Sharekhan sees over 20% upside in this smallcap firm; should you buy?

Brokerage Sharekhan has retained its ‘Buy’ call on smallcap firm Finolex Cables with a target price of Rs 623. It believes that the company’s operations are expected to improve further as the supply chain becomes stable with an improving demand environment and rising infrastructure investments.

Shares of the company traded 0.13% down at Rs 511.50 at around 2.40 pm (IST). On the other hand, the benchmark BSE Sensex was down 155 points, or 0.30%, at 52,413 at around the same time.

Further, Sharekhan added that Covid-19 led to an impact on unorganised players allows the company to increase its market share. Finolex’s debt-free balance sheet and net cash position provide comfort in the present environment. The government’s push for optical fibre cable will aid business and boost demand for telecom cables for the company.

With a rally of nearly 1,000%, shares of the company have created humungous wealth for investors in the past 10 years. It has jumped around 200% since March 2020 lows.

“The stock is trading at a reasonable valuation of 21 times and 18 times its FY2022E and FY2023E earnings, respectively. With improving growth visibility, we retain our Buy rating on the stock with a revised SOTP-based price target of Rs 623,” Sharekhan said.

Latest updates: Q4FY2021 Concall highlights

FMEG business: Business has shown constant improvements with revenue growth of 74% y-o-y during Q4FY2021 due to improved distribution effort. Currently, Finolex has ~490 distributors connecting 1,40,000
retail touch points and expects to reach 500 distributors connecting 1,50,000 touchpoints.

Telecom cables: Both COVID related disruptions, as well as structural issues in the industry, continue to impact this segment. The telecom sector was impacted due to fall in international fibre prices, which led to lower selling prices and delay in the execution of domestic projects due to a liquidity crunch. However, management is confident of a turnaround in this segment as it has received a good number of tenders in Q1FY2022, which will see improved contribution from this segment.

Demand: Management indicated that demand remained good as seen with good volume increase and it has been sustaining in the current quarter with 15-17% growth on an annual basis but was also cautious
about the current situation.

Price hike: Management mentioned that last two quarters, the business has been impacted by price hikes and was forced to take several price hikes. In FY2021, Finolex has taken about 12 price hikes to counter
increased input costs.

Inventory: Finolex reported high inventory due to the high input cost of copper (from $4,500 to $11,000/MT) and polymer. However, management remained confident that overall inventory days will return to 55-60
days quickly.