CMI Ltd is on high growth path
CMI Ltd is one of the most diversified cable manufacturers with presence in all sub-segments of Indian cable industry. Company is present in the entire value chain of the wire and cable industry, starting from design, development and manufacturing to marketing and distribution of cables. The company started its operations on 1967 as a Telecom cable supplier and gradually enriched its product offering to Quad and Signaling cables for Railways, Specialty cables for Metro, ISRO etc, C&I Cables for Refineries, Jelly Filled cables for Indian Railways, Fire survival cables for various industries. With Industry drivers such as growing investment in Railways, Metros, Oil & Gas and Telecom, the Indian Cable demand is expected to grow at a CAGR of 15% over the next 4-5 years to reach Rs 685.6bn. We believe CMI is well placed to capitalize on these growth opportunities in the coming years.
Diversified business model in terms of product mix and clients:
CMI has highly diversified business model, both in terms of client concentration as well as the sectors it services. Company is the approved vendor for supplying of signaling cables to Railways and other government agencies. Indian Railways remains the largest client and it accounts for 40-50% of revenues, while no other client accounts for over 20-25% of revenues. Further, it caters to a diverse set of industries ranging from Metros, Capital Goods to Refineries as well as end user companies like ISRO and Telecom companies. CMI is the sole supplier for ISRO for specific cables used in Multi object tracking system.
Huge growth opportunity for the company’s products:
The size of opportunity is huge for Specialty and C&I cables in Hydrocarbon, Freight corridor, Metros, Railways, power T&D, Smart cities and Telecom sectors. Company remains one of the very few players, present across the all segments of cables, spanning from signaling cable, quad cable, Telecom cable and C&I cables to high margin specialty cables. With Industry drivers such as growing investment in Railways, Metros, Oil & Gas and Telecom, the Indian Cable demand is expected to grow at a CAGR of 15% over the next 4-5 years to reach Rs 685.6bn. With the adequate capacity and technical know-how, CMI is well placed to capitalize on the domestic cables demand.
Acquisition and Capacity Ramp-up of Baddi Plant to aid strong revenue growth:
GCE (General Cables Energy), a wholly owned subsidiary of GCC (General Cables Corporation) invested Rs 3bn to establish a world class highly automated Power Cable manufacturing facility at Baddi. However, the parent company decided to exit from Asia Pacific and closed 17 Cable manufacturing facilities across the region. The Baddi facility was bought by CMI Ltd by the end of FY16 at a cash consideration of Rs 960mn, while the balance Rs 540mn through debt (total consideration of Rs 1.5bn). The plant has a capacity to generate Power Cables worth Rs 10bn and Household Cables worth Rs 2.4bn.
CMI acquired GCE’s Baddi plant in FY16 and restarted the plant by the end of Q1FY17 and achieved a capacity utilization of 22.5% at the end of FY17. The company expects to achieve a capacity utilization of 60% in Q4FY18. The facility achieved a gross turnover of Rs 900mn in FY17 and the management expects to achieve turnover of Rs 2.5bn and Rs 6bn in FY18E and FY19E respectively.
Baddi plant is meant for producing Power Cables upto 132KV, which is usually a low margin business. CMI is investing Rs 200mn to enable the plant to produce varieties of Specialty Cables as produced at its Faridabad plant. This will enable the Baddi plant to supply Signaling and Quad Axle Counter Cables to the Indian Railways and C&I Cables to various companies in different sectors. This coupled with 20-30% more efficiency due to its ability to produce more complex Cables, will lead to significant expansion in the profitability of the Baddi plant. The management expects the plant to operate at 12.5% EBITDA margin in Q4FY18, compared to the current 11%. Further, the plant will witness further rise in the EBITDA margin to 14-14.5%, once it reaches capacity utilizations of 60-65%. This will lead to significant jump in the net profit of the company in the coming years.
Outlook and valuations:
Faridabad plant is operating at almost near maximum achievable capacity utilization, while the Baddi plant will ramp up its revenues from Rs 900mn in FY17 to Rs 6bn by FY19E. Consequently, we expect CMI’s revenues to grow more than 40% CAGR over the next three years. With increased contribution from specialty cables we expect margins to improve and expect earnings to grow at 35% CAGR over the next three years. At the CMP of Rs.326, company is trading at 9x FY18E earnings.
CMI has superior growth and margin profile, while return ratios a tad lower than its peer, KEI Industries. Further, the company has a much diversified product portfolio, compared to that of most of its peers. However, the company trades at a significant discount compared to its peers. We feel that its superior performance metrics are not yet factored into its valuations, and hence present a strong case of rerating.