Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt programmes of Finolex Cables Ltd (FCL).

 

The reaffirmation factors in the company’s healthy revenue growth of ~12% on-year to Rs 5,018 crore in fiscal 2024 and 6% on-year to Rs 2,542 crore in the first half of fiscal 2025.The contribution from different segment during Fiscal year 2024 was as follows :electrical wires and cables (revenue share of 84%), communication cables (10.6%), copper rods (0.7%), and other fast-moving electric goods (FMEG) and home appliances (4.5%).

 

During fiscal 2024, the revenue from the electrical wires and cables segment rose ~15% on-year to Rs 4,222 crore (Rs 3,683 crore in the previous fiscal) on account of growth in domestic demand in the real estate and infrastructure sectors driven by increased government infrastructure spend. However, the revenue from communication cables decreased 9% of Rs 531 crore in fiscal 2024 from Rs 579 crore in fiscal 2023 due to delays in tenders, both from the government and private telecommunication (telecom) players. The FMEG and home appliances segment reported revenue of Rs 225 crore, up 15% on-year, and is expected to break even at Rs 250-260 crore by the end of fiscal 2025.

 

The operating margin improved to 11.8% in fiscal 2024 from 11.6% in fiscal 2023 despite fluctuation in the price of copper, the primary raw material accounting for more than 70% of the material cost, owing to new product launches, economies of scale and cost optimisation.

 

In H1 fiscal 2025, FCL has reported revenue of Rs 2,542 crores i.e. 6% growth vis a vis corresponding period of fiscal 2024, however, the margin declined to 9% in the first half of fiscal 2025 on account of ~13% fall in copper prices between May and August 2024, as a result of which, the company had to adjust its product prices downwards. Plus, the general elections during the first quarter of the fiscal also impacted offtake. The prices have started to stabilise and FCL has revised prices upward at the end of September 2024 which is expected to benefit margins for the reminder of the fiscal.

 

FCL reported higher profit after tax (PAT) Rs 652 crores in fiscal 2024 on account of other income of Rs 175 crores which majorly includes Rs 126 crore of net gain on investment in financial assets classified at fair value through profit and loss (FVTPL) and gain on liquidation of Joint Venture of Rs 12.57 crores. Moreover, in the first half of fiscal 2025, FCL generated non-operating income of Rs 259 crore (including share of income from associate) resulting in a PAT of Rs 362 crores.

 

FCL has maintained a healthy capital structure and strong debt protection metrics. Its net worth was Rs 5,192 crore as on September 30, 2024. The company had cash and equivalents (including investments) of ~Rs 2,556 crore as on September 30, 2024, against nil long-term debt.

 

CRISIL Ratings has taken note of the ongoing dispute among members of the Chhabria family (Mr Deepak Chhabria, and Mr Prakash Chhabria) over management control of FCL. The matter, which is sub judice, has not impacted the business operations of FCL, as per the management articulation. CRISIL Ratings will continue to monitor developments and any impact of a change in ownership and management on the company’s business operations and liquidity will be monitorable.

 

The ratings continue to reflect the stable business risk profile of FCL, driven by its strong position in the electrical cables segment, established brand and integrated operations, and sound financial risk profile, backed by healthy cash accrual. The strengths are partially offset by susceptibility to intense competition, volatility in raw material prices and any economic downturn.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of FCL and its joint ventures (with J-Power Systems [JPS], Japan, and with Corning Finolex Optical Fibre Pvt Ltd [liquidated in the first half of fiscal 2024]) and associate companies (Finolex Industries Ltd).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Stable business risk profile, driven by strong position in the electrical cables segment, established brand, and integrated operations

FCL is a leading manufacturer of electrical wires and cables in India. Its strong market position is backed by its established brand and robust distribution network. As on September 30, 2024, FCL had nearly 2.25 lakh retailers and 5,000 channel partners, and had appointed ~800 distributors to increase its reach to 2.5 lakh retailers by the end of fiscal 2025. The strong distribution network has been instrumental in helping FCL over the past years and will support growth going forward also to provide the company an edge over its competitors in a highly fragmented market.

 

Backward integration with in-house availability of copper rods ensures timely supply of quality raw material, and offers an added benefit against small, unorganised players. To diversify its product portfolio, the company has entered the FMEG segment, which is expected to break even with revenue of Rs 250-260 crore by the end of fiscal 2025. The company’s established position in the electrical wires and cables segment, growing distribution network and new launches in the FMEG segment will drive growth over the medium term.

