Sunday 20 January 2008

Cords Cable Industries - IPO Analysis

Investors with a lowrisk appetite and a moderate return expectation can consider an exposure in the initial public offering of Cords Cable Industries (CCIL).

In the business of manufacturing cables, CCIL offers a proxy exposure to the ongoing infrastructure and power growth story. Robust growth in sales and bottomline, diverse revenue mix, established clientele and the proposed entry into HT (high tension) power, rubber and speciality cables segment, suggest good prospects for the company.

In the price band of Rs 125-135, the stock would be valued at about 12-13 times its likely FY-08 per share earnings on a diluted equity base.

While the valuation is not a steep discount to established players such as KEI Industries, they appear attractive, considering the strong demand environment and the move by CCIL into higher value-added product segment. We would be more comfortable if the offer is priced at the lower end of the price band.

Investment rationale
The demand for cables is set to increase significantly, given the ongoing capex in power and infrastructure and strong growth in industries such as metro rail, shipping and aviation.

In the light of the robust demand undercurrents, CCIL’s capacity expansion in low tension (LT) power cables segment and the proposed addition of HT power, rubber and speciality cables to its product portfolio appear promising. CCIL’s established track record of over 15 years with approvals and pre-qualifications from companies such as NTPC, BHEL, Power Grid and Reliance Energy also lend confidence to its ability to further penetrate the cables’ market.

CCIL’s order-book pegged at about Rs 77 crore (as on November 30, 2007) lends visibility to revenues. Revenues could also get a lift from the management’s renewed focus on the export market.

While the company has so far not enjoyed any significant exposure to the export market (1 per cent in FY-07), it plans to export to over 15 countries by FY-09, broadbasing from the current spread of over five countries.

In this context, CCIL has already tied up with companies in West Asia such as Petroleum Development Oman and Saudi Electric Supply Company.

CCIL witnessed a compounded earnings growth of over 328 per cent supported by a 67 per cent growth in revenues during the last four years. During the period, operating profits enjoyed a CAGR of about 127 per cent; operating profit margins expanded by 8.9 percentage points to about 14.7 per cent.

Going forward, margins may witness a further expansion given CCIL’s foray into higher value-added products. Besides, post-expansion, CCIL may also benefit from better utilisation of its capacities.

Business
CCIL has a diversified clientele and product portfolio. Its current order-book, with the major portion leaning towards power sector (about 48 per cent), is spread across sectors such as cement, refineries and petrochemicals and steel.

The company may be able to further extend its reach to sectors such as railways, shipping and wind power after the proposed expansion of its capacity and the addition of new products. On the product front, it offers an extensive range of high quality control and instrumentation cables, power cables and special cables for oil wells. The company plans to utilise proceeds from the issue towards setting up of production facilities. About Rs 6 crore from the proceeds will be diverted towards working capital requirements.

Concerns
While CCIL does hedge its price risk on copper to an extent, any steep increase in price of copper and aluminium (about 50-70 per cent of the raw material cost) may adversely affect its earnings.

Offer details
The offer is open from January 21-24. Collins Stewart Inga is the book running lead manager to the issue.