Detailed Rationale

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

 

Operating performance may remain flat for fiscal 2021, on account of muted demand from the real estate sector; overall revenue may decline by 4-6% despite some recovery visible since the second quarter. So far in the current fiscal, revenue has dropped by 14%, with the electric cables and communication cables segments witnessing a year-on-year decline of 15% and 36%, respectively. Operating margin is likely to remain steady at 14-15% levels for fiscal 2021, as compared to 14.8% in fiscal 2020. Revenue is expected to grow by 5-7% over the medium term, driven by FCL’s established position in the electrical cables segment, its increasing distribution reach and digitisation of cable networks across the country. Growth will be further aided by traction in new segments such as fans, switchgears, and water heaters. The company has maintained a healthy capital structure and strong debt protection metrics. Networth stood at Rs 2,718 crore as on March 31, 2020, while cash and cash equivalent (including investments) of Rs 1,479 crore were reported as on December 31, 2020, against nil long-term debt.

 

The rating also takes 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 will continue to monitor the event and any impact of change in ownership and management on business operations and liquidity surplus remains 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 healthy financial risk profile, backed by healthy cash accrual. The strengths are partially offset by susceptibility to intense competition, volatility in raw material prices, and economic downturn, if any.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has integrated 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% 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 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 electrical cable manufacturer in India with 3 year revenue CAGR of 5% in fiscal 2020. The strong market position is backed by an established brand and the robust distribution network, comprising one lakh retailers and 380 distributors (both likely to reach 1.5 lakh and 500, respectively, by March 2021), linked by an integrated SAP system. 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. Furthermore, backward integration with in-house availability of copper rods ensures timely supply of quality raw materials and an added benefit against small, unorganised players.

 

* Steady growth prospects in core businesses

FCL mainly operates in the electrical cables and telecommunication (telecom) cables segments. Improved geographic reach in the northern and eastern parts of 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, stable growth over the longer run will keep the long-term outlook healthy.

 

* Strong financial risk profile

Financial risk profile should remain healthy, with networth of Rs 2,983 crore and nil gearing estimated 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 further, backed by steady cash accrual, while gearing will continue to be low, as capital expenditure (capex) towards new capacities or investments will be funded internally. Net cash accruals are expected at Rs 350-400 crore per annum as against annual capex of Rs 50-70 crore over next 2 fiscals, as a result, dependence on external borrowing is expected to remain 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 the company 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 contribute around 80% of revenue, and 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 in the near term.

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, (rated CRISIL AA/Positive/CRISIL A1+) and KEI Industries. Though the domestic market is becoming more quality conscious, intense competition may impact FCL’s operating profitability going forward.

 

* 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, geysers, MCCBs, RCBs etc. However despite the traction seen the overall contribution to FCLs revenue remains modest with FY20 revenue of Rs 86 crore from this segment, with segment recently achieving breakeven in fiscal 2021.

Liquidity: Strong

Cash and liquid investment stood at Rs 1,479 crore as on December 31, 2020. Bank limit of Rs 200 crore remained unutilised in the 12 months through December 2020. Cash accrual of Rs 350-400 crore is expected 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 healthy financial risk profile, supported by a 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 heaters 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 nine months ended December 31, 2020, profit after tax (PAT) was Rs 187 crore and operating income was Rs 1908 crore, as against Rs 285 crore and Rs 2340 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs crore	3,049	3200
Profit after tax (PAT)	Rs crore	402	344
PAT margin	%	13.2	10.7
Adjusted debt / adjusted networth	Times	0.00	0.00
Adjusted interest coverage	Times	610.00	390.78

 

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	NA	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

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Finolex J-Power Systems Pvt Ltd	Moderate	-
Corning Finolex Optic Fibre Pvt Ltd	Moderate	-