Finolex Cables - Weak Quarter; Healthy Growth Is Needed To Sustain Recent Re-Rating: Systematix

Systematix Research Report

Finolex Cables Ltd. soft Q1 (revenue up 2%, Ebitda/profit before tax down 13%/7% YoY; Ebitda margin 10.3%) was impacted by steep fall in copper prices, heat waves and general elections. Cables and wires (revenue down 2% YoY; Ebit margin contracted 190 basis points YoY to 11.2%) segment was impacted due to flat volume in wires (10% rise in power cables).

Ebit margin contracted due to lower volume and fall in product prices in June-24. Low metal price is negative for C&W margin. Ebeam plant is waiting for regulatory approval to start production. At Rs 1 billion capex, the plant has potential to garner Rs 5 billion revenue in two-three years. Starting with auto and solar, Finolex Cables will also enter railways and instrumentation sectors.

Extra high voltage cables, having Rs 3 billion order book, is expected to clock Rs 2.5 billion revenue in FY25. Communication cables (revenue down 13% YoY; Ebit margin low at 2.5%) was impacted due to 8% YoY dip in volume of metal-based products while Optic Fiber Cable volumes grew by 10%.

The preform facility is at an advanced stage of completion and is expected to be commissioned by January 2025. 5G roll out under Bharat Net is a big opportunity. However, telco’s financial position will decide margins in the optic fibre cable business.

Fast moving electrical goods (revenue grew 45% YoY and barely achieved Ebit breakeven) revenue benefited from new launches. We are watchful of Finolex Cables’ Rs 5 billion revenue guidance in two three years. The improving outlook of the electrical wire industry in last two-three years has led to narrow valuation gap with peers.

After a weak operating result in Q1, we have cut our Ebitda estimates by ~5%. We now expect 14%/18% compound annual growth rate in revenue/PAT over FY24-26E.

Maintain Hold with a lower target price of Rs 1,628 (30 times FY26E core P/E for ~24% RoIC + Rs 300/share for its share in Finolex Industries; earlier Rs 1,703).

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