Rating Rationale
March 23, 2020 | Mumbai
Finolex Cables Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.450 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.150 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.50 Crore Short Term Debt CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt programmes of Finolex Cables Ltd (FCL).
 
The company's operating performance is likely to remain healthy. In fiscal 2020 so far, revenue has been flat despite 6% year-on-year growth in the electric cables segment due to the decline in communication cable segment by 17% YoY. Operating margin to remain at 16.3% for the fiscal as compared to 14.9% in fiscal 19 because of low raw material cost. The company has maintained healthy capital structure and strong debt protection metrics, reflected in networth of Rs 2,585 crore as on March 31, 2019, and cash and cash equivalent (including investments) of Rs 1,381 crore against nil long-term debt as on December 31, 2019.
 
CRISIL also notes the temporary demand slowdown due to COVID-19 is likely to impact growth in fiscal 2021. Prolonged demand slump will remain a key monitorable. Revenue is expected to grow 3-5% over the medium term, driven by established position in the electrical cables segment and digitisation of cable networks across the country. Growth will be supported by traction in new segments, such as fans, switchgears, and water heaters, over the medium term.
 
The rating also takes a 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 the management control of FCL due to ownership dispute in the investment company of the promoters, Orbit Electricals Pvt Ltd (Orbit).  The matter is currently sub-judice. Business operations of FCL have not been impacted due to this matter. CRISIL will continue to monitor the event and any impact of change in ownership and management on business operations and liquidity surplus will remain a key monitorable.
 
The ratings continue to reflect FCL's stable business risk profile because of strong position in the electrical cables segment, backed by an established brand and integrated operations, and healthy financial risk profile, driven by strong cash accrual. The strengths are partially offset by susceptibility to volatility in raw material prices and economic downturn, and exposure to intense competition.

Analytical Approach

For arriving at the ratings, CRISIL 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 has only 49% stake in the JV, with 51% held by JPS. Corning-Finolex is a marketing JV with Corning Inc, USA (Corning), and Corning and FCL have equal shareholding in the JV. 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. The company derives its strong position from its established brand and robust distribution network, consisting of 1.0 lakh retailers (will increase to 1.5 lakh by fiscal 21 to increase the distribution reach of company) and 380 distributors (likely to increase to 500) with an integrated SAP system connecting them all. FCL's strong distribution network will drive volume growth over the next 2 fiscals, and gives it an edge over its competitors in the highly fragmented market. Furthermore, backward integration with in-house availability of copper rods ensures timely supply of quality raw materials and an edge over small, unorganised players.

* Steady growth prospects in core businesses
FCL's two major lines of business are electrical cables and telecommunication (telecom) cables. The electrical cables business will maintain growth because of FCL's increased geographic reach in northern and eastern India on account of expansion of its plant in Roorkee, Uttarakhand. 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 in the longer timeframe ensures that the long term outlook remains healthy.

* Healthy financial risk profile
The financial risk profile is expected to remain healthy, with networth expected at Rs 2,948 crore and nil gearing as on March 31, 2020. Debt protection metrics will remain comfortable, with adjusted interest coverage and net cash accrual to total debt ratio expected at 603 times 998 times, respectively, in fiscal 2020. Networth is likely to increase over the medium term, backed by steady cash accrual, while gearing will likely be low, as capital expenditure (capex) for setting up plant for Conduit pipes and solar cables as well as tinning plant for copper rods of Rs 200 crore will be funded through internal accrual.

Weaknesses
* Susceptibility to fluctuations in copper prices
FCL is susceptible to volatility in copper prices. Copper is the primary raw material in the manufacture of cables, and accounts for more than 75% of the raw material cost. Though the company revises the prices of cables based on fluctuations in raw material price, inability to pass on price increases to customers will hit profitability.

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

* Exposure to intense competition
The electrical cables segment has several unorganised players, constraining the pricing power of organised players. FCL faces competition from organised 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.
Liquidity Strong

The cash and liquid investment was Rs 1,381 crore as on December 31, 2019. Bank limit of Rs 200 crore was unutilised in the 12 months through December 2019. Cash accrual is expected to remain steady at Rs 390-420 crore over the medium term against nil debt obligation, providing adequate liquidity.

Outlook: Stable

CRISIL 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 comfortable capital structure and cash accrual.

Rating Sensitivity factors
Upward Factor
* Increase and diversification in revenue across segments over Rs 5000 crore
* Stable operating profitability with steady increase in RoCE

Downward Factor
*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 or profitability with operating margin 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 businesses. 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, which manufactures 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. FCL formed Corning-Finolex with Corning in fiscal 2012 to market optical fibre to cable makers in India.
 
For the 9 months ended December 31, 2019, FCL's profit after tax (PAT) was Rs 327 crore and operating income was Rs 2,298 crore, compared with PAT of Rs 282 crore and operating income of Rs 2,312 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 3,087 2,815
Profit After Tax (PAT) Rs crore 407 358
PAT Margin % 13.2 12.7
Adjusted debt/adjusted networth Times 0.00 0.00
Adjusted interest coverage Times 610.00 390.78

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Cr)		 Rating assigned
with outlook
NA Short-term debt NA NA 7-365 days 50 CRISIL A1+
NA Cash credit* NA NA NA 200 CRISIL AA+/Stable
NA Letter of credit and bank guarantee NA NA NA 250 CRISIL A1+
NA Non-convertible debentures# NA NA NA 150 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 -
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
23-03-20  		CRISIL AA+/Stable      19-07-19  CRISIL AA+/Stable  01-02-18  CRISIL AA+/Stable  27-02-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
Non Convertible Debentures  LT        --  17-06-19  Withdrawal           
            28-02-19  CRISIL AA+/Stable           
Short Term Debt  ST  50.00  CRISIL A1+      19-07-19  CRISIL A1+  01-02-18  CRISIL A1+  27-02-17  CRISIL A1+  CRISIL A1+ 
            17-06-19  CRISIL A1+           
            28-02-19  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  200.00  CRISIL AA+/Stable      19-07-19  CRISIL AA+/Stable  01-02-18  CRISIL AA+/Stable  27-02-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
            17-06-19  CRISIL AA+/Stable           
            28-02-19  CRISIL AA+/Stable           
Non Fund-based Bank Facilities  LT/ST  250.00  CRISIL A1+      19-07-19  CRISIL A1+  01-02-18  CRISIL A1+  27-02-17  CRISIL A1+  CRISIL A1+ 
            17-06-19  CRISIL A1+           
            28-02-19  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 200 CRISIL AA+/Stable Cash Credit* 200 CRISIL AA+/Stable
Letter of credit & Bank Guarantee 250 CRISIL A1+ Letter of credit & Bank Guarantee 250 CRISIL A1+
Total 450 -- Total 450 --
*Interchangeable with overdraft facility, bill discounting, cheque discounting, packing credit, and short-term loan
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation

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