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HOME   >  CORPORATE INFO >  MANAGEMENT DISCUSSION
Management Discussion      
Finolex Cables Ltd.
BSE Code 500144
ISIN Demat INE235A01022
Book Value 300.71
NSE Code FINCABLES
Dividend Yield % 0.82
Market Cap 149658.80
P/E 27.49
EPS 35.60
Face Value 2  
Year End: March 2015
 

Management Discussion and Analysis

1. BUSINESS OF THE COMPANY:

The Company operates in two main segments - Electrical Cables and Communication Cables.

To support its requirement of Copper Rods for both types of cables, the Company manufactures Continuous Cast Copper Rods (CCC rods), at its Rod Plant at Goa. A small part of this production of CCC rods is, however, sold to third party customers. The result from this operation is declared under the Copper Segment.

The Company's foray into the Lamps and Electrical Switches businesses is still in its early years and account for less than 5% of the Company's turnover and are hence reported as "Others" in the Segment Results.

1.1 Main Segments:

The Company is the leading domestic manufacturer of electrical and communication cables with a wide product range. The Company offers a 'Total Cable Solution'. The broad segmentation of the products manufactured by the Company is as follows:

Group :Electrical Cables

Product Covered

1100 V PVC Insulated Cables

Motor winding PVC insulated cables and 3 core flat cables

Automotive/battery cables

UPS cables

Heavy duty, underground, low voltage, power and control cables

Heavy duty, underground, high voltage, power cable

Elevator cables

Application

Electrification of industrial establishments, electrical panel wiring and consumer electrical goods

Submersible pumps and electrical motors.

Wiring harness for automobile industry and battery cables for various applications

For providing power from the UPS to the computer / appliances in the networking environment

Connection to the user point from main supply of power

Intra-city power distribution network

 For use by Elevator industry

Group :Communication Cables

Product Covered

Jelly filled telephone cables (JFTCs)

Local area network (LAN) cables

PE insulated telephone (Switchboard cables)

Coaxial cables

Speaker Cables

Optic Fibre

Optic Fibre cables

V-SAT cables

CCTV cables

Application

Telephone line connections to exchanges and Communication Cables

Indoor and outdoor networking, voice and data Transmission, broadband usage.

Telephone instrument connections to EPABX

Cable TV network solutions, microwave communications, mobile towers.

Meant for broadcasting applications in buildings & electronic goods.

Principal raw material for Optic Fibre cables.

For use in networks requiring high speed transfer of large bandwidth due to voice image and data transmission.

For connecting V-SAT dish to base station.

For better quality of CCTV images

Group :Copper Rods

Product Covered

CCC rods of 8 mm diameter

Application

Raw material for manufacture of copper based Cables.

Electrical Switches

Premium & classic switches, sockets, Domestic lighting, hotels, shops, offices, corridors. regulators, etc

Lamps

Retrofit & non-retrofit CFL lamps as well as Domestic lighting, hotels, shops, offices, corridors. T5 Tube Lights and Fittings

The Company's product application range is thus for electrical usage, transmission of voice, data and images (contents) for domestic, commercial and industrial applications to electrical products, touching every person in his daily life.

2. REVIEW OF OPERATIONS:

Production:

- Electrical Cables at 50,716 MT as compared to 54,423 MT in the brvious year.

- Metal based communication Cables at 5,607 MT as compared to 5,576 MT in the brvious year.

- Optical Fibre Cables at 33,948 KM as compared to 31,023 KM in the brvious year.

• Sales:

- Electrical Cables (including Excise Duty) at Rs.21,919 million as compared to Rs. 21,329 million in the brvious year.

- Communication cables (including Excise Duty) at Rs.2,445 million as compared to Rs.2,272 million in the brvious year.

- Copper Rods (net of interdivisional transfers and including Excise Duty) at Rs. 1,060 million as compared to Rs.1,187 million in the brvious year.

• Exports were marginally higher at Rs. 545 million as against Rs. 501 million of the earlier year.

