In conversation with Mahesh Viswanathan, CFO of Finolex Cables
In this exclusive interview, Mahesh Viswanathan, CFO, Finolex Cables, elaborates on the factors that drive price and volume growth in the electrical and communication cables sector while also providing an overview of the company’s expansion plans, product strategies and challenges faced by the industry
Could you walk us through your professional background and what led you to Finolex Cables?
This is the fourth company I have worked with. My career commenced in 1983 at Union Carbide, where I spent about 12 years. My initial role was in the audit department, from which I transitioned to sales, and eventually to finance, accounting and control. After Union Carbide, which had diversified interests ranging from agricultural chemicals to plastics, I moved to an aluminium company. Although it wasn’t a primary producer, it specialised in secondary products. My tenure there lasted just under two years, during which I established their treasury function.
Subsequently, my career path led me to Philips Limited, where I assumed the role of CFO for their healthcare business in India. Later, I moved to Singapore as the CFO (Healthcare) for Southeast Asia. My time at Philips was marked by significant corporate activities, including the integration of numerous healthcare companies we acquired globally. That period of my career was characterised by extensive travel and oversight across diverse geographies, all over the Asia Pacific region.
A pivotal moment came when there was an opportunity to return to India in 2007. The transition from Philips to Finolex Cables was influenced by my desire to work in India. My decision to join Finolex Cables in late 2008 marked the beginning of a new chapter in my career. This move was not just a professional decision but also a personal one as it provided an opportunity to connect with our Indian roots. The journey has been enriching, filled with diverse experiences across different sectors and geographies, culminating in my current role at Finolex Cables, where I have been for the past 16 years.
What drives price and volume growth in the electrical and communication cables sector at Finolex Cables?
Price growth in the electrical cables sector is closely tied to the fluctuations in the London Metal Exchange (LME) prices, which significantly influence the cost composition due to the substantial use of metals in cables. Our approach is to treat raw material costs as pass-through expenses. This transfer tends to be slower on the rise due to market resistance and somewhat faster on the decline. The primary drivers of price growth are either metal or oil prices, reflecting the cost components of metal and polymer in wires.
The impact of oil price changes on PVC costs, and subsequently on our prices, highlights the importance of efficiently managing this transition. We maintain vigilant stock monitoring, avoiding speculative long-term investments in metal or PVC, recognising our limited global influence on these prices. Our purchasing strategy is based on monthly consumption averages rather than spot prices, except in cases where customer agreements are based on spot pricing. This method allows us to adjust our selling prices based on the actual costs incurred during our production cycle, which spans from converting cathode to rod to wires and eventually distributing them across the country.
In terms of volume, our business is infrastructure-oriented, with our focus areas being construction (60-65 per cent), automobiles (12 per cent), industrials (12 per cent) and agriculture (12-15 per cent). Growth in these sectors, particularly evident in the current construction boom, is expected to translate into increased volumes for us with a slight delay. Cement and steel are early indicators of this growth, suggesting a positive outlook for our sales in subsequent quarters. Agricultural demand is influenced by monsoonal patterns, with both abundance and scarcity impacting sales.
Conversely, a complete lack of monsoon can deter sales due to the prohibitive costs of water extraction for farmers. Our engagement with the automotive sector, while indirect, serves as a key indicator of economic health. We supply to harness manufacturers who then sell to automakers. Although the automobile manufacturers do not purchase directly from us, our products require their approval as part of the vehicle design process. This relationship has contributed positively to our performance over the past year.
What are the company’s strategies to sustain volume growth and do you have any capacity expansion plans?
Our company’s strategy to sustain volume growth and explore capacity expansion or product launches is multifaceted, reflecting the diverse nature of the sectors we serve. Growth prospects are closely aligned with the infrastructure sector’s evolution, particularly focusing on construction and the automotive industry. Over the next decade or so, these sectors are expected to expand significantly due to demographic shifts and governmental initiatives aimed at boosting manufacturing and improving supply chains within India. This, in turn, supports growth in industrial applications and power cables, which are integral to our product range.
We are acutely aware of the ongoing demand for housing, especially in the affordable segment, which presents a substantial market opportunity. Our belief in the enduring need for residential spaces, coupled with the anticipated increase in housing demand, underpins our optimistic outlook for the sector’s growth, despite potential market fluctuations. In terms of distribution and market coverage, we have made strategic adjustments in the past two years, transitioning from reliance on a limited network of large wholesalers to establishing a broader distribution footprint.
