Stock Market Result Update on Finolex Cables for 1QFY2012

Stock Market Result Update on Finolex Cables for 1QFY2012 with a Buy recommendation and a Target Price of `59 (12 months).

For 1QFY2012, Finolex Cables (Finolex) reported a 6.6% yoy decline in its top line to `461cr. The company’s operating profit also declined by 13.1% yoy to `34cr. OPM declined by 56bp yoy but improved by 8bp qoq to 7.5%. PAT came in at `20cr, down 12.3% yoy, but improved by 8.2% qoq. Going ahead, the business outlook remains positive, given the growth prospects in user industries and higher sales from the high-tension (HT) cables plant.

Sales and margins dip: Finolex reported a 6.6% yoy decline in its top line to `461cr. The main electrical cables segment reported strong growth of 26.8% yoy. However, the other two segments, communication cables and copper rods reported declines of 18.7% and 15.5%, respectively. Consequently, operating profit declined by 13.1% yoy to `34cr. OPM contracted by 56bp yoy but improved by 8bp qoq on the back of lower raw-material cost. PAT declined by 12.3% yoy but increased by 8.2% qoq to `20cr on the back of lower forex losses.

Outlook and valuation: We remain positive on the company’s prospects going ahead, given strong growth in user industries, which are showing no signs of abating. Higher sales from the HT cables plant and start of production at the EHV plant would further boost the company’s growth. However, in view of the company’s limited ability to effectively pass on copper price fluctuations, we have revised our OPM estimates for FY2012E and FY2013E downwards to 8.7% and 8.9%, respectively. Overall, we expect sales to grow at a 12.7% CAGR over FY2011–13E, while PAT is expected to post a CAGR of 32.1% over the same period. At the CMP, the stock is trading at 4.1x its FY2013E EPS. We maintain our Buy rating on the stock with a revised target price of `59 (`75).