Notwithstanding the real estate slow-down, we expect 15/20% earnings/OCF growth over FY17-20 on strong growth in non-housing segments.
We recently met the top brass of Finolex Cables (FCL). Key takeaways include: (i) FCL posted lower revenue growth versus peers in past two-three years, largely owing to weak housing demand where the company has major (60% of revenues) presence compared to peer-set; (ii) management seemed upbeat on communication cables segment (we estimate the unit to log 25% CAGR over FY17-20) given burgeoning demand for optic fibre cables (to lay 35-40mn km annually over next two-three years) as India remains highly under-fiberised (40-45%) to meet the complete 4G roll out; and (iii) with FCL’s new PVC switches unit coming up at Goa, it is targeting Rs 2 bn revenues from fans and switchgears by FY20. Notwithstanding the real estate slow-down, we expect 15/20% earnings/OCF growth over FY17-20 on strong growth in non-housing segments. We maintain Buy with target price of Rs 800, based on 25x FY20e PE.
Reasonable growth ahead despite high exposure to housing
FCL has the highest (60% of electrical cable revenues) exposure to housing sector vs. peers, which has impacted its overall growth in past many years. Also, 9mFY18 volume growth of mere 4-5% was due to the sharp dip in agri segment which accounts for 15% of FCL’s electrical cable segment. While agri is likely to improve, residential housing sector will remain a key near-term drag impacting overall volume growth of both FCL and cables & wires sector.
No major shift seen in unorganised market share in FY18e
Despite GST implementation, FY18 did not see any major shift (positive or negative) in market shares of organised/unorganised players and both segments have clocked high single digit volume growth. Stricter compliance and implementation of E-Way bill will ensure higher growth for large organised players over next two-three years, in our view.
Outlook and valuations: Growth matrix intact; maintain ‘BUY’
We estimate FCL to post 17/15% revenue/earnings CAGR over FY17-20 on robust outlook for communication cables and rising demand for consumer electricals. We maintain ‘BUY/SO’ with target price of Rs 800. At CMP, stock trades at 26x/22x FY19/20e EPS.
Communication cables growth faster vs. electrical cables
In FY18, FCL grew in line with industry — the cables & wires industry posted 15% growth in value terms and 8-9% in volume terms. Hence, we expect the company to post 17% revenue CAGR over FY17-20. While growth in electrical cables was slower mainly impacted by housing and agri sectors, overall revenue would primarily be driven by the strong communication cables (25% CAGR) segment which is a beneficiary of the government’s robust off-take of communication cables. Other segment is also expected to grow to 6% of revenues by FY20 (vs. 1.5% in FY17) given the huge demand for consumer electrical cables.
High exposure to housing impacting electrical cables growth
The electrical cables segment posted 4% CAGR during FY12-17, which was much lower than peers like Havells (11% CAGR) and KEI Industries (7% CAGR). Though the growth is not comparable, primary reason for slower growth was FCL’s high exposure to housing segment versus peers. Management highlighted that growth in electrical cables, net of agri cables (15% electrical cables), has been at par with peers.
In FY17, FCL’s electrical cables segment was hit by the slowdown in agri cables segment. However, with agricultural sector showing signs of improvement, outlook for agri cables segment is set to improve. Volatility in commodity prices had also adversely impacted the segment. Despite this, the company managed to sustain margins. In FY19, we estimate FCL’s electrical cables segment to register moderate 8-10% growth due to recovery in housing and agricultural sectors.
Shift from unorganised to organised slower than expected
The shift seems to be happening much slower than anticipated — only few leading companies in the cables & wires industry are seeing such shift. Primary reason for same is delay in the implementation of E-Way bill which we believe is likely to be back-ended. However, as per our checks, while the volume growth rate in cables & wires in FY18 was ~8% (value terms 15%), growth rate of unorganised and organised players has been at similar levels.
Communication cables to drive incremental growth
We estimate FCL’s communications cable segment to grow to Rs 8 bn (20% of revenues by FY20), posting 25% CAGR over FY17-20 (vs. 20% CAGR during FY12-17), given huge demand as India remains highly under fiberised. India’s cumulative fiber-deployed-to-population ratio stands at 0.1x (vs. United States: 1.2x and China: 0.7x) with only 20% of the towers (for incumbents) currently fiberised vs. the 65-75% required to support 4G and 100% fiberisation for 5G going ahead.
At present, India’s annual optic fibre consumption stands at 20mn km. We expect India’s fiber rollout to increase significantly as the government continues to invest in building networks to bridge the digital divide. India’s annual optic fiber cable demand is expected to rise to 35-40mn km over the next three years.