By Ketan SonalkarWire and cable companies are performing well over the past few months, with the top five stocks from the industry surging more than 30 percent. It’s expected to get better from here, with operations expected to improve as supply chains stabilise with the easing of lockdowns from Q2FY22. With demand coming back from sectors like housing, power, and infrastructure, this is one sector that could outperform in FY22.
Finolex Cables is one of the oldest companies in the wires and cables business, in operations for more than fifty years. Apart from electrical and communication cables, it forayed into light fittings a few years ago. In the last two years, the company has introduced many FMEG (fast-moving electrical goods) products.
Most of the leading cable companies like Havells, Polycab & V-Guard have over time diversified into FMEG products like fans, geysers, and light fittings, and Finolex Cables is the latest to join the bandwagon. The competition here is not restricted to cables and wires alone, but also in building brands around FMEG products. Will this strategy of increasing penetration of FMEG products help Finolex Cables outperform its peers in the future?
Quick Takes
The company posted its highest-ever annual net profit in FY21 at Rs 461.5 crore.
Revenue from the FMEG vertical increased 73% YoY in FY21 to Rs 113.6 crore
The June 2021 quarter was impacted due to the second wave of Covid-19 with partial and complete lockdowns in different states
Expansion of products in the FMEG category is expected to increase Finolex Cables’ market share in FY22
Highest ever annual profits in a challenging year
Though the company saw has seen declining revenues over the past two years, it registered the highest ever net profits in FY21 at Rs 461.5 crore. The electrical cables business is primarily driven by a pickup in real estate activities, which in the last two-quarters of FY21 helped this segment grow, despite being affected by the pandemic. Communication cables sales were impacted, which saw a decline in YoY revenue contribution. This was because of a fall in fibre prices internationally leading to lower selling prices, impacting margins, and deferred spending on communication cable projects by customers.
In a pandemic affected FY21, Finolex Cables continuously improved sales in every quarter from Q2FY21 to Q4FY21. The second wave of Covid-19 impacted the performance in Q1FY22, and with most states in partial or complete lockdown during the months of April and May, sales across verticals were affected.
Despite being able to operate only for a limited number of days or limited hours per day in Q1FY22, electrical wires volumes for Finolex increased by 7%, while the volumes of power cables rose by 23%. In the communication cables segment, volumes of metal-based products rose improved by 71% and Optic Fiber Cable volumes grew by over 290% during the quarter. All new products within the FMEG sector grew by more than 21% each.
Electrical cables constitute a lion’s share of revenue with more than 80% contribution. Within this segment, the building wires used in homes, offices, etc. generate more than half of the revenues. Agriculture and automobile wires segment has a share of 20% and power cables with 20% share complete the pie of electrical cables.
With the focus on expanding the range and distribution of FMEG products, the management expects these products to contribute to 15% of sales by the end of FY22. Stepping up efforts in this direction, the company is expanding the distribution reach of the FMEG products by enlisting existing distributors.
Expansion plans and new product launches on track for FY22
According to the management, despite the lockdown, the company has not scaled down or slowed the Rs 200-crore capex (capital expenditure) plan which is underway in the Urse plant near Pune where they will make radiation technology-based solar cables, auto wires for the engines instrumentation cables using thin copper wires and telecom fibres for residential use.
In Q4FY21, it launched inverter LED bulbs & LED concealed downlights to add to its range. The inverter LED bulbs are designed to switch on automatically in the absence of power. These bulbs operate with 100 lumens per watt output during power supply & work at a reduced lumen level of 40-50% at times of power outages. The company expects this product to do well as it resolves a problem faced by customers during unexpected power cuts and sees potential demand in rural areas as well as urban centres with higher power outages.
Peers ahead of Finolex cables on many metrics
The results for the Q1FY22 look encouraging for most of the companies in this sector and this may be one of the outperforming sectors in FY22.
Finolex Cables' 79.1% YoY growth in revenues in Q1FY22, came behind Polycab’s highest jump in revenue growth. The latter ended the quarter with a loss. V-Guard, despite having the lowest YoY revenue growth, grew its net profits by 6X.
Except for KEI Industries, which is purely a cable manufacturing company, all the others have diversified into FMEG products from voltage stabilisers, lights, fans, electrical switches, etc.
While Havells, Polycab, and V-Guard have been present in the FMEG segment and already have a piece of the market share, Finolex Cables' strategy to gain market share in the FMEG segment will play a critical role in its growth in the coming months.
Finolex’s stock underperformed its peers over the past year. The government’s focus on affordable housing can lead to a resurgence in housing demand. With demand for housing expected to rise, there is scope for growth for the cable industry. The ramp-up of the number of distributors for the FMEG segment should help the company show results by the end of FY22. With these triggers, will Finolex Cables be able to deliver better returns to investors going forward?
One metric where Finolex Cables scores above its peers is the PE TTM (Price to Earnings, Trailing Twelve Months) ratio.
Looking at the overall picture, the wire and cable industry is slated for growth. Finolex Cables has the potential to be among the better-performing companies in the sector, both in terms of growth as well as investor returns in FY22. Investors need to keep a track of how Finolex Cables charges up the next few quarters.