3QFY2012 Result update | Power Cables

February 6, 2012

Finolex Cables
Performance highlights
Y/E March (` cr) Net sales EBITDA EBITDA (%) PAT 3QFY2012 499 41 8.3 14 2QFY2012 499 40 8.0 20 % chg (qoq) 0.1 3.7 29bp (30.6) 3QFY2011 513 51 9.9 26 % chg (yoy) (2.6) (18.8) (165)bp (47.7)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Power Cables 530 1.0 57/21 39,360 2 17,707 5,362 FNXC.BO FNXC@IN

`35 `48
12 Months

Source: Company, Angel Research

For 3QFY2012, Finolex Cables (Finolex) reported a 2.6% yoy decline in its top line to `499cr. The companys operating profit declined by 18.8% yoy to `41cr. OPM declined by 165bp yoy but improved by 29bp qoq to 8.3%. PAT came in at `14cr, down 47.7% yoy and 30.6% qoq. Going ahead, the business outlook remains positive, given the growth prospects in user industries and higher sales from the high-tension (HT) cables plant. Sales decline and margin dips: Finolex reported a 2.6% yoy decline in its top line to `499cr. The main electrical cables segment reported strong growth of 21.6% yoy. However, the other two segments, communication cables and copper rods reported declines of 22.7% and 51.8%, respectively. Despite a yoy decline of 18.8% in operating profit, PAT declined by 47.7% yoy to `14cr (`26cr), while margin declined by 237bp yoy to 2.7% (5.1%). The decline in PAT was largely on the back of higher interest, depreciation and forex losses. Depreciation increased by 30.4% yoy to `13cr (`10cr), while interest cost increased by 60.9% yoy to `8.1cr. Exceptional items, which included forex losses, increased by 15.8% yoy to `8cr (`7cr). Outlook and valuation: We remain positive on the companys prospects going ahead, given strong growth in user industries, which are showing no signs of abating. Higher sales from the HT cables plant and start of production at the extra high voltage (EHV) plant would further boost the companys growth. However, in view of the companys limited ability to effectively pass on copper price fluctuations, we have revised our OPM estimates for FY2012E and FY2013E downwards to 8.0% and 8.5%, respectively. Overall, we expect sales to post a 7.2% CAGR over FY201113E, while PAT is expected to post a CAGR of 18.5% over the same period. At the CMP, the stock is trading at 4.3x its FY2013E EPS. We maintain our Buy rating on the stock with a revised target price of `48 (`51).

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 35.7 11.7 5.1 47.5

Abs.(%) Sensex Finolex Cables

3m 0.7

1yr (1.8)

3yr 90.1 78.6

(4.9) (26.1)

Key financials
Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA Margin (%) FDEPS (`) P/E (x) P/BV (x) RoE (%) RoACE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010E 1,619 20.7 58 12.2 3.8 9.2 0.8 9.3 17.1 0.3 2.5

FY2011E 2,036 25.8 87 50.6 8.4 5.7 6.1 0.7 12.8 13.6 0.3 3.0

FY2012E 2,081 2.2 76 (12.3) 8.0 5.0 7.0 0.7 10.2 12.7 0.2 2.7

FY2013E 2,341 12.5 122 60.1 8.5 8.0 4.3 0.6 14.8 15.5 0.2 2.0

Sharan Lillaney
+91 22 3935 7800 Ext: 6811 Sharanb.lillaney@angeltrade.com

Please refer to important disclosures at the end of this report

Finolex Cables | 3QFY2012 Result update

Exhibit 1: 3QFY2012 performance highlights

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`)
Source: Company, Angel Research

