Cords Cable Industries Ltd

BSE Code: 532941

CMP: Rs.45.35

Book Value: Rs.73.26

EPS: Rs.4.7

Dividend Yield: 2.21%

Price/Book: 0.89

Market Cap: Rs.54.57

P/E:10.16

Industry P/E: 11.78

Sector: Power Cable

Introduction: Cords Cable Industries Ltd (CCIL) was established in 1987 by a group of industry professionals with an objective of catering to a growing requirement for high quality customized cables.

With it’s headquarter in New Delhi, it manufactures Instrumentation cables, Control cables, Power cables besides special cables for electrical connectivity requirements, mainly for Industry. The Company manufactures cables up to 1.1 kilovolt for applications including industrial, utility and buildings. It caters to industries such as power, steel, cement, fertilizers and chemicals, and refinery/petroleum. The Company’s products include low-tension control cables (up to 1.1 kilovolt), low-tension power cables (up to 1.1 kilovolt), instrumentation cables, signal and data cables, thermocouple extension/compensating cables, panel wires/house hold wires/flexible cables, and specialty cables.

In January 2008, the Company came out with an IPO and on 13th February 2008 got listed on Bombay Stock Exchange and National Stock Exchange of India.

In a significant development in 2008, Cords Cable Industries Limited became the only Cable manufacturer in the Asia-Pacific region to be listed by Forbes Magazine in its “Asia's 200 Best Companies under a Billion List.” It is now the biggest instrumentation cable maker in India.

Shareholding Pattern: According to the latest shareholding pattern, the promoters hold a controlling stake of 58.48% while the general public holds 41.52% of the shares of the company.

Financials: For FY09, the total sales of the company increased to Rs.222.8 Cr as against Rs.170.85 Cr in the same period previous year. However due to higher expenditure, interest and depreciation, the net profit of the company suffered. For FY09, the net profit of the company dipped to Rs.7.13 Cr as against Rs.13.8 Cr in the same period previous year, on a small equity base of Rs.11.43 Cr. The EPS of the company for FY09 dipped to Rs.6.24 as against Rs.16.81 in the same period previous year. The net and operating profit margin of the company also dipped considerably on Y-o-Y basis, due to slowing down of the world economy. The poor FY09 results considering Y-o-Y basis is mainly due to Q4FY09 results, which were abysmal and were much below expectations.

For Q1FY10, the total sales of the company though remained flat on Y-o-Y basis but the net profit dipped Y-o-Y basis. However the net profit of the company for Q1FY10, sequentially speaking was superb, which is an indication of improvement of business environment in the coming days. For FY10, the total sales of the company came out to be Rs.359.74 Cr as against Rs.360.40 Cr in Q1FY09. The net profit of the company for Q1FY10 suffered due to higher interest and depreciation. The net profit of the company for Q1FY10 came out to be Rs.67.7 lakhs as against Rs.2.44 Cr in the same period previous

year. But the though the net and operating profit margins of the company dipped considerably on Y-o-Y basis but the good point is that they improved substantially speaking sequentially; which tells us indirectly that going forward the company would do well. This is primarily the fundamental basis of recommending this hidden gem in the Power Cable Sector.

Industry Outlook: At global level, India's growth story is so far impressive with GDP expected to grow at the rate of 6-6.5% in FY10. Infrastructure needs to grow at a similar level for sustaining this GDP growth. This infrastructure is undoubtedly dependent upon the manufacturers of cables in the Indian cables industry. This augurs well for the suppliers of power cables, instrumentation and other cables.

The key to sustaining India's growth rate during a global meltdown lies in developing India's infrastructure sector as mentioned earlier. Keeping this in mind, the government is targeting an investment of US$ 20.38 billion over the next two years in the infrastructure sector. The scheme proposed by government cannot be achieved without participation of Private sector. The government has asked the Infrastructure Investment Finance Company Ltd (IIFCL) to put together a corpus of over US$ 8.15 billion for this purpose. This is in addition to the US$ 320 billion that the government plans to invest for the up-gradation of ports, railroads, highways and airports over the next 15 years. Further, the core sector growth is back on track. The index for six core industries crude oil, petroleum refinery products, coal, electricity, cement and finished carbon steel has turned in a growth of 2.9 per cent in March 2009 over March last year.

