>FINOLEX CABLES LIMITED (HSBC)

Maintain UW(V): Forex losses overhang to continue

■ FY09 reported loss of INR355m based on exception loss of INR870 m due exposure to foreign exchange derivative

■ Forex losses are an overhang for FY10e based on outstanding derivative contracts

■ Maintain Underweight (V) raise target price to INR30 from INR16; higher EBITDA margin is the key upside risk

FY09 ends with loss. In our previous report, Finolex Cables Remain UW(V): Losses in FY09,
dated 28 January 2009 we had mentioned that company’s outstanding foreign currency derivatives exposure would lead to net losses for FY09. For FY09, the company has reported losses of INR355m while sales were -5% y-o-y at INR13bn. EBITDA margin decline 400bps to 5.5% due to volatile raw material prices. The key highlights for Q4FY09 results were tight control on working capital and an exceptional loss of INR870m in FY09

Tight control on working capital. The company has capitalised assets of its Rorkee plant (INR700m) and its Urse plant (INR700m). In spite of the capitalisation of assets, capital employed has not increased due to sharp reductions in debtors and inventory which is positive.

Exceptional loss of INR870m in FY09: The Company reported an exceptional loss of INR870m, which comprised of losses on account of foreign exchange derivative transactions of cINR879m, losses based on effects on accounts of exchange fluctuation of INR262m and a credit for reversal of impairment of optic fibre assets of cINR271m due to revival in business.

Forex losses overhang to continue in FY10: Though most of the outstanding derivative contracts have been booked in FY09, a few contracts are still outstanding, and we believe that the overhang of these will continue on the stock.

Maintain UW(V) raise TP to INR30: We have increased our target PE and PB multiples based on signs of improvement in business momentum , tight control of working capital and the fact that a significant portion of derivatives contracts have been booked inFY09. Our target price of INR30 is the midpoint of PB (Target PB 0.9x; fair value INR35) and PE (Target PE 8x; fair value INR25) multiple based valuations.


To see full report: FINOLEX CABLES LIMITED