ACL CABLES PLC - review - march 2011

8/6/2019 ACL CABLES PLC - review - march 2011

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All of the company’s subsidiaries are engaged in businesses either directly or indire

related to the cable industry.

While ACL concentrates more on domestic cables, its subsidiary Kelani Cab

concentrates on industrial cables.

Cable Industry The Cable industry comprises of two segments;

Domestic Cable Market

Industrial or Heavy Cable Market


Industrial/Heavy Cable Market

ACL Kelani Magnet Wire Manufacturing & Export of enamelled winding wires

Ceylon Bulbs & Electricals TradingLanka Olex Cables Investing

ACL Plastics Manufacturing Cable grade PVC compounds

ACL Polymers Manufacturing PVC compound

ACL Metal & Alloy Manufacturing & selling Alluminium Rods, Alloys

Alluminium & Other Metals

Kelani Cables Manufacturing & selling of Power Cab

Telecommunication Cables & Enamelled winding wi

Addresses housing wire requirements on the main.

Competition is intense with many players operating

in the market.

Copper is the main input requirement.

Addresses requirements of;

o Institutional Projects

(Including factories, other building facilities etc.)

o Power transmission segment

Three key players, with strong competition against

one another, dominate the market.

Alluminium conductors are the key inputs for low

volta e ower transmissions.

eylon Bulbs & Electricals,which is now into trading

ables & related items, was

nce an electric light bulb

manufacturer.

elani Cables is still theecond largest cable

manufacturer.

he Market for Cables grow

%-10% annually

CL has maintained a steady

nnual growth of 8% from

000 onwards, with the

xception of 2001 where

rowth was below 8%.



The total cable Market is valued to be between Rs. 5 Billion to 6 Billion.

Out of this, the power cable market is estimated to be around Rs. 2 Billion per annu

whilst the overall demand from the housing wire market amounts to Rs. 2.5 Billion

annum.

Market Share

Five major players dominate the Cable industry in Sri Lanka;

ACL Cables

Kelani Cables

Sierra Cables

Ruhunu Cables

KM Cables

36%

45%

18%Power Cable Market

Housing Wire Market

Other

45%

30%

20%5%

ACL

Kelan

Sierra

Other

ACL on its own has a 45% market share which goes up to 70% where the gro

(Including Kelani Cables) is concerned.

The 45% total market share can be further segregated according to different

market segments as follows;

80% of the domestic cables market

60% of the industrial cable market

The industry cable segment is considered to be the more profitable one for ACL ,

given the fact that this segment has made the most noteworthy contribution

towards the company’s rapid growth over the last five years.

The reason being contracts for projects under this segment are longer term and

provide for larger sales volume.

The company also enjoys an 80% share of all duty-free projects (BOI Projects).

ACL is the overall market

eader

eavy/Industrial Cable market

elds higher margins than the

omestic Cable market.

erial Bundle Conductors (ABC)

one of ACL’s key products,

anufactured for the Heavy

able Market.



Macro Factors affecting the Cable Industry

Copper, Alluminium & PVC Prices

The cable industry is extremely vulnerable to sudden dips in Copper prices, as copper

key input.

Copper Prices can affect the company’s cost of sales & GP margins in the form of;

Increasing Copper Prices

Decreasing Copper Prices

Decreasing Copper Prices

Sudden dips in Copper Prices can hurt profitability in two ways;

1. High Cost of sales


High cost of sales result from substantial leftover stocks purchased during time

high prices.

I.e. Cost of sales does not come down immediately following the decrease

Copper prices. This creates a lag effect.

Industrial Cable Market

In the case of institutional markets, the cable company faces significant los

where contracts were tied to London Metal Exchange (LME) prices wh

prevailed at time of contract.

Therefore contractual obligations leave the company with no option other than

use higher priced stock.

2. Low Selling Prices

Lower selling prices, stem from price reductions & discounts provided

customers in order to maintain sales volumes.

We believe this is because the consumer chain from wholesaler and dealer to

end-user cut back their purchases knowing that along with the price fal

commodities, the cable prices must come down.

e second half of FY 2009 saw

drastic drop in Copper & PVC

ices. on after, Copper prices rose

a significant rate.

ovements in Copper prices are

flected in the company’s cost

sales after some time, due to

ag effect.



Increasing Copper Prices

Abrupt increments in Copper prices have the following impacts;

1. Low Cost of Sales

Low Cost of sales, result from substantial leftover stocks purchased during tim

of low prices.

2. High Selling Prices

Increase in selling prices resulting from the company passing down c

increments to buyers. Given that Cables have an inelastic demand; this is

expected to contract sales volume too much.

Construction, Power & Telecommunication Sector Performance

The cable industry shares a positive relationship with the construction sector, wh

invariably results in the cable market benefiting from prosperous times for

construction sector & vice versa.

.

This is evident from the above graph, which shows a positive relationship betwe

Construction sector growth & GP Margin of ACL cables.

