Stock Pick From The Electricals Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a market leader in the electricals sector.

• The company operates in the power cables segment, which has huge opportunities.
• Its recent capacity addition is expected to add more revenues.
• The softening of copper and aluminum prices will result in improved margins.

We had recommended some power stocks in the last few issues, which have performed as per our expectations. After the recent changes on the regulatory front and the rate hikes put in place by almost all states, the sentiment in the sector has shown some easing. While this bodes well for the power sector, it also means good days ahead for the ancillary segment. This is precisely why we are recommending Torrent Cables (TCL) to our readers.

TCL is a flagship of the Ahmedabad-based Torrent Group, which is into the manufacturing and sales of power cables. A primary reason for recommending this stock is that the company is sure to see higher growth in the future due to the growth in the transmission and distribution sector. Besides this, the recent capacity addition it has undertaken will also help in adding more revenues.

TCL is a market leader in the High Tension (HT) power cables segment. It manufactures two different types of cables, viz. Cross Linked Polyethylene Insulated (XLPE) and Polyvinyl Chloride (PVC) cables. In the XLPE segment, it has two more categories – High Tension (HT) and Low Tension (LT) cables. As per the company’s FY12 annual report, HT cables contributed to around 71 per cent of its total revenues while 21 per cent came in from LT cables. The remaining eight per cent came in from PVC cables.

Over the years, the contribution of XLPE to its revenues has been rising, while that of PVC is declining. XLPE cables are superior to PVC cables in terms of performance and resistance to environmental changes, and hence, the demand for the former has been on the higher side. They also enjoy premium pricing and margins as compared to PVC cables. The installation of XLPE cables is easier than that of PVC cables, and this is also one of the demand driving factors.

TCL currently has one cable manufacturing plant located at Nadiad in Gujarat, which can manufacture all three types of cables. It has a current annual capacity of 9900 core km for HT cables, 4800 core km for LT cables and 15000 core km for PVC cables. It improved its HT capacity by 72 per cent in FY11, as demand was good in that segment and is expected to remain so.

The principal raw materials used by the company include aluminum, copper, XLPE and PVC compounds and armouring wires. Of late, the higher prices of aluminium and copper had put some pressure on its margins. However, the prices of both these metals have shown some respite after August 2012 due to slower global demand, and hence, we expect stable margins at least for another two quarters.

Besides the power sector, TCL also caters to various other industries such as petrochemicals, cement, steel, aluminum, etc., which gives its customer profile a diversified look. Its extensive list of customers (State Electricity Boards, the Central Railway, companies like RIL, Tata Power, L&T, etc.) indicates that its products are well accepted in the industry.

On the financial front, its revenues have seen a CAGR of 39 per cent over the past two years and its net profit went up by an impressive 36 per cent over the same period. For the quarter ended September 2012, the company reported a 50 per cent rise in its revenues to Rs 100 crore and a 27 per cent jump in its net profit to Rs 2.75 crore. Its operating margins remained under pressure, but we expect an improvement on this front.

On the valuations front, the stock is currently trading at a TTM PE of 4x. In our opinion, the scrip is quite undervalued and should command a PE of at least 5x, resulting in a price target of Rs 110. We advise an entry in this counter, as it has the potential of providing at least a 20 per cent return in the next one year.