• The income from operations (including excise duty) was Rs.25,748 million for the year under review as compared to Rs.25,099 million for the earlier year.

• As mentioned during the brvious year, the Power Sector in the country has been going through uncertain times. Capital investment in this sector has been minimal during the year. Further the stringent br-qualification conditions imposed by utilities as well as the unrestricted imports from South East Asia have also been an impeding factor in order acquisition by the JV. It is estimated that the JV will become profitable only around 2016-17 and will need financial support in the form of equity infusion until then. While the long term outlook of the JV is positive, in the short term there continues to be an erosion of net worth in the JV.

• The Joint Venture with Corning SAS, Corning Finolex Optical Fibre Pvt. Ltd. has clocked sales of over Rs. 1,581 million in the year 2014-15 as against Rs 1043 million in the brvious year. The operations are expected to be profitable going forwards.

• For more details on the operations, a reference may please be made to the financial statements.

3. KEY STRENGTHS:

• One of India's leading cable manufacturers.

• Has the widest range of cable products in both segments and is recognized as a "Total Cable Solutions" Company capable of designing cable solutions for every need.

• Acknowledged as a leader in technology with a strong emphasis on quality

• Has the widest distribution network, which is being further expanded

• Backward integrated in respect of its major materials - CCC Rods, PVC compounds, Optical Fibre and FRP rods which allow the Company a certain technical superiority over its competitor while providing a cost advantage as well.

• A strong brand image and value - for long it has been the only cable company to hold the Super Brand status; the brand has also enabled the Company to market its products in overseas markets.

• Expanded into product segments that are complementary to the electrical cable market i.e. CFLs, LED lamps and electrical switches - this move has brought additional market reach at minimal cost expansion.

4. GROWTH DRIVERS:

The Company's position as the market leader is due to its persistent efforts and emphasis in the following areas: Product quality

Continuous product improvement

Introduction of new products through in-house developments

Creating customer brferences Competitive pricing and extremely competitive cost structure Dynamic approach to situations

Strong and dependable distribution channel sbrad all over the Country.

5 BUSINESS ENVIRONMENT:

The segment-wise discussion on the markets which are served by the Company is as follows:

5.1 Electrical Cables:

Electrical cables can be further categorised into light duty electrical cables, power and control cables.

(i) Light duty electrical cables include electrical wires used extensively for electrification of industrial establishments, electrical panel wiring in industrial establishments and major equipments, consumer durable goods, automobiles, agricultural pump sets, small generator applications besides general lighting purposes.

(ii) In power cable category, the Company has the ability to manufacture such cables within the range 1.1 kV to 66 kV. These cables are high voltage cables designed in various constructions depending upon their applications; however, always meant for underground usage. Power and control cables upto 3.3 kV rating are used for connecting user point to the main supply of power. Power cables above 3.3 kV rating are meant for use in underground application for intra-city electricity distribution network. The Company manufactures insulated power cables only. These cables meet the requirements of international standards.

Performance:

For the year under review, this segment cables registered sales (including excise duty) of Rs.21,919 million against Rs.21,132 million of the brvious year. It accounted for 85% of total sales for the year under review. Growth during the year was driven mainly by agricultural and construction applications. Both infrastructure and automobile sectors remained very subdued. Margins, however, were strong with EBITA at 13.6% for the year as against 12.7% in the earlier year.

Outlook:

Electrical cables are the main focus area of business for the Company. In the long term the outlook is positive - construction sector appears positive especially given the governments drive towards Housing For All by 2022; agricultural applications also appear positive and poised to continue on the growth shown in the brvious years; automobile and infrastructure (power), however seem to be going through a slower growth path at this moment. In the long term, however, the outlook for the entire segment is positive, given the fact that sustained economic growth of the country depends on a robust and stable infrastructure.

