Cords Cable Industries Limited : Striking the Right Cords

(CMP - Rs. 50.70 / 03 Feb'16)

The recent sudden crash in Indian market has many stories attributed - china, oil, Fed Rate, currency wars, Political tension and all doom and gloom about the collapse, downfall, recession, stagnant growth and many such difficult sounding words, but in our opinion – it has done a wonderful job of separating the wheat from the chaff and throwing many attractive opportunities to enter into some really good bargains on offer by Mr. Market.

One such opportunity that we believe is “Cords Cable industries Limited” (BSE: 532941, NSE: CORDSCABLE, ISIN: INE792I01017). There are some very generic and ordinary factors which are all coinciding at the same time which is making it a very attractive investment at current prices.

Key highlights:

•        A 30 year old Industrial Cable company, established name in B2B, catering to a wide variety of industries and have many major marquee names as customers.
•        Attractive Sector - Industrial cable is a proxy to Infrastructure sector. There is a clear focus on developing infrastructure in the country and its hoped that the perfect timing for delivering big on is going to be in the coming budget.
•        The company is also into growth sectors like PV solar cables, Metro & highway, offering a lot of pent up demand and good order book.
•        Once among the Forbes list of Asia’s best 200 under a billion small companies’, the performance of the company went stagnant for past few years due to sluggishness in the whole sector. Now the company is at the right inflection point to take the advantage of huge pent up demand from renewed focus on Infrastructure & favorable fiscal situation of Indian Govt.
•        Current valuation offers a significant margin of safety and limited downside risk. The company offers a right balance between limited floating stock and liquidity in the trade.
•          A highly respected name in Indian equity investor fraternity - has acquired a large stake recently in the company on a preferential allotment basis (details given below).

Introduction:

Cords Cable Industries Ltd. manufactures and sales communication, control and instrumentation cables for domestic and industrial use. Its product includes Low Tension Control Cables, Low Tension Power Cables, Instrumentation, Signal and Data Cables, Thermocouple Extension/Compensating Cables, Panel Wires, House Hold Wires, Flexible Cables and Specialty Cables mainly for industrial use. These products cater to a wide spectrum of cable users in various industries like power, steel, cement, fertilizers and chemicals, refinery / petroleum, Water Desalination, Metro Rail, Airports, solar and many others. The Company's clients include BHEL, NTPC, Hindalco, ACC, HPCL, GAIL, TATA STEEL, Siemens, Honeywell, L&T, MRPL among others

·      The Company came out with an IPO (Priced at Rs. 135 per share) and got listed in Feb’ 2008 on BSE & NSE. The IPO was mainly to fund the Setting up of additional production facilities and to meet the long term working capital requirements of the Company.

·      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'.

·   In 2012, Cords Cable Industries Limited was ranked 513th by International Business Times in its list, published on January 16, 2012, of world's 1000 fasted-growing companies.

Industry and market outlook

Infrastructure is going to be the big theme in budget 2016 and beyond. In the entire globe, its only Indian government which has got reasonable surplus money to spend this time on public expenditure (Govt. saves around 6500 Crore for each $ drop in oil price, effectively a saving of 5 Lac crore in a year for Indian Govt.). Considering that private sector capex spending is sluggish, credit markets are bad, there is a huge political pressure to perform at the central govt. and the perfect timing of budget session, there is every reason to believe that big bang public expenditure projects should be announced and most of it going to be in core Infrastructure sectors like Power/Road infrastructure/Railway etc.

Majority of the direct Infra Company’s Balance Sheets are completely shattered with Debt, therefore the best way to gain from this change is to bet on a direct proxy to Infra. Cords cable fits the bill because they are an old company with long relations with PSUs, & Railways as customers and they are the direct suppliers to all major infra sectors- into cables for power transmission, airport, railway, refinery and Solar Power etc.

Promoter Profile -

Mr.Naveen Sawhney - Chairman & Managing Director, A Mechanical Engineer (AMIME) with a postgraduate diploma in Marketing Management, he has been associated with the Cable Industry for over 35 years, and has an enriching experience in Strategic Planning, Marketing and Quality Control.

Financial Snapshot

Although there has been a dip in the topline of the company in last few years, but still the company has been able to maintain stable EBIDTA margins of approx. 10% in the last 3 years. The dip is attributed to the fall in commodity prices as a whole which resulted into lower reported revenues but the volumes of production activity remained up.

For year ended/ ending March 31	2013	2014	2015
Figures in Rs. Millions	Audited	Audited	Audited
No of Months	12	12	12
Total operating income	3,854.4	2,629.9	2,650.3
EBIDTA	383.4	258.2	272.9
EBIDTA/TOI (%)	9.95%	9.82%	10.30%
Depreciation	84.0	49.9	54.1
PAT	60.8	20.4	27.0
NCA(Net cash accrual)	149.7	80.1	86.2

Currently company has been generating very minuscule profit margin, much of which is because of under-utilization of capacity, but the net cash accrual (NCA) from the business is at high levels (because of higher depreciation on the relatively newer capex made few years back). In other words, in last 3 years, the total cash generation from the business was in excess of 30 Cr and company is available at a market cap of less than 60 Cr.

