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Finolex Cables: BSNL blues - Views on News from Equitymaster
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  • Oct 24, 2001

    Finolex Cables: BSNL blues

    The operations of Finolex Cables Ltd. has received a jolt in the quarter ended September '01 leading to a significant de-growth in business.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Sales 1,715 722 -57.9% 2,212 1,737 -21.5%
    Other Income 46 17 -62.8% 152 28 -81.7%
    Expenditure 1,338 548 -59.0% 1,725 1,364 -20.9%
    Operating Profit (EBDIT) 377 174 -53.9% 486 373 -23.3%
    Operating Profit Margin (%) 22.0% 24.1%   22.0% 21.5%  
    Interest 56 35 -37.8% 102 65 -36.1%
    Depreciation 51 49 -3.7% 98 100 2.4%
    Profit before Tax 316 107 -66.1% 439 236 -46.3%
    Tax 65 24 -63.8% 95 54 -43.3%
    Profit after Tax/(Loss) 251 84 -66.6% 344 182 -47.2%
    Net profit margin (%) 14.6% 11.6%   15.5% 10.5%  
    No. of Shares (eoy) 34 34   34 34  
    Diluted Earnings per share* 29.2 9.7   20.0 10.6  
    P/E Ratio   14.8     13.6  

    As mentioned earlier, one of the risks faced by the telecom equipment industry was the presence of only a few buyers. With the entry of private operators and telecom infrastructure providers some of this risk is mitigated. However, these consumers are largely buyers of optical fibre cables, which offer higher bandwidth and lower voice/data distortion. Bharat Sanchar (BSNL) -- erstwhile Department of Telecom (DoT) -- is the largest and probably the only buyer of Jelly Filled Telecom Cables (JFTC) in the country. Consequently, suppliers of JFTC face a demand risk in the event of BSNL canceling or delaying orders.

    Finolex Cables is a key manufacturer of JFTC in the country. With materialisation of demand risk, as BSNL delayed the placement of JFTC orders, the company's financials suffered in the quarter ended September '01. Although, October - March tends to be the better half, the company's gross sales will have to more than double over the next six months to match FY01 performance. It seems to be an uphill task from here. A lot, as mentioned earlier, will depend on BSNL orders fructifying.

    Facing uncertainty in domestic demand the company has adopted an export strategy to tackle the challenge. This does indicate alacrity in responding to adverse changes in business conditions. Exports of the company have increased to Rs 140.7m in 1HFY02 as compared to Rs 17.9 m in the corresponding period of the previous year. Inventory in the quarter has increased considerable with the BSNL order getting delayed. As per the company, the order was received in mid-October.

    With a likely de-growth in business, Finolex Cables is expected to report lower turnover and bottomline, YoY, for FY02. The quarter / half-yearly results signal reduced volumes, as operating expenses have moved in tandem with sales insulating margins (OPM). Lower interest costs maybe due to reduced working capital requirements, which again hints at reduced business volumes.

    As consumers shift to better technology cables the demand for JFTC could witness a slump. Therefore, besides demand risk, Finolex Cables faces the risk of falling behind the technology curve (technology risk). The company, however, believes that the demand for JFTC is not likely to see a drop and expects the historical growth of 20% p.a. in BSNL JFTC tenders to continue. This belief seems to have changed with the company deciding to acquire balance 51% stake in Finolex Technologies Ltd. (FTL), which manufactures optic fibre cable. Eventually, FTL will be amalgamated into Finolex Cables.

    In February '00, the company re-purchased 10% of the post bonus equity at Rs 275 per share. At start of the current fiscal, Finolex Cables announced a second round of share buyback at a maximum price of Rs 250 / share allocating Rs 750 m for the exercise. The company has altered the buyback methodology and offer price. The buyback will be at a fixed price of Rs 200 per share through a tender offer and not the stock market route. This is a positive move.

    At Rs 144 the stock is trading on a multiple of 13.6x 1HFY02 annualised earnings, which is significantly higher than the peer group. However, the premium in valuations is due to the pending share re-purchase offer and would stand to be corrected post buyback.



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