Anand Rathi maintains buy on Finolex Cables, target price Rs 478
Buy Finolex Cables Ltd. at a price target of Rs 478.0 .
Despite a weak quarter, Anand Rathi has maintained a buy on Finolex Cables with a target price of Rs 478 as it finds the valuations appealing given its cash-rich status and healthy FCF generation. However, the brokerage lowered the target from Rs 514 set earlier. The stock traded 1.49% higher at Rs 366.85 on Monday.
On the lower margin estimate, the brokerage cut FY20e/21e earnings 7% each and expect consolidated PAT to clock a 9% CAGR over FY19-21 (vs. ~20% over FY13-18). After the marked re-rating over FY13-18, low growth expectation led to the stock de-rating in the past one year. Success in the new product lines, the JVs' significantly better performances and strong earnings growth in core business would decide a re-rating.
It was a weak first quarter for all its divisions. While revenue growth was a mere 2% y/y due to low 3% volume growth in electrical wires, which was hit by muted construction and the deceleration in automobile, EBITDA/PAT declined 18%/10% on higher other expenses including spending on advertising and market development in FMEG. However, due to the lower ETR (~31%), the drop in PAT was restricted to 10%, despite a 16% y/y decline in PBT.
Gradual recovery was expected in wires, with FMEG taking longer to pick up. Due to subdued construction activity, Finolex has seen <5% growth in electrical wires in the last five years but retained its advance-payment model (unlike its peers). Despite this, profits have grown faster due to a markedly better EBITDA margin. Ahead, we expect demand for wires to gradually return. In FMEG, Finolex is finding it difficult to make its presence felt. In Q1, the division suffered a `55m EBIT loss, following the Rs 120m loss in FY19. We believe the losses would mount only if revenue does not grow substantially.
The brokerage likes Finolex for its leading position in electrical cables and debt-free status. At 13.5x FY19 P/E, we find the valuation appealing. Thus, we maintain a Buy with a target of Rs 478 (15x FY21e EPS), earlier Rs 514. Risks: Demand disruption, keener competition, volatile copper prices.