3rd September, 2018

Revenue growth strong... Q1FY19 revenue grew by 17% YoY, led by pass through of higher copper prices coupled with strong growth in Electric cables revenue which grew by 12% YoY. Overall revenue growth from Electrical Cables was 12% YoY. Electrical Wires volume grew by 10% YoY and Power Cables grew by ~20% YoY. Though the revenue growth in communication cables was flat YoY, however there was a healthy volume growth in the segment primarily led by a 20% growth in Optical Fiber Cables. Management is confident that the ongoing government programs to improve broad band connectivity and related technologies will continue to drive growth in this segment. Going forward, with stabilisation of GST impact, reduction in tax rates, higher growth from optic fibre and gradual pick-up construction sector will drive revenue growth. We factor a revenue growth of 15% CAGR over FY18-FY20E.

EBITDA margin improves...higher tax expenses impacts… Gross margins declined by 123bps YoY to 26.9% largely due to higher raw material cost. Owing to supply shortage of copper in domestic markets, the requirements are met through imports which were costly impacting Q1 gross margins. While EBITDA margin improved by 10bps YoY to 16.4% led by lower employee and administrative expenses. But PAT declined by 11% YoY to Rs90cr due to higher tax expenses, as Roorkee facilities tax exemption period has expired. Consequently, tax provision for the current quarter was higher at 35.4% versus 21.3% in Q1FY18. Going ahead with stabilisation of GST volumes are expected pick-up, while pass through of higher copper prices, EBITDA margins are likely to improve. We raise our EBITDA margin estimates by 30bps & 40bps to 15.1% & 15.4% and factor EBITDA to grow by 16.4% CAGR over FY18E-20E. However, we lower our EPS estimates by 8.3% & 8.5% for FY19E & FY20E to factor in higher tax incidence going forward.

Valuations Despite downgrade in earnings we continue to remain positive on FCL in the long term given its strong brand recall & expanding product portfolio. However, considering the earnings downgrade, we value FCL‟s core business at P/E of 19x (21x earlier) on FY20E and FCL‟s investments in Finolex Industries at Rs75 to arrive at SOTP price target of Rs644 and upgrade to “Buy” from Accumulate.

RETAIL EQUITY RESEARCH

FINOLEX CABLES Ltd

Rating as per Midcap 12 Months investment period Electrical Equipments BSE CODE:500144 NSE CODE: FINCABLES

CMP Rs. 550 TARGET Rs. 644 RETURN 17% Bloomberg CODE: FNXC:IN SENSEX: 38,312

Company Data

Market Cap (cr) Rs. 8,412

Enterprise Value (cr) Rs. 8,306

Outstanding Shares (cr) 15.3

Free Float 44%

Dividend Yield 0.4%

52 week high Rs. 750

52 week low Rs. 511

6m average volume (cr) 0.01

Beta 0.8

Face value Rs. 2

Shareholding (%) Q3 FY18 Q4 FY18 Q1 FY19

Promoters 37.3 37.3 37.3

FII‟s 6.8 6.9 6.2

MFs/Institutions 20.4 20.9 21.8

Public 18.4 17.9 17.8

Others 17.1 17.0 16.9

Total 100.0 100.0 100.0

Price Performance 3 Months 6 Months 1 Year

Absolute Return -20.1% -22.5% 1.8%

Absolute Sensex 9.4% 13.5% 21.8%

Relative Return* -29.5% -36.0% -20.0%

*over or under performance to benchmark index

Standalone (Rs.cr) FY18A FY19E FY20E

Sales 2,815 3,251 3,723

Growth (%) 15.1 15.5 14.5

EBITDA 422 489 572

Margin (%) 15.0 15.1 15.4

PAT Adjusted 358 392 458

Growth (%) 13.4 9.6 16.7

Adj.EPS 23.4 25.7 29.9

Growth (%) 13.4 9.6 16.7

P/E 23.5 21.4 18.4

P/B 3.8 3.3 2.8

EV/EBITDA 19.7 17.0 14.5

ROE (%) 17.6 16.5 16.5

D/E 0.0 0.0 0.0

COMPANY UPDATE

Tax woes impacts profitability... Finolex Cables Ltd (FCL) is India's largest manufacturer of electrical (80% of revenue) and telecommunication cables (16%). FCL has a wide distribution network with a high brand recall.