Therefore the construction sector is one of the key drivers of the Cable indus

performance.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2007 2008 2009 2010

GP Margin

Construction Sector Growth GP Margin

During FY 08/09, the construction sector slowdown & the reduction

government construction due to war efforts, affected the Cable industry.

This was apparent in the company’s performance where GP Margin had co

down during the period under review, as reflected in the graph above.

onstruction sector is expected

grow at an increasing pace in

ture.

ble industry performance is

sitively correlated with the

nstruction sector performance



Projected increase in future profitability, driven by construction sector boom

The Construction sector in Sri Lanka has been growing at a CAGR of 7.88% for the p

five years, with each individual year recording growth as follows.

Sector growth fell further to 5.6% during 2009 in spite of post war developm

opportunities.

Yet, the construction industry picked up from its fall in 2009, to achieve a 9.3% grow

rate during 2010. This is evident from the graph below;

Cement consumption movements can be interpreted as an indicator of construct

activity taking place in the country.

As the graph shows, with the exception of June, cement consumption is seen to

greater in 2010 when compared to 2009, which is an indication of relatively hig

growth in the construction sector during 2010.

9.2%

9.0%

7.8%5.6%

9.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2006 2007 2008 2009 2010

Construction Sector Growth

Source: CBSL Annual Report, 2009

0

100

200

300

400

500

Jan Feb Mar May Jun Jul Aug Sep Oct

MT 000' Cement Consumption2010 2009

nstruction sector is expected

grow at an increasing pace in

ture.

Source: CBSL Annual Report, 2009



With the projected economic revival, it is envisaged that the surge in construction sec

will sustain or improve in the future. This will result in growth for all construction rela

industries such as; Cable manufacturing, Cement manufacturing, and Tile manufactur

etc.

Therefore in the backdrop of post war construction boom, ACL Cables is well poised

future profitability growth.

Excess capacity built up by the company, which is sufficient to supply three to four tim

current local market demand, will further enhance ACL’s capabilities to deal w

increasing demand in future.

Strengths of the Company

Resilience against volatile Copper prices

Copper is one of the key inputs used in domestic cable manufacturing. Raw mater

account for 60% of the ACL’s total production costs.

Hence, the company’s production costs are sensitive to copper price movements wh

have been as follows for the past few years;

During the last quarter (October-December 2010), copper prices increased rapidly. T

led to a rise in the company’s GP Margin, due to the cost of sales & selling price reacti

explained above.

Source: London Metal Exchange

CL import Copper from

ustralia, India, Korea & Russia

prices traded at the LME

G & Daewoo of Korea are the

ompany’s key suppliers

uring the last couple of weeks,

pper prices followed a

eclining trend, to reach the

ecember price levels.



The fact that GP Margins rise in direction with increasing copper prices is a recur

event, as the shaded areas of the graphs show. This impact is caused by the Lag effect

Lag Effect

The Lag effect is created by substantial leftover stocks, which leads to high cost of sa

when copper prices fall abruptly & vice versa.

As a result, cost of sales at times is seen to move in the opposite direction of cop

prices.

As seen from the circled areas in the chart above, cost of sales has come down wh

copper prices have gone up unexpectedly, deviating from a declining trend.

0.0

50.

100

150

200

250

300

350

400

450

0%

5%

10%

15%

20%

25%

30%

USD/lbGP Margin (Ex Hedge) Copper Prices



Also, when copper prices unexpectedly fall, the reduction in cost of sales takes place a

lesser rate than copper prices.

Hence, it could be said that the lag effect leaves the company at an advantage dur

times of rising Copper prices.

Therefore there’s a positive relationship between GP Margins & Copper Prices,

depicted in the graph below.

Therefore during Jan-March 08, Jan-March 09 & Oct-Dec 10 ACL managed to sh

resilience against rising copper prices by increasing its GP Margins, because of the

effect.

The company will be able to sustain margins into the future if copper prices continue

go up, because of an inventory large enough to supply one to two quarters.

Performance of the recent Quarter

-40%

-20%

0%

20%

40%

60%

80%

100%

2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11

Growt h in Copper Prices Growt h in GP Margin

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000LKR 000'

Inventory Inventory Growth

Source: ACL Cables Annual Report 09/10



Performance of the recent Quarter

Oct- Dec 10 QOQ

Growth

YOY

Growth

Revenue 2,366,868 2% 20%

COGS (1,962,051) -3% 17%

Gross Profit 404,817 33% 35%

Other Income 4,828 -91% -2%

Distribution Expenses (101,191) 16% -15%

Administrative Expenses (64,810) -1% 13%

Other Operating Expenses (8,440) -13% -8%

Operating Profit 235,204 18% 98%

Finance (Cost)/Income (25,331) -68% -50%

Profit Before Taxation 209,873 74% 210%

Income Tax Expenses (77,154) 130% 165%

Profit for the Year 132,719 53% 245%

The results reported for the quarter ending 31st December 2010 has been positive

the company with a 33% & 35% increase in GP Margin QoQ & YoY respectively

The quarterly increment in GP margin can be mainly attributed towards the 2% incre

in top line & the 3% reduction in cost of sales, QoQ.

