ACL CABLES PLC - review - march 2011
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Transcript of ACL CABLES PLC - review - march 2011
8/6/2019 ACL CABLES PLC - review - march 2011
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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
Domestic 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%.
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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.
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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
Domestic Cable Market
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.
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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
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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
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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.
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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
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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
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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.
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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%.
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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.
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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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