Q1FY19 revenue and EBITDA grew by robust 17% & 18% YoY respectively, but PAT declined by 11% YoY owing to higher tax expenses.

EBITDA margin improved by 10bps YoY to 16.4% led by lower cost.

Led by higher demand from communication cables and gradual pick-up in construction sector, we expect revenue growth momentum to continue.

However, we lower earnings estimates by 8.3% & 8.5% for FY19 & FY20 to factor in higher tax rates. We expect earnings to grow by 13% CAGR over FY18– FY20E.

Considering the earnings downgrade, we value FCL’s core business at P/E multiple of 19x (21x earlier) on FY20E and value FCL’s investments in Finolex Industries at Rs75 to arrive at SOTP price target of Rs644 and upgrade to “BUY’from Accumulate.

Buy

Anil R Analyst

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FCL Sensex Rebased

SOTP Valuation

Particulars Segments FY20 EPS Valued at P/E Holding discount Value/Share (Rs)

FCL Standalone Core Business Rs 30.0 19x - 569

Finolex Industries FCL holds 32.4% Rs 32.5 11x 20% holding discount 75

Total Value per share 644

Financials

Profit & Loss Account

(Rs cr) Q1FY19 Q1FY18 YoY Growth % Q2FY18 QoQ Growth %

Sales 791 674 17.4 796 (0.4)

EBITDA 130 110 18.0 115 12.5

EBITDA margins 16.4 16.3 +10bps 14.5 +190bps

Depreciation 10 12 (17.6) 10 (1.3)

EBIT 120 98 22.2 106 13.8

Interest - - - 1 -

Other Income 20 31 (35.8) 24 (14.9)

PBT 140 130 8.0 128 9.5

Tax* 50 28 79.3 46 7.8

Share of profit from Associate - - - - -

Exceptional - 7 - - -

Reported PAT 90 109 (17.4) 82 10.5

Adjustments - (7) - - -

Adj PAT 90 102 (11.3) 82 10.5

No. of shares (cr) 15.3 15.3 - 15.3 - EPS (Rs) 5.9 6.7 (11.3) 5.4 10.5

Change in estimates

Old estimates New estimates Change %

Year / Rs cr FY19E FY20E FY19E FY20E FY19E FY20E

Revenue 3,286 3,797 3,251 3,723 (1.1) (1.9)

EBITDA 486 571 489 572 0.6 0.2

Margins (%) 14.8 15.0 15.1 15.4 +30bps +40bps

PAT 428 500 392 458 (8.3) (8.5)

EPS 28.0 32.7 25.7 29.9 (8.3) (8.5)

Standalone Financials

Profit & Loss Account

Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E

Sales 2,360 2,445 2,815 3,251 3,723

% change (3.6) 3.6 15.1 15.5 14.5

EBITDA 339 371 422 489 572

% change 30.4 9.6 13.7 15.9 17.0

Depreciation 58 48 44 46 52

EBIT 281 323 379 443 520

Interest 9 4 1 - -

Other Income 64 100 127 143 173

PBT 336 419 504 586 694

% change 27.8 24.7 20.3 16.1 18.4

Tax 88 103 146 193 236

Tax Rate (%) 26.0 24.7 29.0 33.0 34.0

Reported PAT 249 316 358 392 458

Adj* - - - - -

Adj PAT 249 316 358 392 458

% change 41.2 26.9 13.4 9.6 16.7

No. of shares (mn) 15.3 15.3 15.3 15.3 15.3

Adj EPS (Rs) 16.3 20.7 23.4 25.7 29.9

% change 41.2 26.9 13.4 9.6 16.7

DPS (Rs) 1.9 1.9 1.9 1.9 1.9

CEPS (Rs) 20.1 23.8 26.3 28.7 33.3

Cash flow

Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E

Net inc. + Deprecation. 307 364 402 438 510 Non-cash adj. 24 (42) (6) (6) (6) Changes in W.C (55) (64) (133) (51) (91) C.F.O 276 259 262 382 413 Capital exp. (13) (36) (35) (61) (81) Change in inv. (135) (220) (212) (30) (5) Other invest.CF 20 55 9 9 9 C.F - investing (127) (201) (238) (83) (77) Investments - - (92) (277) (299) Issue/repay debt (25) (25) (0) (1) - Dividends paid (33) (46) (29) (29) (29) Other finance.CF (9) (4) (1) (0) (0) C.F - Financing (68) (76) (122) (306) (328) Chg. in cash 81 (18) (98) (7) 8 Closing cash 219 201 103 99 107