The Company faces two principal risks in this business - firstly competition from a large unorganized sector which produces products of inferior quality but at cheap prices and secondly a highly volatile commodity market where price movements can be very sharp. The Company has been handling the risk of the competitive forces through its organized business approach, by the strength of its reach, superior quality products, safe products and maintaining high standards of service levels with its customers. The Company enjoys the advantages of economies of scale and backward integration. As and when GST is rolled out in the country, the Company believes the threat of a competitive force that relies on cheap quality and unfair trade practices will reduce further. As regards the risk of sharp raw material price movements, though the Company endeavors to pass on the price effect to the customers, there has always been a time lag between the price movement and the passing thereof. The Company negotiates price variation contracts with bulk buyers. The Company has been fair in dealing with its customers and accordingly enjoys customer confidence in pricing decisions.

5.2 Communication Cables:

The communication cables comprise of state of art, new generation communication cables and traditional telephone cables. (i) The state of art communication cables are either copper based or glass based. The copper based cables include LAN cables, coaxial cables, PE insulated switchboard cables and V-SAT cables. These cables are used for last mile connectivity. LAN cables are used in high speed networks, Coaxial cables are used to provide content input to TV receiving sets and in microwave communications and mobile towers, PE insulated switchboard cables are used to connect telephone instruments to an EPABX system and V-SAT cables find their application in V-SAT towers to connect the dish to the base station. Newer products include special cables that provide for both image capture as well as power solutions to CCTV cameras.

Optic Fibre cables are glass based cables and they have the maximum bandwidth and speed. Certain cable designs are used as trunk cables in long distance networks while other designs are used in distribution, whether by telecom companies, multi­service organisations or other service providers.

Communication cables which carry voice, data or images is the backbone of an economic activity. The speed and bandwidth determine the capabilities of a communication network.

(ii) Traditional telephone cables include JFTCs which are laid underground and are used for connecting land line telephones to exchanges. These are copper based cables. With introduction of mobile telephones in India and due to substitution by optic fibre cables, JFTC business has lost its value. Nevertheless, JFTC continues to remain a brferred option for last mile connectivity in fixed line telephones. The demand for JFTCs will continue to remain modest. The Company would continue to manufacture JFTCs especially with broadband features for public sector and private sector telecom companies and to meet the export demand. The Company has the capability to make JFTCs as per customer's needs.

Performance:

The communication cables segment (including optic fibre) recorded sales of Rs.2,445 million for the year under review against Rs.2,264 million for the earlier year. During the first half of the year, the underutilised due to considerable delay in acquisition of a large government order. Subsequently, however, the utilisation factor improved. Hence margins were under brssure during a substantial portion of the year. EBITA levels for the year fell to 6.35% in this segment as compared to 13.7% in the brvious year.

Outlook:

With the impetus from the Government in providing better and faster internet access to rural India, your Company believes that demand for communication products will be robust for the foreseeable future. The economic development requires inter-alia, a strong, dependable and sustainable communication network. Besides the programs being implemented by the Government, roll out of 4G services by private service providers will entail additional capital expenditure in the form of an optic fibre network. The Company's communication cables meet with the requirement of local as well as international standards and therefore, find ready acceptance with domestic customers as well as in the exports market. The outlook here is positive, both in the near as well as long term.

The risks of competition and copper price movements similar to the electrical cables business are also applicable to the business of communication cables. The varying global demand-supply equation of optic fibre and resultant price movement thereof; availability of brforms and price thereof and delay/slow-down in investment into networks by telecom companies/ service provider and other relevant entities due to global slow-down pose risk to the business of communication cables. Your Company's association with Corning Inc of USA, inventor of glass fibre, one of the world's leading glass and fibre manufacturer and having the largest market share in the world, would be beneficial in meeting technological and market based challenges.

5.3 Copper Rods:

Copper rod is the feed stock for copper based electrical and communications cables. The Company manufactures its own copper rods. The base material for producing copper rods is copper cathodes, the bulk of which are procured from local manufacturers under long term supply agreements. A smaller portion of the requirement of copper cathodes is imported as and when needed. After meeting the in-house requirement of copper rods, the balance capacity to produce copper rods is allocated for third party sale.

