Top Brokerage Has Assigned Buy On This FMEG Stock, Claims 23% Strong Upside

Sharekhan has assigned a buy call on Finolex Cables Limited, a mid-cap Fast Moving Electrical Goods (FMEG) company. The brokerage has estimated a Rs 660/share target price for the stock of the company. According to the brokerage's given target price, if you buy the stock at the current market price, it is likely to give a 23% return. Finolex Cables Ltd is India's largest and leading manufacturer of electrical and telecommunication cables with a turnover in excess of Rs 26 Billion. The company operates in the consumer durable sector. It has a market capitalisation of Rs 8,254.14 crore.

Stock Outlook & Returns

The share price of Finolex Cables on NSE closed at Rs 539.70/share, 0.60% down from its previous close. The 52 week high was recorded on 30 November 2022 at Rs 593.90/share and the 52-week low was recorded on 19 May 2022 at Rs 343.50/share, respectively.

The stock has fallen in the last 1 month, giving 248% negative returns. However, it has given 16.39% positive returns in the last 3 months. It has given a 2.24% positive return in the last 1 year and maximum 36.17% in the last 3 years, respectively. It fell 26.24% in the last 5 years.

Robust long-term demand outlook

Demand for electric cables is likely to improve as new residential projects are picking up and the momentum in industrial and automobile industries is expected to be good. Further, demand for OFC is expected to be robust, given the government's focus on network connectivity. The construction segment, which contributes 65% to total electrical cables, has also witnessed strong volumes. Housing demand is normalising in rural and urban areas and catching up to pre-Covid demand gradually. Industry wise, sales break-up is as follows - Construction: 60%, Auto: 10-12%, Industrials: 10-12%, Agriculture: 10%, and remaining would be from power cables. The company's EPC order book in EHV cables stands at Rs. 300 crore and its current market share in EHV would be 15-20%. The company has begun the expansion of its wires and conduit pipes capacity in FY2022 and would spend a total of ~Rs. 200 crore by FY2023. In electrical cables, utilisation is at 70%, including capacity added in the past 12 months. Given the current demand scenario, utilisation may reach 80-85% in 9-12 months.

Decent performance eyed in Q3FY23E, Fans sales may be muted due to changes in BEE norms

Sharekhan said, "We expect the company to post decent numbers in Q3FY23E. The sales will be driven by demand from construction, automobile and industrial sectors. Further, growth will be aided by strong performance of communication cables led by OFC. While, volumes would be good, realization could be lower due to decline in copper prices. On the gross margin front, we expect y-o-y decline as automobile and industrial sectors have lower margins. However, in the last two months, copper prices have appreciated and therefore low-cost inventory at the beginning of Q3FY23 may lead to margin expansion on q-o-q basis. Further, the company has moderated its discounts (5-8% discount during Covid times) which shall support margin increment on q-o-q basis. We expect the company to report flat to single-digit y-o-y PAT growth in Q3FY23E. In FMEG, fans - a key contributor to revenues has been impacted due to changes in BEE rating norms which would be applicable from January 2023. In Q2FY23, fans volume off-take was low as the channel partners were de-stocking old inventory ahead of implementation of new BEE norms. The price differential between a star-rated fans vs non-star rated fans is likely to be ~5-8%. Further, new fans would have brushless direct current (BLDC) motor fans and mandatory star labelling. Channel partners are adopting wait and watch approach due to lack of clarity in terms of pricing and consumer response to cost escalation. Major players like Finolex Cables, Havells India and Polycab India anticipate muted demand of Q2FY23 to continue in Q3FY23. However, normalisation would kick-in as the customers become aware about cost saving in the long-term."

Revision in estimates

The brokerage said, "We have marginally tweaked our estimates for FY2023-FY2024E and introduced FY2025E estimates."

Valuation - Retain Buy with a revised PT of Rs. 660/share

According to the brokerage, Finolex Cables' performance has been tepid in the last quarter, given the high-cost inventory following the fall in copper prices and change in product mix. Nevertheless, we believe the company's long-term growth momentum would continue, backed by demand from key sectors such as auto, construction, and industrials. Further, the government's push and telecom players' capex for OFC will aid business and boost demand for communication cables for the company. The company has expanded wires and conduit pipes capacity, which would boost volumes going forward. Finolex's debt-free balance sheet and strong cash position provide us comfort. The company's strategy of taking advance payments and facilitate channel financing for its channel partners, without any recourse to the company, ensures timely cash flows and less stress on its working capital. "With strong growth visibility, we retain our Buy rating on the stock with a revised SOTP-based PT of Rs. 660 (14x its P/E on December FY2024E standalone Core EPS and 30% holding company discount for its stake in Finolex Industries). We believe that dispute between promotors regarding control of the company is an overhang on the stock and resolution of the same would be a key upside catalyst," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.