FNXC’s H1FY20 sales/PBT clocked +1%/+2% YoY, impacted by 1) subdued traction in real-estate, autos & communication cables (~70% optic); 2) H1 op-margin at 13.8% (steady-state 15-16%); 3) loss in new products -14% EBIT margin (-13.6% YoY). We acknowledge FNXC’s franchise in cables & wires and its robust B/S. But, tepid construction, weakness in communication, core margin miss and persistent losses in new categories are key risks. ‘Hold’ with revised price target at Rs. 400.
FNXC’s cables & wires applications range from domestic, industrial (Electrical) to transmission of content, voice & data (Communication). Co.’s FY19 sales mix stood as follows: Electrical: 81%, Communication: 16%, New Products: <5%. Steady-state op-margin for Electrical was at ~15-16% and for communication at 10-12% over the past few years.
Electrical: H1FY20 revenue stood at Rs. 1,250 crore, up 4% YoY. Segmental (EBIT) margin was at 15.6% (+170bps YoY). Approximate segmental mix in Electrical segment is as follows: 1) construction: ~60%, 2) auto, agriculture, industrial and power each at ~10%. Note that last year’s base was subdued in Q2, impacted by Kerala floods.
Communication: H1FY20 revenue stood at Rs. 220 crore, registering a steep decline of 16% YoY. Segmental (EBIT) margin stood at 7.9% (-650bps YoY). Broader segmental mix here is: Optic: ~70%, co-axial, LAN and others at ~30%. As cited by FNXC, volumes of optic fibre cables declined in Q2FY20 owing to a slowdown in government spending (difficulties faced by BSNL/MTNL).
Also, private spending in fibre assets by telcos has seen a significant dip in recent months. FNXC expects this subdued level of activity to continue for a few more quarters.