3QFY2012 2QFY2012 % chg (qoq) 3QFY2011 % chg (yoy) 499.5 388.9 77.9 17.3 3.5 52.0 10.4 458.2 41.3 8.3 8.1 12.8 4.0 24.4 (7.9) 16.5 3.3 2.8 17.0 13.7 2.7 15.3 0.9 499.0 387.8 77.7 17.2 3.5 54.2 10.9 459.2 39.8 8.0 5.2 9.7 16.6 41.5 (16.4) 25.1 5.0 5.4 21.4 19.7 4.0 15.3 1.3 (30.6) (30.6) (121)bp (47.7) (34.2) (0.2) 3.7 29bp 53.8 32.3 (76.1) (41.2) (4.1) 0.5 0.1 0.3 513 403.4 78.7 16.0 3.1 42.4 8.3 461.8 50.9 9.9 5.0 9.8 1.3 37.3 (6.8) 30.4 5.9 4.3 14.0 26.2 5.1 15.3 1.7 (47.7) (47.7) (237)bp (33.9) (0.8) (18.8) (165)bp 60.9 30.4 218.4 (34.5) 15.8 (45.8) 22.5 8.2 (2.6) (3.6)

Segment-wise performance
The electrical cables segment reported strong 21.6% yoy growth in sales, driven by higher realization and higher contribution from the HT cables plant. However, the segments margin declined by 143bp yoy to 10.9% (12.3%), with EBIT coming in at `45cr (`42cr). The communication cables segment posted a decline of 22.7% yoy in the top line, with sales of `41cr (`53cr), as there was a considerable reduction in the number of tenders invited for the segment. The situation is expected to remain this way for some time. As a consequence of lower sales, the segments margin fell by 1,697bp yoy to 6.2% (23.1%). The copper rods segment reported a 51.8% yoy decline in its top line to `153cr (`317cr) during the quarter. EBIT came in at `0.7cr and margin stood at 0.5%. The others segment registered a 23.0% yoy decline in sales to `31cr (`41cr). A sizeable part of the decline was due to inter-segment sales. Management is considering closing down the PVC sheet manufacturing facility, owing to its low contribution to sales and the fact that there have been a number of technological improvements in the product in the industry, which will take some effort to catch up with. The others segment reported loss of `2cr at the EBIT level in 3QFY2012, compared to `1cr loss in 3QFY2011.

February 6, 2012

Finolex Cables | 3QFY2012 Result update

Exhibit 2: Segment-wise performance

Y/E March (` cr) Total Revenue A) Electrical Cables B) Communications Cables C) Copper Rods D) Others Total Less: Inter-Segmental Rev. Net Sales EBIT Margin (%) A) Electrical Cables B) Communications Cables C) Copper Rods D) Others
Source: Company, Angel Research

3QFY2012 2QFY2012 3QFY2011 % chg (qoq) % chg (yoy) 417 41 153 31 642 142 499 10.9 6.2 0.5 (7.3) 412 36 263 36 747 248 499 11.8 7.4 0.3 (7.3) 343 53 317 41 753 241 513 12.3 23.1 0.1 (3.4) 1.2 13.4 (42.0) (12.3) (14.1) (42.6) 0.1 (89)bp 14 bp (0) bp 21.6 (22.7) (51.8) (23.0) (14.8) (40.9) (2.6) (143) bp 37 bp (387) bp

(124) bp (1,697) bp

Sales decline by 2.6% yoy

Finolex reported a 2.6% yoy decline in its top line to `499cr. Going ahead, we expect sales to grow, given the positive outlook in user industries and higher contribution to sales from the HT cables plant.

Exhibit 3: Sales trend

520 510 500 490 493 491 513 499 499 60 50 40

(` cr)

470 460 450 440 430

464

461

461

20 10 0

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Sales (LHS)
Source: Company, Angel Research

yoy Growth (RHS)

February 6, 2012

3QFY12

(10)

(%)

480

30

Finolex Cables | 3QFY2012 Result update

OPM declines yoy to 8.3% but improves sequentially

The companys OPM declined to 8.3% in 3QFY2012 from 9.9% in 3QFY2011. However, OPM improved by 29bp on a qoq basis. This qoq improvement can be attributed to lower raw-material cost. Going ahead, however, we expect the companys margin to improve from current levels.