Apart from the power cables, Indian cable manufacturers are producing technologically advanced specialty cables including instrumentation cables, process control cables, low voltage electrical power cables, rubber cables, control cables, etc. which are used by the space, oil, gas, petrochemicals, fertilizers, cement, steel, railways, medical, automotive, electronics and many other core sectors of the Indian economy. Hence any positive development in the economy is directly proportional to the company’s fundamentals, which is expected to improve substantially going forward.

Triggers:

• The decline in margins in FY09 and Q1FY10 was mainly due to the increased cost of raw material which happened on account of sharp fluctuation in price of commodities like Copper & Steel which constitute almost 80% of the raw materials for cables. Moreover, global recessionary trend has adversely affected the profits of the Company by comparatively increasing the cost of inputs and slowing the product demand in the market. CCIL booked the material against order at higher price but had to offer lower price to customer when prices declined.

This has resulted into higher raw material cost for CCIL. However with improved business environment for the company in the coming days, this is expected to ease out considerably.

• Company even in the tiring business environment maintained its dividend payout in FY09 at the rate of Re.1 per share which is same as in FY08.

• The year 2008-09 proved to be a very challenging year for Indian Industry. During the year the GDP of the country fell down to 6.7% compared to 8.5% in FY’08. Cable Industry was no exception to this domestic and global meltdown. Despite all the global and domestic challenges and sharp fluctuation in commodities like Copper & Steel which constitute almost 80% of the raw materials for Cables, Cords Cable Industries Ltd (CCIL) achieved a growth of 30% in sales over FY08. To face all these challenges CCIL further diversified its business model and has added 33 new clients to its existing client base, has started exporting its product to many new countries and has added 3 new business sectors.

• In an effort to make its business model more sustainable CCIL focused aggressively on export markets and as a result the company increased the share of exports to 16.1% as against 7% in FY'08. With rupee depreciation, the company is expected to get good impetus on its export revenues. CCIL is well poised for future growth with a well developed strategy in place and is on course for achieving its target to increase the share of its export sales to 25% in FY10.

• The cable industry in the past 16 months has undergone a massive slowdown both in domestic and global markets. However the turnaround has already taken place and there is a great potential for the cable industry not only for 100% capacity utilization but also to capture more market by expansion drive. Looking at the aforesaid scenario and great potential, the company is poised for expansion. The effective steps for expansion had already been taken by the company last year but due to overall slowdown in the economy, the expansion drive was put on hold. However, now in view of the improvement in the overall situation, the project is expected to be commissioned expeditiously and is likely to commence production by April 2010. Also, RIICO allotted an alternative piece of land for the project due to certain issues with the proper procurement of the previous piece of land. The new land is better located and more suitable for the project.

The cost over run as such is proposed to be met from internal accruals & borrowings. The company had already received machinery which CCIL installed in the existing facility and has already started producing.

• As of 31st Mar 2009 CCIL had an order book of Rs.103 Crs. The company is not facing any problem in order booking. The order booking is same quantity wise but the value of the order book is low due to the declining prices of the raw materials. The order book is expected to cross Rs.150 Cr by Q4FY10.

Chart Check and Conclusion: Going forward, with increased manufacturing capacity, focus on exports and addition of new products, CCIL is poised to wire a new growth story in the cable sector.

We can expect CCIL to report Net Revenue of Rs.265 Cr, EBIDTA of Rs.29.6 Cr, EBIDTA Margin of 11.2%, PAT of Rs.11.1 Cr and EPS of Rs.9.7-Rs.10, in FY10. At the estimated EPS of Rs.9.7—Rs.10 for FY 10 the stock could trade at Rs.110-120, in the next 9-12 months time frame. Moreover, considering CCIL’s reasonable order book position, focus on exports, pick up in demand and stable commodity prices we can safely assume that CCIL’s margin is likely to improve in the coming quarters.

The stock has a solid bottom in place at XXXX (Only for the Paid Groups), where maximum accumulation should be done in any dip in the market. However, if the scrip manages to stay above XXXX (Only to the Paid Groups), then the next logical target should be XXXX (Only to the Paid Groups).

This scrip is suitable for investors who do not want to take too much risk but want a healthy return after a couple of years.

Note: The stock was recommended to the Paid Group last week in the Sunday Report. The above are the excerpts from the original report sent to the Paid Groups.