 

Steady growth prospects in core businesses

FCL operates mainly in the electrical cables and telecom cables segments. Improved geographic reach in northern and eastern India, following the expansion of the Roorkee plant, should support the electrical cables business. The communication cables segment, after facing some pressure in the recent past, is likely to grow over the near to medium term. FCL participated in the tender for BSNL’s Bharat Net during the first half of fiscal 2025 — the value of the entire project is ~Rs 55,000 crore, of which ~10% will be for communication cables. 

 

Strong financial risk profile  

The financial risk profile should remain healthy, supported by adequate networth of Rs 5,192 crore and nil gearing as on September 30, 2024. The net worth is expected to increase, backed by steady cash accrual, while the gearing will likely remain low as capital expenditure (capex) for new capacity or investments will be funded internally. Expected annual net cash accrual of Rs 500-550 crore should suffice to cover the capex requirements for the next two fiscals, thus limiting external borrowing. FCL has undertaken capex of ~Rs 220 crore in fiscal 2024 and the first half of fiscal 2025 and is likely to take up capex of ~Rs 350 crore in fiscal 2025.

 

Weaknesses:

Susceptibility to fluctuations in copper prices

Volatility in copper prices impacts profitability and cash flow from operations. Copper is the primary raw material and accounts for 70-75% of the material cost. Although the company revises products prices every month based on the previous month’s London Metal Exchange prices, profitability will be impacted if it is unable to pass on the price increase to customers, as reflected in the last few quarters.

 

Vulnerability to economic downturn and intense competition

FCL will remain vulnerable to any slowdown in the domestic economy. Electrical wires and cables, which contribute ~84% to revenue, are used in the construction (real estate), agriculture, and automotive industries. Growth in these sectors is linked to the overall economy. Low gross domestic product growth and its impact on the real estate sector may cause moderation in demand for electrical cables.

 

Furthermore, presence of several established players and unorganised entities in the electrical cables segment constrains the pricing power of organised players. Entry of new entities and aggressive market expansion strategy of existing players have intensified competition. Though the domestic market is becoming more quality conscious, intense competition may impact operating profitability.

 

Small scale of operations in the electrical appliances segment

In recent years, FCL has entered the electrical appliances segment, with product offerings such as fans, switches, switch gears, LED (light emitting diode) lamps, water heaters, room heaters, conduit pipes and fittings, irons and smart home solutions (smart door locks & smart switches). However, revenue contribution of this segment was modest at Rs 225 crore in fiscal 2024 and ~Rs 128 crore in the first half of fiscal 2025. This segment is expected to break even at Rs 250-260 crore in fiscal 2025.

Liquidity: Strong

As on September 30, 2024, FCL had robust liquidity supported by cash and liquid investments of Rs 2,556 crore, majorly parked in liquid mutual funds, along with unutilised fund-based limits of Rs 200 crore. The company has nil long-term debt 2024. FCL’s utilisation of the fund-based limits was nil and of the non-fund-based limits was around 58% for the 12 months through September 2024. The company had net cash accrual of Rs 588 crore in fiscal 2024, which was sufficient to meet capex requirements.

Outlook: Stable

CRISIL Ratings believes FCL will maintain its stable business risk profile over the medium term, driven by its dominant position in the electrical cables segment. The company’s financial risk profile should remain healthy, too, supported by comfortable capital structure and sufficient cash accrual.

Rating Sensitivity Factors

Upward Factors

• Significant growth in revenue to over Rs 10,000 crore, led by strong market leadership in 2-3 business segments, along with a steady operating margin
• Sustenance of strong financial risk profile and cash surplus

 

Downward Factors

• Material impact on business because of the family dispute and any change in ownership
• Large, debt-funded acquisition or capex, weakening the capital structure
• Decline in revenue and continued pressure on operating margin (remaining below 10%)

About the Company

FCL was set up in 1956 as the flagship company of the Finolex group. The company is a leading electrical cable manufacturer in India. It has a large product portfolio of electrical, communication, and power distribution cables. The company is also present in the electrical switches, LED-based lighting products, fans, miniature circuit breakers and water heater segments, conduit pipes, irons. Its products are used in the residential, commercial, infrastructure and industrial sectors. Its manufacturing facilities are in Maharashtra, Goa and Uttarakhand.

 

In January 2008, FCL and JPS entered into a JV agreement to form Finolex J-Power Systems Ltd (FJPS), to manufacture high-voltage (up to 500 kilovolt) and cross-linked, polyethylene-insulated power cables, used in power distribution. FJPS also offers turnkey solutions in extra-high-voltage cable systems.

Any other information: Not Applicable

Annexure - List of Entities Consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Finolex J-Power Systems Ltd	Moderate	Joint venture
Corning Finolex Optic Fibre Ltd^	Moderate	Joint venture
Finolex Industries Ltd	Moderate	Associate company

^JV liquidated as on September 30, 2023