Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt programmes of Finolex Cables Limited (FCL).

 

The ratings reflect the expected recovery in the company’s operating performance in fiscal 2022 on account of improved demand from the real estate sector and increase in price realisation leading to revenue growth of 15-16%. Revenue increased 58% on-year in the first half of the fiscal, albeit on a low base, with the electric cables and communication cables segments rising 54% and 87%, respectively. However, operating margin is expected to contract to 12-13% in fiscal 2022 from 13.9% in fiscal 2021 due to lag in passing on increase in raw material costs.

 

Revenue is expected to grow 5-6% over the medium term, driven by the established position of FCL in the electrical cables segment, its increasing distribution reach and digitisation of cable networks across the country. Growth will be aided by traction in new segments such as fans, switchgears and water heaters.

 

The company has maintained healthy capital structure and strong debt protection metrics. Networth was Rs 2,951 crore as on March 31, 2021. The company had cash and equivalent (including investments) of Rs 1,649 crore as on September 30, 2021, against nil long-term debt.

 

CRISIL Ratings has taken note of the ongoing dispute among the Chhabria family members (Mr Prakash Chhabria, executive chairman of Finolex Industries Ltd, and Mr Deepak Chhabria, executive chairman of FCL) over management control of FCL, due to ownership issues in Orbit Electricals Pvt Ltd (Orbit, an investment company held by the promoters). The matter is sub-judice and has not impacted business operations of FCL so far. CRISIL Ratings will continue to monitor developments and any impact of change in ownership and management on business operations and liquidity will be a key monitorable.

 

The ratings continue to reflect FCL’s stable business risk profile, driven by its strong position in the electrical cables segment, established brand and integrated operations, and sound financial risk profile, backed by healthy cash accrual. The strengths are partially offset by susceptibility to intense competition, volatility in raw material prices and any economic downturn.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of FCL and its joint ventures - Finolex J-Power Systems Pvt Ltd (FJPS) and Corning Finolex Optic Fibre Pvt Ltd (Corning-Finolex)'to the extent on FCL’s stake in them. FJPS is a JV with J-Power Systems Corporation (JPS), Japan, and FCL holds 49% in this JV, with 51% held by JPS. Corning-Finolex is a marketing JV with Corning Inc, USA (Corning), with both the parties having an equal shareholding. CRISIL Ratings believes FCL will support its JVs only to the extent of its shareholding.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Stable business risk profile, driven by strong position in the electrical cables segment, established brand, and integrated operations

FCL is a leading manufacturer of electrical cables in India. Its strong market position is backed by established brand and robust distribution network. FCL has mapped 1.5 lakh retailers and appointed 500 distributors to increase its reach to retail outlets, which has increased its distribution reach to about 1 lakh retailers (expected to increase to 1.5 lakh) from 30,000-40,000. The strong distribution network will drive volume growth over the next two fiscals and give the company an edge over its competitors in a highly fragmented market.

 

Backward integration with in-house availability of copper rods ensures timely supply of quality raw materials, providing an added benefit against small, unorganised players. The company is de-risking its product portfolio by entering the fast-moving electric goods (FMEG) segment, which recorded revenue of Rs 114 crore in fiscal 2021 and is expected to grow to Rs 500 crore over the next three years. Growth over the medium term will be driven by established position in the electrical cables segment, increased distribution network and new launches in the FMEG segment.

 

Steady growth prospects in core businesses

FCL mainly operates in the electrical cables and telecommunication (telecom) cables segments. Improved geographic reach in northern and eastern India, following expansion of the Roorkee plant, should support the electrical cables business. The communication cables segment will see reduced demand over the next fiscal, because of delayed investments by telecom, broadband, and direct-to-home companies. However, the long-term outlook is healthy with stable growth prospects.

 

Strong financial risk profile  

The financial risk profile should remain healthy, supported by adequate networth of Rs 2,951 crore and nil gearing as on March 31, 2021. Debt protection metrics will be comfortable, with healthy adjusted interest coverage and net cash accrual to total debt ratio in fiscal 2022. Networth may grow, backed by steady cash accrual, while gearing will remain low, as capital expenditure (capex) for new capacity or investments will be funded internally. Net cash accrual is expected at Rs 250-350 crore per annum against annual capex of Rs 100 crore in the next two fiscals, which will keep external borrowing low.

