Finolex Cables Ltd

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The ratings continue to reflect Finolex Cables Limited’s strong financial position as is evident from its low gearing (0.23 times as at March 31, 2002), strong debt protection measures, comfortable liquidity position and high but declining net profit margins. The ratings also draw comfort from the company’s diversified product portfolio, which has helped mitigate the impact of the sharp downturn in domestic demand for jelly-filled telecom cables (JFTC), its leadership position in the steadily growing electrical cables segment as well as its successful foray into the JFTC exports market. The company’s financial flexibility has improved as it has scaled down its optical fibre project from Rs 3.62 billion to Rs 970 million. These rating strengths are, to some extent, offset by the expected reduction in Finolex Cables’ profit due to the sharp downturn in domestic JFTC sales and the Rs 750-million cash outflow for its share buyback programme.

Diversified product profile partially cushions the sharp decrease in domestic JFTC sales: Although Finolex Cables saw its sales improve in 2001-02, adverse developments in the JFTC market are likely to impact its topline in the short to medium term. State-owned telecom operator and the largest JFTC consumer, Bharat Sanchar Nigam Limited’s (BSNL) decision to use CDMA-based wireless in local loop (WiLL) for its future network roll-outs has pushed down JFTC offtake in the domestic market. This, coupled with fragmented and excessive capacity, has resulted in a sharp decline in realisations and consequently, margins.

Finolex Cables’ lower JFTC sales in the domestic market would be partially offset by the increase in its exports, which have grown at a healthy rate in the past 18 months. Also, going ahead, the electrical cables segment is expected to post robust growth rates due to the greater use of branded wires in the steadily-growing housing sector and higher pump sales because of the lower than normal rainfall in many parts of the country. While the increase in JFTC exports and robust growth in electrical cables is unlikely to completely offset the sharp decline in domestic JFTC sales, it does cushion its impact to some extent.

Market position in other segments remains strong: Notwithstanding the expected decline in its topline, Finolex Cables’ market position remains strong. It is a market leader in light-duty cables (LDC) as well as the largest JFTC exporter in the country. While the LDC market is currently dominated by the unorganised sector, consumers are shifting towards branded wires. Hence, given its market leadership, Finolex Cables would stand to benefit from such a shift.

On the export front, Finolex Cables has performed much better than most of its peers as it is one of the few manufacturers of foam-skinned JFTC in the country. Its timely efforts to develop its export markets have borne fruit with exports almost quadrupling to Rs 540 million in the first half of the current year as against Rs 140 million in the previous corresponding period. Finolex Cables’ margins in JFTC exports are higher than in domestic sales, indicating that competition is less intense in this segment.

Lower topline and profits, but credit protection ratios remain strong and liquidity comfortable: Finolex Cables’ financial risk profile is characterised by a robust capital structure, strong credit protection measures, high but declining net profit margins and comfortable liquidity.

Although high, the company’s net profit margins have been declining and the trend is expected to continue in the medium term. Margins have fallen because of lower realisations in the JFTC segment. While the company’s favourable cost structure, with its high variable costs, would mitigate the impact of the lower topline and falling realisations to some extent, on the whole, the company’s profits would decline.

Going ahead, the sensitivity of the company’s profitability to prices of its most important raw material -- copper -- is expected to be higher. Till 2000-01, a significant portion of Finolex Cables’ sales was of JFTC to BSNL through a tendering process, which ensured that the fluctuations in the copper prices were passed through. However, with a greater portion of its turnover now coming from the LDC segment, its margins are likely to be sensitive to global copper prices as well as to the company’s ability to pass through any increases in copper prices to consumers.