Exhibit 4: OPM trend

60 50 40 7.1 8.0 8.5 9.9 7.5 7.5 8.0 8.3 12 10 8

(` cr)

20 10 0 33 40 41 51 34 34 40 41

4 2 0

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

EBITDA (LHS)

OPM (RHS)

Source: Company, Angel Research

PAT comes in at `14cr

Finolex had reported loss in 4QFY2010. Barring that, the companys PAT has been reasonably high, despite continuing forex losses. For 3QFY2012, the companys PAT came in at `14cr. Going ahead, as forex losses taper off and sales increase further, we expect the companys PAT to increase from current levels.

Exhibit 5: PAT trend

30 25 20 15 23 19 26 20 20 20 14

(` cr)

10 5 0 (5) (10) (5)

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

Source: Company, Angel Research

February 6, 2012

3QFY12

(%)

30

Finolex Cables | 3QFY2012 Result update

Investment arguments
LT and HT cables segments to drive growth: Finolex is poised to register moderate growth over the next few years, owing to growth in the existing low-tension (LT) cables segment and entry into the HT and EHV cables verticals. In the LT cables segment, we expect organized players to gradually gain market share as their distribution reach expands and customers increasingly demand high-quality and branded wires. Entry into the HT cables segment gives accessibility to the generation and distribution segment, where the market opportunity is estimated at `37,000cr over the next 10 years. Tax benefits from Roorkee plant to help in the companys turnaround: The company has shifted a major chunk of production to its Roorkee plant, which avails excise duty and income tax benefits. Owing to this, we expect excise duty and tax rates for the company to remain low at 12% and 22.0%, respectively, in FY2013E. The company has further increased the capacity of this plant by 50%. Proximity to the growing north Indian markets and tax benefits availed by this plant are expected to boost the companys turnaround. Major capex already undertaken: Finolex has already incurred the major capex required to register growth over the next 45 years. The company plans to further spend `80cr towards increase/rebalancing of capacities for manufacturing various wire and cable products at its manufacturing units at Roorkee and Urse over FY2013-14. Thus, on account of high operating leverage and strong sales growth, we expect the companys net profit to increase to `122cr in FY2013E from `87cr in FY2011.

Outlook and valuation

We remain positive on the companys prospects going ahead, given strong growth in user industries, which are showing no signs of abating. Higher sales from the HT cables plant and start of production at the EHV plant would further boost the companys growth. However, in view of the companys limited ability to effectively pass on copper price fluctuations, we have revised our OPM estimates for FY2012E and FY2013E downwards to 8.0% and 8.5%, respectively. Overall, we expect sales to post a 7.2% CAGR over FY201113E, while PAT is expected to post a CAGR of 18.5% over the same period. At the CMP, the stock is trading at 4.3x its FY2013E EPS. We maintain our Buy rating on the stock with a revised target price of `48 (`51).

February 6, 2012

Finolex Cables | 3QFY2012 Result update

Profit and loss statement

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of associate Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 1,342 (3.1) 1,240 1,058 24 53 103 102 (30.2) 7.6 39 63 (47.2) 4.7 32 51 62.5 82 (38.7) 112 (30) 5 (35) (35) 82 (2.3) (2.3) 1,619 20.7 1,422 1,221 28 59 113 197 93.5 12.2 37 160 153.5 9.9 19 24 14.6 165 102.5 76 89 32 35.4 58 58 134 63.8 3.8 3.8 2,036 25.8 1,864 1,619 34 65 147 172 (12.7) 8.4 39 133 (16.7) 6.5 17 26 18.3 142 (14.3) 34 107 20 19.0 87 87 121 (9.3) 4.3 5.7 5.7 50.6 2,081 2.2 1,914 1,655 38 66 154 167 (2.8) 8.0 40 128 (4.1) 6.1 19 30 22.0 139 (2.1) 41 98 21 22.0 76 76 117 (3.4) 3.7 5.0 5.0 (12.3) 2,341 12.5 2,141 1,855 39 74 173 200 19.5 8.5 42 158 24.0 6.8 15 32 18.1 175 26.2 19 156 34 22.0 122 122 141 20.0 5.2 8.0 8.0 60.1 FY09 1,502 160 1,342 FY10 1,727 108 1,619 FY11 2,211 176 2,036 FY12E 2,287 206 2,081 FY13E 2,660 319 2,341

