Finolex: Powering growth

The company's scrip rose 2.6% after it signed a JV with Japan-based J-Power Systems

At a time when the country will receive an additional power capacity of 62,213 MW over the next five years, Finolex Cables will be able to leverage the strong growth conditions in the power sector through a joint venture with Japan-based J-Power Systems to offer turnkey solutions in extra high voltage cable systems.

The latest development helped the stock rise 2.6 per cent to Rs 109.35 on Thursday despite the overall weakness in the market.

Meanwhile, in the September 2007 quarter, Finolex's operating profit fell marginally on a y-o-y basis to Rs 39 crore, while its net sales rose 21 per cent to Rs 334 crore. Its operating profit margin also declined 260 basis points y-o-y to 11.7 per cent in Q2 FY08.

The pressure on its margins in the last quarter was due to its adjusted raw material costs as a percentage of net sales rising 360 basis points y-o-y to 79 per cent in the last quarter.

Analysts, however, highlight a high base effect in the first half of FY07. That's because cable companies were able to report strong growth in the operating profit margins due to a sharp rally in copper prices on the London Metal Exchange.

In Q2 FY08, its copper rods division clocked a revenue growth of 30.4 per cent y-o-y and electrical cables business went up 8.4 per cent due to curtailed demand during the monsoon season.

It is understood that Finolex's power cables plant in Uttarakhand, which was scheduled for commissioning by November 2008, will now go onstream by April 2009. The stock trades at a reasonable 19 times estimated FY08 earnings and 14 times FY09 earnings.

Mold-Tek: Designed to separate

Mold-Tek stock has nearly tripled over the past year thanks to doubling revenues from its KPO business every year. The firm has a conventional business of plastic pails, PET bottles and jars, which is complemented with a structural design solutions KPO business that caters to construction majors across the world.

The KPO business enjoys a 50 per cent operating profit margin. The company announced its plan to de-merge the plastic manufacturing and the structural design services business into two entities - Mold Tek Plastics and Mold-Tek Technologies.

For every 100 shares of the present Mold-Tek, investors would get 72 shares of Mold-Tek Plastics, and 28 shares of the design services firm Mold-Tek Technologies.

The KPO business provides structural engineering, designing, detailing and estimation services for construction of high-rise buildings, plants and factories to builders and construction companies, mainly in the US and West Asia.

Besides organic growth, Mold-Tek has acquired two companies in the US to have a front office in the US. In April this year, Mold-Tek acquired Crossroads Detailing Inc, a 12-engineer design and detailing firm.

Last month, it acquired another detailing firm, which has its own design centre in India with about 90 engineers. For FY09, the management has provided a topline guidance of Rs 60 crore in the KPO business, which is 140 per cent higher than estimated FY08 revenues. The profitability has remained high despite rupee's appreciation, and will continue to at similar levels.

The stock has soared over 30 per cent in the past one month and trades at about 13 times and 10 times estimated FY08 and FY09 earnings respectively (for the combined businesses).

At its current price, it appears expensive as the high-growth KPO constitutes less than a third of the total revenues.

With contributions from Amriteshwar Mathur and Niren Shah