Performance:

The sales were Rs.7,015 million (brvious year Rs.7,005 million) of which Rs.973 million were sales to third parties (brvious year Rs.1,178 million) and balance was inter-divisional transfers. The trend of high brmiums on cathodes Vs comparably lower brmiums on copper rods continues and negatively impacts the sales of copper rods for the Company. This put severe brssure on margins related to sale of copper rods to third party - consequently Your Company restricted its sale of copper rods to already committed contracts or contracts where the margin levels were acceptable.

Outlook:

The copper rod production is mainly for in-house consumption. The Company's steps to set up new plants for cables as well as to expand the cable capacity at the existing plants will boost up the captive consumption of copper rods.

5.4 Electrical Switches and CFLs:

The manufacture and sale of these electrical products act as a logical extension of the cables business of the Company. They have the backing of Finolex name, assuring the customer of quality, safety and performance standards. These electrical and lighting products are sold through the existing well-sbrad distribution network of cables. Other distribution avenues are also being explored to penetrate further in the market. Products have been well accepted by the market.

On its part to contain the effects of global warming, the Government is promoting use of CFLs and now LED based lamps. Keeping in mind the expected growth in CFL demand the Company has built capacity in T3 and T4 type CFLs and has also launched the latest T5 tube lights and fittings in the market. As mentioned elsewhere in this report, there has been a shift in the customer brference towards LED based lamps especially in the lower wattage range - the price differential between CFL and LED based lamps is the lowest in this category. In view of this change, it was decided to impair one of the manufacturing lines within the CFL facility. Accordingly a cost of Rs 7.6 million has been charged to the income statement this year.

5.5 Summary:

The Company's main businesses are core to development of infrastructure. As the country marches ahead towards attaining the status of being a developed nation, it is natural that the demand for the products produced and marketed by your Company would grow. With the focus being on supplying products of superior quality at a price that is attractive to the customer, backed by the distribution reach that the Company has it is but a logical conclusion that the future holds vast promise. The Company is committed to expanding its business activities in an optimal manner. The Company has resources available at its disposal to implement and realize its business goals.

6. OPPORTUNITIES AND THREATS:

Your Company has adequate production capacity to meet an increase in demand. Restart of mining activity, government policy on infrastructure development & digitalization of rural India is expected to lead to an increase in demand for power & communication cables.

Competition and high volatility in copper price remain as threats.

7. RISK MANAGEMENT:

The Company has a Risk Management Manual in place that defines the policies, lays out the strategies and methodology to decide on the risk taking ability of the organization.

The Company constantly reviews its exposure to various types of risk, whether it be regulatory, operational, environmental, financial or political. The Company has in place adequate systems to ensure compliance with all regulatory and statutory matters, reviews the same on a periodic basis and takes appropriate corrective action when necessary. Operationally, our Company does not depend on a single vendor for any of its major raw materials. It has in place a well-defined practice on the levels of inventory that need to be maintained which while ensuring customer serviceability also ensures minimal stock holdings together with a clearly documented practice where credit risks are analysed prior to taking exposures with customers etc.

8. INTERNAL CONTROL SYSTEM:

In line with the size and nature of its operations, the Company has designed a system of internal controls that provides for:

- Accurate recording of its transactions with checks and balances built in;

- Prompt reporting;

- Adherence to applicable Accounting Standards and Policies;

- Compliance with applicable laws, statutes, as well as internal procedures and practices; and

- Safeguarding of assets and their proper usage

The Company has appointed outside agency to develop tools to monitor its Internal Control System. This will be implemented in the next financial year .The Company regularly conducts internal audits in respect of the above by using both in house resources as well as external consultants. The reports from these teams are reviewed by the management regularly and corrective actions are taken. Further, the Audit Committee of the Board meets once every quarter to consider and review the audit reports submitted by the internal audit teams and discusses the corrective actions needed with management.

The Audit Committee met 9 times during the year under review.

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