February 6, 2012

Finolex Cables | 3QFY2012 Result update

Balance sheet
Y/E March SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Inventories Debtors Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 762 346 416 40 314 316 28 86 144 58 171 144 914 802 384 419 29 280 415 37 86 221 71 193 222 950 839 422 417 17 245 536 21 105 281 129 207 329 1,009 860 462 398 17 255 551 23 105 289 134 215 336 1,007 903 504 400 18 255 607 13 117 325 151 246 361 1,034 31 566 596 296 22 914 31 613 643 275 32 950 31 687 717 260 31 1,009 31 745 776 200 31 1,007 31 842 873 130 31 1,034 FY09 FY10 FY11 FY12E FY13E

February 6, 2012

Finolex Cables | 3QFY2012 Result update

Cash flow statement

Y/E March Profit before tax Depreciation (Inc.)/ Dec. in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY09 (30) 39 141 51 5 93 (125) 3 (4) 51 (75) 8 4 (16) (11) 7 21 28 FY10 89 37 (81) 24 32 (10) (29) 34 1 24 30 (21) 11 21 (11) 9 28 37 FY11 107 39 (106) 26 20 (7) (25) 35 (19) 26 18 (15) 13 1 (27) (16) 37 21 FY12E 98 40 (11) 30 21 74 (21) (10) 30 (1) (60) 18 7 (71) 2 21 23 FY13E 156 42 (30) 32 34 102 (44) (12) 32 (25) (70) 25 8 (87) (10) 23 13

February 6, 2012

Finolex Cables | 3QFY2012 Result update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/E (on basic, reported EPS) P/CEPS P/BV Dividend yield (%) Market cap. / Sales EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROCE (Post Tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) ROCE (Post-tax) Angel ROIC ROE Turnover ratios (x) Asset Turnover (Gross Block) Asset Turnover (Net Block) Asset Turnover (Total Assets) Operating Income / Invested Capital Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.5 0.2 1.4 1.9 0.4 0.2 0.8 8.5 0.4 0.3 1.1 7.6 0.3 0.2 0.8 6.6 0.1 0.1 0.3 10.7 2.1 4.3 1.4 2.8 52 22 48 46 2.1 3.9 1.7 2.9 41 15 44 41 2.5 4.9 2.1 3.1 45 18 36 56 2.4 5.1 2.1 2.9 50 23 36 56 2.7 5.9 2.3 3.2 48 22 35 58 6.8 8.0 15.4 (5.7) 17.1 11.1 18.2 9.3 13.6 11.0 16.2 12.8 12.7 9.9 13.9 10.2 15.5 12.1 16.9 14.8 4.7 118.0 2.8 15.4 13.1 0.2 15.9 9.9 64.6 2.9 18.2 4.2 0.2 21.4 6.5 81.0 3.1 16.2 5.3 0.2 18.9 6.1 78.0 2.9 13.9 6.6 0.2 15.4 6.8 78.0 3.2 16.9 7.0 0.1 18.1 (2.3) (2.3) 0.2 0.2 39.0 3.8 3.8 6.2 0.6 42.0 5.7 5.7 8.2 0.7 46.9 5.0 5.0 7.6 1.0 50.7 8.0 8.0 10.7 1.4 57.1 0.9 0.6 0.4 0.4 4.8 0.5 9.2 9.2 5.6 0.8 1.7 0.3 0.3 2.5 0.5 6.1 6.1 4.2 0.7 2.0 0.3 0.3 3.0 0.5 7.0 7.0 4.6 0.7 2.9 0.3 0.2 2.7 0.4 4.3 4.3 3.2 0.6 4.0 0.2 0.2 2.0 0.4 FY09 FY10 FY11 FY12E FY13E

February 6, 2012

Finolex Cables | 3QFY2012 Result update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Finolex Cables No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 6, 2012

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