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Why shares of Finolex Cables are lacking the power in fiscal 2020

researchsnappy by researchsnappy
December 20, 2019
in Consumer Research
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Why shares of Finolex Cables are lacking the power in fiscal 2020
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Shares of Finolex Cables Ltd are not electrifying on the bourses. The stock has fallen by 23% so far in FY20. To that extent, valuations are compelling. At ₹365, it trades at 12 times estimated earnings for FY20, according to Bloomberg.

However, triggers for the stock to outperform are difficult to find. Financial performance for the half-year ended September (H1 FY20) is far from impressive, with year-on-year (y-o-y) net revenue growth at just a little over 1%.

Among its segments, the communications cables business especially has been a drag with revenue for H1 FY20 falling by 16% y-o-y. The segment accounted for 12% of total revenues in the period.

Slowdown in government spending due to problems faced by Bharat Sanchar Nigam Ltd/Mahanagar Telephone Nigam Ltd and even in private telecom companies has hurt the communications business.

The electrical cables business, which contributed about 71% of revenues for H1 FY20, grew by a subdued 4.5% y-o-y. Slowdown in the construction, auto and industrial segments capped growth in the business.

Finolex Cables has also not been able to diversify efficiently in the fast-moving electrical goods (FMEG) sector. The segment is posting a loss at the earnings before interest and tax level.

“Finolex Cables has lagged behind in the FMEG space compared to peers because of lack of aggression. Further, advertising spends at below 1% of revenues don’t move the needle much. In comparison, closest peer Polycab India Ltd has been able to move faster in the FMEG space in recent years because of better brand visibility,” said Ashish Poddar, research analyst at Anand Rathi Share and Stock Brokers Ltd.

In general, the FMEG business tends to fetch higher valuation multiples compared to the wires and cables business. This is also one reason that this segment’s progress remains crucial.

“We acknowledge Finolex Cables’ franchise in cables & wires and its robust balance sheet. However, tepid construction, weakness in communication, core margin miss, and persistent losses in new categories are key risks,” said Jefferies India Pvt. Ltd in a report on 16 December. A recovery in the construction and auto sectors would be helpful. However, investors are likely to be cautious and watch how that plays out.

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