The company has depreciated asset base of Over 100 Cr against current market cap of 60 crore ( which means company is available at a significant discount to its book value per share) and term debt of only 15 Cr (Long term and short term except working capital finance). The breakup of total debt of the company is tabulated below:

Net fixed assets	1,093.6	1,048.9	1,001.3
Long term debt (LTD)	230.1	156.7	91.6
Short term debt (STD)	116.6	73.4	64.9
WC bank finance	481.6	493.5	525.3
Total Debt (w/o Guarantee)	828.2	723.6	681.8

Despite of tough macro environment the company has been able to maintain stable receivable days of around 4 months. Which is at par with the industry standards. 

Debtors Turnover Ratio (days)

78.4

116.4

119.3

Recent Entry of Marquee investor Mukul Agarwal.

While we do not believe in blindly imitating the portfolio of successful investors, but we can't also turn a blind eye than to notice what successful people in this industry are doing. Mukul Agarwal of Param Capital is a well-known name in successful investor fraternity in the Indian equity markets with the knack of identifying winners much before anyone else does it. Few of his recent top investments include Intellect Design, Shaily Engineering, Gm Breweries, Dynamatics Technologies and many more value buys which have turned into multibaggers. 

Recently, he is buying around 15 lac shares in Cords Cables at a price of 43 Rs a share through preferential allotment resulting into a stake of 11% in post issued capital. Entry of a master investor like Mukul adds to the conviction about this company – from the valuation, corporate governance and future growth point of view. Especially in the current markets when the capital is scarce , for a master picker to invest a large sum into lock-in investment of 1 year, definitely augurs well for smaller investors.

More about Mukul Agarwal (Of Param Capital) and his Portfolio 
http://alphaideas.in/2015/05/04/portfolio-of-mukul-agarwal-of-param-capital/

http://articles.economictimes.indiatimes.com/2015-11-17/news/68356320_1_stock-market-investors-dalal-street

Key Risks with the company

Macro environment risk, Global economic risk.

Delay in execution of large infra projects, Bad debts from distressed customers.
Sharp increase in Base metal/commodity prices.

Low Capacity utilization leading to higher proportion of fixed costs.

Recent rating downgrade by CARE (From BBB to BBB-, still investment grade)

Technicals

Though technical analysis does not matter much for a low liquidity stock like this, still few weeks back the company recorded 52 week high of 70 odd rupees with high volumes. The company is trading above its 200 DMA (34.68), 150 DMA (38.44), 50 DMA (47.87) and 30 DMA (54.89), which is a great sign. Technical analysis should not be read much into for this stock as there is no large seller at these levels and even a small buyer can swing the prices. Last 3 months trading pattern and delivery status in cords has been very encouraging, out of only 40 lac odd available float, there was a delivery based trade for above 20 lac shares in NSE alone, a good portion of which we believe is ending into strong long term hands, giving stability to the stock.

Summary:

With the ready available capacities to absorb the huge pent up demand, the company is poised at a very favorable position of better utilization of capacities and improving its margins. Here are some insights on why this company is a relatively safer and a value buy.

•       Negligible long term debt.
•        NIL Pledged Shares.
•        Market cap only 60 odd Crore
•     Healthy promoters & long term investors holding (currently close to 60% which will further increase after preferential allotment to Mukul) 
•      40%  floating stock (Which we feel is getting cornered everyday)
•          Recent entry of a Master stock picker taking more than 10% stake.
•      Reasonable valuation – The book value of the company is above 100 per share, Even IPO was at 135. The recent preferential allotment to Non- Promoter investor is made at 43 per share for a lock-in period of 1 year.
•        High sales to Mcap ratio – 260 crore sales vs. 60 crore market cap.
•      Healthy order book- Read the management interview on Moneycontrol. They 100 crore order pending Another 100 crore expected to be in pipeline in Q4.
•       Margin improvement in next few quarters

Important Links

Management interview Link:

http://www.moneycontrol.com/news/business/fresh-orders-worth-rs-100-cr-expectedq4fy16-cords_4762421.html

http://www.moneycontrol.com/news/business/cords-cable-industries-plans-rs-85cr-expansion_434606.html

Company website - http://cordscable.com/cordscable/

EGM Notice link ( issuance of Pref. allotment) – 
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/BBFEBF71_C01D_4AE1_A09A_04E2D71BABE4_184416.pdf

Disclaimer: The above is not a research report but assimilation of information available on public domain and it should not be treated as a research report.

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Disclosure: It is safe to assume that we might have vested interest in stocks discussed here and hence the point of view can be biased. Readers should consult registered consultants before making any investments.

General Disclaimer

Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on individual analysis and up on sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. The stock price projections shown are not necessarily indicative of future price performance. The information herein, together with all estimates and forecasts, can change without notice.