Despite a 91% contraction on other incomes during the period under review, operat

margin has risen by 18% this quarter whilst margins improved by 98% on a YoY basis.

Although income tax expenses were seen to have risen this quarter (130% QoQ & 16

YoY), the company’s bottom line has increased significantly to 53% QoQ & 245% YoY.

Decline in interest expenses was the key driver behind bottom line improvements.

Thus, strong performance recorded by the company during the most recent quarter

further indication of the company’s future potential.



Backward Integration

Backward Integration has enabled the company to retain control over their raw mate

supplies & benefit from cost advantages.

PVC compounding plant

In 1993 it set up its own PVC compounding plant which helped the Company impr

the quality of regular imported compounds & to help develop new products such

fire-rated compounds, and water-resistant compounds etc.

Rod Plant to obtain Alluminium Rods

In 2007 ACL commenced operations of its own rod plant in order to obtain various

grades of aluminum rods that were fine-tuned to suit the needs of the local market

Rod Plant to obtain Copper Rods

During the latter half of 2008, ACL announced its plans to set up a copper rod

manufacturing plant for internal requirements & to export.

Customer Base

ACL operates in the local market, as well the global market where the company expo

some of its products.

Local Customers

Local Customers of ACL comprise of domestic cable buyers & industrial cable buyer

Key Industrial Customers of ACL include;

State power utility

Ceylon Electricity Board (CEB)

CEB has been an industrial customer of ACL since 1981, where the company suppl

1400 MT’s AAC-fly conductors.

Export Market

ACL’s exports on the main comprise of magnet wire products. As at present, Exprevenue contributes to 30% - 33% of total company revenue.

South Asia led by India accounts to around 50% of ACL’s exports.

Other major export markets include Maldives (25%) United Arab Emirates (13%

Australia (7%)

aw Material 60%nsulation Material 15%

ther 25%

otal Production Cost 100%

ACL’s Cost Structure

With Raw material, accounting

or 60% of total productionackward integration is bound

o help the company decrease

s cost.

he insulated cables provided by

he company, have supposedly

educed power loss at Lanka

ectricity company (LECO) to

2% from 22%.



Risks Faced by the Company

Unpredictability of Copper Prices

Although the company has faced unpredictability with resilience, commodity mar

uncertainty is still a major risk for the company because the exact movement

prices cannot be fully predicted at any point in time.

Thus, abrupt movements can bring about losses for the company as during FY 20

where the company was hit with significant hedge losses for several quarters.

Dependence on State Utility

The state utility is a key industrial customer of ACL Cables as well as other ma

cable manufacturers such as Sierra. Dependence on this customer may lead to g

swan risk.

Although this trend has eased over the last five years, CEB & LECO still continue

be ACL’s largest customer, with their tendering contracts coming to almost 20%

revenue

Losing retail market share (Domestic Cable Market) to cheap low

quality products

The company has a strong dealer network of around 4000 to service the re

segments but has been losing market share in this segment to cheaper low quaproduct, which has been a matter of concern to the company.

High taxes imposed on Raw material imports whilst semi-finished &

finished products are permitted to be brought in duty free

Almost 90% of the necessary input materials are imported in raw form. T

compounds are unavailable locally, so the resins are imported.

Generally, CEB and SLT import raw materials directly (as they enjoy d

advantages) and contracts the cable manufacturing to private companies.

However, this practise has eased to be so, particularly where the CEB is concern

Therefore, cable manufacturers have to import raw material requirements at th

own expense.

When local producers import key inputs, they are at a disadvantage because of

heavy duties and taxes payable on material imported.



Conclusion

The medium term, cost increments can be passed down to customers

without affecting demand too much

Increase/Decrease in cost of sales caused by the lag effect is more of a short

term trigger. Thus, in the long run customers demonstrate an inelastic demand

for cable products. This is due to two reasons;

Lack of close substitutes for cables products.

Although Cables constitute to a small part of total construction cost, it is

an indispensable ingredient in the construction of a building/house.

Given the inelastic demand for cables in the long run & the fact that all

competitors in the cable industry use the same raw material, makes it possible

to pass down cost increments to the final customer without upsetting demand

too much, in the medium term.

Therefore in the medium term, all cost increments can be passed down to the

customer, with little impact on consumer demand.

GP Margin of the company will rise in the long term

As mentioned above, construction sector is poised for growth, in future. This

envisaged construction sector boom will drive ACL’s GP Margins upward, via

increase in sales volume.

Therefore in the long run, average GP margin will not get hit by raw material pric

even if raw material fluctuations occur and create short term impacts.

As shown in the graph below, current GP margin is relatively low compared to six

years ago from now, indicating room for structural improvement.

0%

5%

10%

15%

20%

25%

30%

2004 2005 2006 2007 2008 2009 2010

GP Margin


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ACL CABLES PLC - review - march 2011