Balance Sheet

Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E

Cash 219 201 106 99 107

Accounts Receivable 126 124 175 187 224

Inventories 329 462 499 568 655

Other Cur. Assets 515 653 768 1,051 1,357

Investments 294 302 514 544 549

Gross Fixed Assets 486 515 554 609 689

Net Fixed Assets 432 414 408 417 445

CWIP 3 8 5 12 13

Intangible Assets - 1 1 - -

Def. Tax (Net) (24) (19) (35) (37) (40)

Other Assets - - - - -

Total Assets 1,894 2,147 2,441 2,841 3,310

Current Liabilities 259 253 209 239 272

Provisions 13 17 37 45 51

Debt Funds 26 1 1 - -

Other Liabilities - - - - -

Equity Capital 31 31 31 31 31

Reserves & Surplus 1,565 1,847 2,163 2,527 2,956

Shareholder‟s Fund 1,596 1,877 2,194 2,558 2,987

Total Liabilities 1,894 2,147 2,441 2,841 3,310

BVPS (Rs) 104.3 122.8 143.4 167.2 195.3

Ratios

Y.E March FY16A FY17A FY18A FY19E FY20E

Profitability. & Return

EBITDA margin (%) 14.4 15.2 15.0 15.1 15.4

EBIT margin (%) 11.9 13.2 13.4 13.6 14.0

Net profit margin (%) 10.5 12.9 12.7 12.1 12.3

ROE (%) 16.7 18.2 17.6 16.5 16.5

ROCE (%) 17.3 17.5 18.0 18.3 18.4

W.C & Liquidity

Receivables (days) 18.9 18.7 19.4 20.3 20.2

Inventory (days) 67.9 83.6 86.2 82.6 83.1

Payables (days) 15.2 19.1 24.1 28.8 28.2

Current ratio (x) 4.4 5.4 6.3 6.7 7.2

Quick ratio (x) 1.3 1.3 1.3 0.8 0.8

Turnover &Leverage

Gross asset T.O (x) 4.9 4.9 5.3 5.6 5.7

Total asset T.O (x) 1.3 1.2 1.2 1.2 1.2

Int. coverage ratio (x) 31.4 75.4 - - -

Adj. debt/equity (x) 0.0 0.0 0.0 0.0 0.0

Valuation ratios

EV/Sales (x) 3.5 3.4 3.0 2.6 2.2

EV/EBITDA (x) 24.3 22.1 19.7 17.0 14.5

P/E (x) 33.8 26.6 23.5 21.4 18.4

P/BV (x) 5.3 4.5 3.8 3.3 2.8

Recommendation Summary (last 3 years)

Dates Rating Target

5th November, 2013 BUY 77

13th November, 2013 BUY 81

17th February, 2014 BUY 87

9th May, 2014 ACCUMULATE 173

11TH August, 2014 HOLD 196

20th May, 2015 ACCUMULATE 286

04.March,2016 ACCUMULATE 262

31 May, 2016 ACCUMULATE 392

17 August, 2016 ACCUMULATE 456

17 February 2017 ACCUMULATE 498

06-June-2017 HOLD 543

13-Novomber-2017 ACCUMULATE 699

06-March-2018 ACCUMULATE 769

03-September-2018 BUY 644

Source: Bloomberg, Geojit Research

Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap;

Buy - Upside is above 10%. Hold - Upside is between 0% -10%. Reduce/Sell - Downside is more than 0%.

Neutral - Not Applicable

Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable

To satisfy regulatory requirements, we attribute „Accumulate‟ as Buy and „Reduce‟ as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review.

General Disclosures and Disclaimers

CERTIFICATION

I, Anil R, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit.

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We have prepared this report based on information believed to be reliable. The recommendations herein are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. The stocks always carry the risk of being upgraded to buy or downgraded to a hold, reduce or sell. The opinions expressed are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. This report is non-inclusive and does not consider all the information that the recipients may consider material to investments. This report is issued by Geojit without any liability/undertaking/commitment on the part of itself or any of

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