In 9MFY19, FNXC has clocked sales/PAT growth of 11%/-6% YoY. While we acknowledge the solid positioning of FNXC’s core cables business, margin accretion benefits from new products (switchgears, fans, water heaters) could take longer. This segment has been showcasing segmental loss, now a consistent feature over 10+ quarters. Post the sharp uptick in stock price (35% over past month), most positives seem priced in. Maintain price target of `525. Downgrade to ‘hold’.
FNXC’s cables & wires applications range from domestic & industrial (electrical) to transmission of content, voice & data (communication). Our interaction with industry participants indicates that pricing of FNXC’s cables & wires (especially residential) stands at a premium to many competitors. Steady-state OP-margin for electricals is 15-16%, benefiting from higher exposure to construction (largely B2C). The margin for ‘communication’ hovers at 10-12%, which is lower as a majority business is B2B.
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FNXC launched new products in 2016, whose revenue is < 5% of overall sales. This segment has been showcasing segmental (EBIT) losses consistently over past 10+ quarters, now over two years since its launch. We attribute this to higher ad-spends, as these are fairly competitive product categories, with incumbents on a strong footing. In 9MFY19, sales from new products stood at `50.2 crore (+22% YoY), with EBIT margin at -20.8% (-21.1% in 9MFY18).
We note the latest leg of PE re-rating in FNXC coincided with its diversification into the high-margin new products. However, in our opinion, the subdued pace of ramp-up in this segment remains a key risk for the stock. Post the recent uptick in FNXC stock price (~35% in a month), we believe most positives seem priced in.
