger post the monsoon.

On a consolidated basis, electrical cables accounted for the largest chunk (61%) of gross segment revenues in Q2, followed by copper rods (28%), communication cables (8%), and others (3%). “Better traction in margin-accretive segments and capacity expansions could support growth," said analysts at Jefferies India.

New products such as appliances, switchgears, and switches are margin accretive. During the Q2 earnings call, Finolex indicated that volumes for new product offerings in both lighting and conduit products were strong. Switches also showed positive performance. However, volumes in other appliance product lines were subdued due to inflationary pressures and sluggish demand. This trend is expected to have reversed during the festive season.

In addition to encouraging commentary on volumes, softening raw material costs are expected to lead to better margins. In Q2, Ebitda margin expanded sharply to 12.3%, from 9% a year earlier.

“The fundamentals are strong and the business environment is conducive for future growth," said Sanjeev Hota, head of research, Sharekhan by BNP Paribas. Even with a debt-free and financially sound balance sheet, the family feud and related court cases have weighed on investor sentiment for far too long. Any resolution or clarification in these matters would remove a significant overhang on Finolex’s stock, Hota said.

A family dispute has persisted between promoters Deepak Chhabria and Prakash Chhabria for a prolonged period revolving around the control of Finolex Cables.

Finolex Cables is currently trading at a price-to-earnings multiple of 20 times its estimated FY25 earnings, show Bloomberg data. This is a discount compared to that of competitors such as Polycab India Ltd, KEI Industries Ltd, and RR Kabel Ltd, which are trading at 35-42 times. The expectation is that this discount will narrow down once the family dispute is resolved.

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