 

Weaknesses

Susceptibility to fluctuations in copper prices

Copper, the primary raw material used to manufacture cables, forms over 75% of raw material cost. Though FCL revises cable prices based on fluctuations in raw material prices, inability to pass on the hike to customers will hit profitability.

 

Susceptibility to economic downturn and intense competition

FCL remains susceptible to the economic environment in India. Electrical cables, which contribute around 80% of revenue, are used in the construction (real estate) and automobile industries. Growth in these industries is linked to the overall economy. Low gross domestic product growth and its impact on the real estate sector may cause moderation in demand for electrical cables.

 

Presence of several unorganised players in the electrical cables segment constrains the pricing power of organised players. FCL faces competition from players such as Havells India Ltd, Polycab India Ltd (‘CRISIL AA+/Stable/CRISIL A1+’) and KEI Industries. Though the domestic market is becoming more quality conscious, intense competition may impact operating profitability.

 

Small scale of operations in the consumer durables segment

Finolex in recent years has forayed into the consumer durables segment with product offerings like fans, switches, switch gear, LED lamp, water heaters, conduit pipe and fitting etc. However despite the traction seen the overall contribution to FCLs revenue remains modest with fiscal 2021 revenue of Rs. 114 crore from this segment, and product line is expected to breakeven around Rs.175-150 crores.

Liquidity: Strong

Cash and liquid investment stood at Rs 1,649 crore as on September 30, 2021. Bank limit of Rs 200 crore was unutilised in the 12 months through December 2021. Cash accrual is expected at Rs 250-350 crore over the medium term against nil debt.

Outlook: Stable

CRISIL Ratings believes FCL will maintain its stable business risk profile over the medium term, driven by its dominant position in the electrical cables segment, and will sustain its healthy financial risk profile, supported by comfortable capital structure and sufficient cash accrual.

Rating Sensitivity factors

Upward Factors:

• Significant growth in revenue to over Rs 10,000 crore through establishing market leadership in 2 or 3 business segments, while sustaining its operating margin
• Sustenance of strong financial risk profile and cash surplus

 

Downward Factors:

• Material impact on the business because of the family dispute and any change in ownership
• Large, debt-funded acquisition or capex, weakening the capital structure
• Decline in revenue and operating margin (to below 12%)

About the Company

Established in 1956, FCL is the flagship company of the Finolex group, and a leading electrical cable manufacturer in India. It has a large product portfolio of electrical, communication, and power distribution cables. The company is also in the electrical switches, light emitting diodes, fans, miniature circuit breakers and water heater segments. Its products are used in the residential, commercial, infrastructure and industrial sectors. FCL has manufacturing facilities in Maharashtra, Goa and Uttarakhand.

 

In January 2008, FCL and JPS entered into a JV to form FJPS to manufacture high-voltage (up to 500 kilovolt), cross-linked, polyethylene-insulated power cables, used in power distribution. FJPS also offers turnkey solutions in extra-high-voltage cable systems. In fiscal 2012, FCL formed Corning-Finolex with Corning to market optical fibre to cable makers in India.

 

For the six months ended September 30, 2021, consolidated profit after tax (PAT) was Rs 232 crore and consolidated operating income was Rs 1608 crore, as against Rs 147 crore and Rs 1016 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Short-term debt	NA	NA	7-365 days	50	Simple	CRISIL A1+
NA	Cash credit*	NA	NA	NA	200	NA	CRISIL AA+/Stable
NA	Letter of credit and bank guarantee	NA	NA	NA	250	NA	CRISIL A1+
NA	Non-convertible debentures#	NA	NA	NA	150	Simple	CRISIL AA+/Stable

*Interchangeable with overdraft facility, bill discounting, cheque discounting, packing credit, and short-term loan

#Proposed instrument, yet to be issued