Finolex Cables stock can be a multi-bagger as the worst is over
After the scaling down of debt and likely improvement in valuations, the firm is expected to be a multi-bagger.
It also has the ability to generate free cash flow of over Rs 100 crore annually. To leverage its brand, Finolex Cables has entered the high-margin consumer product segment (CFL lamps, low-voltage switch gears) and is expected to improve its revenues and margin in the coming years. It has already beefed up its retail distribution network for this purpose.
Therefore, the EBITDA margin is expected to move up from 7% in 2011-12 to 11% in 2014-15. The brown field expansion at Roorkee (the capacity has now been doubled and the new capacity is expected to be operational in 2014-15) will help the company to expand in the north and eastern parts of India. In addition to the expected economic recovery, the incremental capacity usage from the Roorkee plant should help Finolex Cables report double-digit growth in the electrical cable business — its main source of revenue — in the coming years.
Exposure to the derivatives market and the need to book forex-related losses made its past net profits highly volatile. The company was forced to report a cumulative loss of Rs 300 crore between 2008-9 and 2012-13.
With the closure of derivative exposure positions and scaling down of debt (debtto-equity ratio has come down to 0.2 times in 2012-13), a major overhang is out of the way for the counter. That explains the sudden surge in the counter (see relative performance chart for more details).
With the worst already behind it, the market will start focussing on the company increasing its revenue and earnings growth, and improving margins. This would mean that the valuation multiples should improve further in the coming years for this counter.
We pick the stock that has shown the maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in rating indicates that the analysts are becoming more bullish on the stock.
To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks which have been covered by at least 10 analysts.