In spite of these pressures, given its low debt in relation to its cash accruals and sizeable liquid assets, Finolex Cables’ credit-servicing capability is expected to remain strong. The company’s low gearing of 0.23 as on March 31, 2002, even after the merger of loss-making Finolex Technologies and Finoram Sheets with itself, its buyback programme and the expenditure on its optical fibre project, underscores the robustness of its capital structure. The company’s liquidity is comfortable with sizeable investments in liquid debt mutual funds. Crisil expects the company to maintain its current liquidity in the near term.

Reduction in optical fibre project size to increase financial flexibility: The company recently merged its subsidiary, Finolex Technologies, which is implementing a backward integration project to manufacture optical fibre with itself. But since optical fibre and optical fibre cable realisations have been declining sharply due to global over-capacity, the company has reduced the scope of its project from the earlier estimated Rs 3.62 billion to Rs 970 million today. The project is yet to go on-stream and the current rating does not factor in any revenues from the same.

Business Description
Finolex Cables is among the country’s leading cable manufacturers with a well-diversified product portfolio comprising copper-based telecom cables and electrical cables. These contributed around 42 per cent and 53 per cent of its operating income respectively in 2001-02.

Finolex Cables’ JFTC facilities are located at Urse, near Pune, with an installed capacity of 6500 thousand-core kilometres (tckm) and in Verna, Goa, with an installed capacity of 4100 tckm. LDCs are produced at its plants in Pimpri (near Pune) and Verna with a total installed capacity of 900 tckm. The company’s initial LDC product range was restricted to automobile wiring, flexible cables used in machinery and polyvinyl chloride (PVC) insulated electrical wires for domestic household applications. Finolex Cables has gradually widened this product range to include PVC-insulated winding wires, three core flat cables for submersible pumps, housing wires and specialised cables such as fire retardant low-smoke cables and communication cables.

Finolex Cables also promoted two joint-ventures: Finolex Technologies and Finolex Essex Ltd. Finolex Technologies was incorporated as a joint venture with Lucent Technologies Inc., the US, to manufacture optical fibre cables. Lucent divested its shareholding in the company in 1999-00 in favour of an associate company of Finolex Cables. In 2001-02, Finolex Cables acquired the 51 per cent stake in Finolex Technologies from its other group companies and merged it with itself during the financial year 2001-02.

Finolex Essex Ltd was incorporated as a joint venture with Essex Group Inc to manufacture continuous copper rods. The company started commercial production in October 1998. The Essex group has since decided to exit from the venture and the company has become a 100 per cent subsidiary of Finolex Cables and has been renamed as Finolex Wire Products Ltd. The company is strategically important to Finolex Cables because copper rods are a key input for manufacturing cables. Also, by controlling the quality of its copper rods, Finolex Cables is able to maintain its cable quality. Its other wholly-owned subsidiaries are Finolex Finance Ltd and Creole Holdings Company Ltd, which are essentially holding companies with most of the investments in group companies.

Industry Outlook
Crisil expects the JFTC segment to remain under pressure given that realisations and volumes have dipped. The realisations have dipped on account of the large, fragmented over-capacity in the industry, while volumes have dropped due to lower offtake by BSNL, which has taken a strategic decision to shift towards wireless technologies for further rollouts. JFTC exports, on the other hand, would depend on the manufacturers’ ability to manufacture foam-skinned cables, which are used in other countries. In the optical fibre cable segment, although domestic demand is likely to grow at a healthy rate, realisations are likely to remain depressed owing to the global over-capacity. In LDCs, since wiring constitutes a small proportion of the total cost of housing, the shift towards more expensive but superior cables is likely to persist and therefore, LDC demand is expected to remain robust. But again, given the intense competition in the segment, no significant improvement in margins is expected.

Rating Sensitivity Factors
Finolex Cables’ ability to increase and sustain the JFTC exports and LDC sales would be crucial to fully utilise its higher capacity and maintain profitability. The company’s ability to source raw materials at competitive prices and effective treasury management would be critical for it to maintain its strong financial profile. The rating does not factor in any support to group companies and assumes that the company would maintain its current comfortable liquidity position.

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