With most players singed in the telecom equipment business, Finolex Cables Ltd. (FCL) has salvaged a reasonable performance. Having said that, with approval from the High Court, FCL has amalgamated the optic fibre cable subsidiary, Finolex technologies Ltd. with itself. Consequently, the results are not entirely comparable. Revenues were higher by 10% and profits down 22% for the first nine months of FY02.
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The telecom equipment business has experienced a challenging 12-15 months, as telecom service providers scaled back their network infrastructure spending. Over the last quarter of FY02, the industry does seem to have made a recovery, as pricing power returns. Finolex Cables is primarily a jelly filled telecom cable (JFTC) manufacturer. We had mentioned in our earlier reports that FCL faces technology risk, as telcos and infrastructure service providers switch to optic fibre cables (OFC). With optic fibre prices falling over the past 12 months, substitution effect is likely to have increased. Also, FCL faces client concentration risk with BSNL and MTNL being among the only users of JFTC.
With a slowdown in domestic demand, the company has targeted export markets to ensure product offtake. The prompt shift in target markets is commendable. Export and domestic sales were higher by 158% and 4% respectively over FY02. Similar to the peer group, the higher operating margins in 4QFY02, seem to indicate an improving industry. With no exposure to the optic fibre market, for the full year, pressure on margins has been lower.
Interest expense has registered an increase after three consecutive declining quarters. The lower interest cost for the year could be due to tightening of working capital cycle. Working capital to sales declined from 56.6% in FY00 to 46.3% in FY01. However, it seems, further efficiency gains can be derived. Also, the company set up a plant in FY00 leading to higher interest costs in FY01, which could have led to a YoY effect. The same is true for depreciation charges.
The shift from JFTC to OFC is likely to have induced the management to amalgamate the OF business to better meet market requirements. The company has presence across the value chain from manufacture of pre-form to drawing fibre and finally manufacturing of cables. The company is undertaking a two-phase expansion programme augmenting OFC capacity by 1.2 m fibre kilometers (mFKm) in each stage. Trial production under phase-I is likely to commence in September/October '02 involving an outlay of Rs 1,250 m. Currently, the company has 10.6 m cable kilometers (CKm) of JFTC capacity. With substitution of JFTC by OFC, idle capacity could be built-up. In FY01, the company amalgamated, wholly owned subsidiary, Fonram Sheets Ltd., which manufactured PVC sheets.
In FY00, FCL had announced a 1:1 bonus, which was followed by a 10% buyback at Rs 275 / share. In FY02, FCL announced a second round of share buyback at a maximum price of Rs 250 / share allocating Rs 750 m for the exercise. However, the company altered the buyback methodology and offer price. The buyback was fixed at Rs 200 / share through a tender offer and not the stock market route. The buyback is likely to reduce outstanding shares by an estimated 3.8 m or 10.9%.
At Rs 151 the scrip trades on a multiple of 7.8x FY02 earnings. The scrip has been trading at these levels over the past year. The industry seems to attract a valuation band of 5x-8x.
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