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S. Vaidya Nathan

Higher prices for optical fibre cables have helped the company.

SHAREHOLDERS of can remain invested in the stock of Finolex Cables, as the company's performance is likely to improve substantially over the next few quarters. Robust growth in the electrical cables business, a spurt in the demand for telecom cables, which may not be completely sustainable, higher prices for optical fibre cables, and a strong balance-sheet that would aid bankroll business growth plans, drive our recommendation. The surge in equity prices and the possibility of near-term pressures on profitability temper our view on a company that is well-placed to leave behind a line of business — jelly-filled telecom cables — where growth prospects are bleak.

There could be room for improvement in valuation over a one/two-year period as the company has an entrenched and growing presence in power cables. Pressure in the telecom cables business has, however, weighed on valuation of the stock over the past few years. The key risks to our recommendation are: The rise in prices of key inputs such as copper and polyethylene, to name a few, and the reported earnings level that could suffer due to a decline in `other income'; the latter ought not be viewed as a major risk as the improvement in the revenue profile and prospects for better profitability should neutralise its effect.

Finolex Cables has expanded its variety of electrical cables. This, coupled with its focus on the retail segment and brand equity, should ensure healthy growth in revenues. The enhanced level of activity in the construction sector — residential and commercial — and the rise in the industrial investments augur well for revenue growth. Unlike other companies in the electrical cables business, Finolex has maintained healthy level of profitability over the years. Now, the company's sustainable earnings flow mainly from this business.

The telecom cables business may bolster the top-line numbers, but its contribution to earnings may not be commensurate. This is clear from the performance in the July-September quarter when this business added a coat of red to the earnings card, despite a two-fold rise in revenues. Rising input costs and competitive bidding at lower prices for BSNL tenders have affected profitability. As the optical cables business' share of revenues increases, there could be improvement on this score.

The company has introduced products that could support broadband networks. If the latter gains momentum over the next couple of years, this foray could make a sizeable to revenues and profits.

As BSNL and MTNL are unlikely to share the last-mile network with private operators (such as Reliance Infocomm and Bharti), they may rollout their own networks. This, as well as BSNL's plans to capture the broadband space, could prove key demand drivers.

Unlike the last fiscal, Finolex Cables has, in the first half of FY-05, shown a thick coat of black in its bottomline without support from `other income'.

A steady decline in interest costs and the ability to raise equity, if needed, to fund growth, are positive factors. In this backdrop, we maintain our hold recommendation on this stock. We are more confident about the prospects than was the case last year. Returns are, however, likely to accrue over a one/two-year time-frame and are likely to be steady.

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