This shift has involved the appointment of around 720-730 distributors nationwide, enhancing our geographical reach and ensuring no district is overlooked. This expansion was accompanied by efforts to ensure each distributor has access to a substantial retailer base, aiming for a minimum of 300 retailers per distributor to facilitate profitability and market penetration. Our marketing strategy has evolved to support this expanded distribution network, with increased investment in advertising and promotional activities to boost brand visibility and retailer engagement. Currently, our marketing expenditure is about 1.5 per cent of the turnover, double what it was previously, and we are open to further increases as we see positive results from these investments.
Looking ahead, while our distributor network covers a significant portion of the market, there is room for further expansion. Our approach includes not just filling geographical gaps but also enhancing coverage within the existing territories. This strategy is supported by comprehensive market mapping and the use of IT platforms to gather detailed sales data, enabling us to understand market dynamics better and optimise our supply chain. Our strategies for sustaining growth involve a combination of sector-focused expansion, strategic distribution enhancements, and leveraging technology to improve efficiency and market responsiveness.
Are predictive analytics employed to forecast seasonality in product sales?
We have incorporated a proprietary algorithm developed by the consultancy firm to manage seasonality in our product sales. This algorithm has been instrumental in determining optimal stock levels at our depots, enabling us to reduce our inventory days significantly over the past six months. The system is designed to adjust itself over time, learning from sales peaks, troughs, and events like price hikes, thereby improving its predictive accuracy. Although it incorporates elements of artificial intelligence as part of its proprietary solution, the core of it is a time-series forecasting model.
With the recent tensions around the Red Sea, do you foresee any impact on your input costs, particularly given your reliance on certain imports?
The geopolitical tensions around the Red Sea have raised concerns, but I view them as temporary challenges rather than long-term threats. The situation seemed more pronounced towards the end of December and through most of January. However, February has been relatively calm, thanks to interventions by the global powers, including India, the US and the UK, which have helped mitigate the situation. In an extreme scenario where shipping is affected for an extended period, there might be a need for strategic stockpiling to ensure continuity. However, I view such a situation as highly unlikely in the immediate future, given the current global response to the tensions.
Could you provide any insights into your company’s future earnings projections?
Our company does not provide specific earnings guidance. However, we have aspirations to achieve a turnover of approximately Rs 11,000 crore over the next five years, as previously mentioned by our management. This goal aligns with our strategic focus on expanding our presence beyond cable products. We've introduced several new products recently, though there’s room for improvement in market penetration and performance. To address this, we have appointed a dedicated individual responsible for overseeing these product lines, aiming for better focus and results.
What is your perspective on maintaining margins, especially considering your target for future earnings?
Maintaining a margin of around 14 per cent in the electrical cables segment is realistic and achievable, based on our historical performance. However, margins in the communication cables segment are more volatile and influenced by external factors, such as government procurement schedules and market demand. While we aim for a blended margin of 14 per cent, it’s important to acknowledge that outcomes in the communication cables sector can significantly affect our overall margin performance due to its dependence on factors beyond our direct control.
What are the primary factors driving growth for your company, considering the various capital expenditures and projects you are undertaking?
The key growth drivers for our company in the near term include several strategic initiatives and capital investments. Primarily, securing a significant role in the BharatNet tender is critical, as it represents a substantial opportunity in the optic fibre segment. The completion of our projects related to optic fibre pre-form manufacturing and the electron beam (E-beam) facility for cable irradiation are also vital components of our growth strategy. Additionally, we are expanding our capabilities in the automotive cable sector and enhancing our production of insulation compounds, which are essential for wire insulation.
We have recently increased our cabling capacity in Goa, necessitating the establishment of a new PVC compound plant in the region to support this expansion efficiently. This plant will eliminate the need for compound transportation from other locations and cater specifically to the requirements of our E-beam-treated products, which demand specialised compounds. The total capital expenditure for these growth initiatives is estimated at Rs 500 crore, primarily allocated over the next two to three years, with the bulk of spending planned for FY 2024-25 and some extending into FY 2025-26. These investments are designed to bolster our manufacturing capabilities, enhance product quality and expand our market reach, thereby driving future growth.