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Finolex Cables: JFTC, asset or liability? - Views on News from Equitymaster
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  • Aug 20, 2002

    Finolex Cables: JFTC, asset or liability?

    With advent of the new economy, one expected jelly filled telecom cable (JFTC) manufacturers to be laggards in the telecom equipment industry. However, Finolex Cables Ltd. (FCL) has outperformed industry peers, especially optic fibre cable manufacturers. With optic fibre (OF) prices turning unremunerative Aksh Optifibre Ltd. and Sterlite Optical Technologies Ltd. have reported sharp slump in sales and complete erosion in profits.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 1,068 953 -10.8%
    Other Income 11 30 174.1%
    Expenditure 864 787 -8.9%
    Operating Profit (EBDIT) 204 166 -18.7%
    Operating Profit Margin (%) 19.1% 17.4%  
    Interest 34 27 -20.4%
    Depreciation 56 58 3.4%
    Profit before Tax 125 111 -11.5%
    Tax 24 19  
    Profit after Tax/(Loss) 101 91 -9.4%
    Net profit margin (%) 9.4% 9.6%  
    No. of Shares 34.3 30.6  
    Diluted Earnings per share* 13.2 11.9  
    P/E Ratio   10.3  
    * annualised      

    Having said that, FCL is experiencing volume and realisation pressure, which is reflected in topline and operating margins. The company stated that Bharat Sanchar Nigam Ltd. (BSNL) -- probably the only JFTC buyer in the country -- has considerably reduced JFTC tender prices. Also, with demand for high bandwidth, there is a shift towards optic fibre cables (OFC), which could be compounded with the current slump in optic fibre prices. Domestic sales for 1QFY03 are lower by 31% YoY. Performance for FY02 is likely to have been salvaged, as delayed Bharat Sanchar Nigam Ltd. (BSNL) orders came through in the third quarter. The industry does pick up momentum in the second half of the fiscal, as service providers can more conveniently lay cables post monsoon.

    As was indicated in 1QFY03 results, OFC manufacturers are likely to have stalled production with OF prices turning unremunerative. OFC manufacturers had negative operating margins in 1QFY03. FCL is primarily a JFTC and electrical cable manufacturer. In FY02, the concerned divisions contributed to 95% of revenues. Consequently, pricing power, to that extent, was protected. The company has acquired OFC capacity by amalgamating wholly owned subsidiary, Finolex Technologies Ltd. with itself. However, currently the capacity is insignificant. To overcome such constraints the company is undertaking a two-phase expansion programme at Verna, Goa 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.

    Rapid escalation in internet usage, cable T.V penetration and multi-media applications has led to growing demand for bandwidth. We had mentioned in our earlier quarterly reports that FCL faces 'technology risk', as telecom service providers shift to optic fibre cables. The company seems to have addressed the problem. That said, FCL has 10.6 m cable kilometers (CKm) of JFTC capacity and a shift to OFC is likely to result in build-up of idle capacity. To meet the challenge, the company has shown adeptness by penetrating export markets. Exports more than doubled in FY02 and have more than quadrupled in 1QFY03. Consequently, in the first quarter itself the company has covered approximately half of FY02 exports. However, export growth is not likely to be able to compensate for decline in domestic sales.

    In the past three years, FCL has announced a 1:1 bonus and two buyback offers. The latest offer, through the tender route, at Rs 200/ share with aggregate outlay of Rs 750 m closed recently. The company also declares considerable dividends. At Rs 123, the scrip is trading on a multiple of 10.3x 1QFY03 annualised earnings. The stock trades in a band of 5x-8x full year earnings.



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