Sierra Cables [SIRA : LKR3.70], together with its subsidiaries, is engaged in the manufacturing and sale of power and communication cables and various aluminum conductors for the domestic as well as international market (such as India, Australia, Dubai, Tanzania and Maldives). It is the parent company of the well reputed brand of ‘Alucop Cables’. SIRA holds around 20% share in the Sri Lankan electric cable market.
SIRA’s product range comprises of domestic cables as well as heavy cables. It is the heavy cable range which carries greater margins for SIRA with the main consumer being the Ceylon Electricity Board (CEB). CEB makes up around 40% of SIRA’s top line which varies according to the number of tenders awarded to them. Also, these heavy cables have little but strong competition with just 3 players in the market whilst competition for small domestic cables is more intense.
Of SIRA’s total cost structure, approximately 90% of the total cost encompasses the raw materials, copper and aluminium whilst PVC takes up around 2%-3%. Copper and aluminium is imported from India on a weekly basis and traded at London Metal Exchange (LME) spot prices whilst PVC is purchased from Singapore and Malaysia. The graph below shows the price movements of these materials over a year:
Sales dipped 31.5% YoY in FY2010, as a result of the management’s hesitation to deliver stocks on credit to customers whose purchasing power was crippled during the financial turmoil in 2009.
Also, SIRA has terminated its manufacture of enameled winding wires as the product did not perform to their expectations. Though the top line was eroded, the company has recorded a favorable move in gross profit margins from 15.2% to 21.2%, thus restoring SIRA’s financial stability in FY2010. This was a result of the management procurement policy in purchasing raw materials on a WoW basis and thus is prone to minute price fluctuations than other risky attempts.
The investment in energy efficient machinery last year also contributed to the company’s production efficiency strategies shrinking energy cost from LKR2.4 per kg to LKR1.65 per kg this year.
The overall administration costs fell by 15.1% YoY leading to an operating profit of LKR115.6 mn with a 3% YoY increment elevating the Operating profit margins by 3.7% YoY to 11.1%. Other income owed vastly to support SIRA record a healthy bottom line despite the dip in the top line.
Other income recorded a 34.8% YoY increase on the back of a gain of LKR34.6 mn made on the disposal of the 20.3% stake in their associate- Central Industries [CIND : LKR250]. SIRA now holds 16.8% in CIND as at 31.03.2010.
Future Potential Early 2010, SIRA took a diversified move to invest around LKR250 mn (of which LKR100 mn was funded through commercial loans) in hydro power stations in the Central Province of Sri Lanka through its 100% owned subsidiary, ‘ Sierra Power’, which holds 93% of this investment.
The intent of the strategy was to merge strongly with the energy industry of the nation. The management expects to add the output to the national grid in another two years time. Also, the company plans to produce value added products such as wire harnesses for auto mobile as they believe these value added products would yield better margins.
SIRA is in the process of negotiating with an European car manufacturer to supply their new product range of automobile wires which is being delayed as a result of the air financial crisis. Also, similar discussions continue on a tie up with a Norwegian cable manufacturer. As per the publication of Central Bank of Sri Lanka, the construction industry had grown by 8.5% YoY during 1Q2010 in comparison to equally high growth rates witnessed in 2006 and 2007 after recording a mere 3% YoY growth n 1Q2009.
According the 2010 mini budget, the Nation Building Tax of LKR16.9 bn would be invested in the rehabilitation and reconstruction programme in 2010. The budget also highlighted that around LKR13 bn was spent on the road network projects during January-April 2010 whilst power, port, irrigation, water, resumption of private sector initiatives on urban development projects also absorbed in heavy investments.
SIRA has shown signs of recovery after reporting an upturn of 31.05% YoY in FY2010.The company is taking optimistic moves in having their market penetration and product development strategies in play coupled with the footing in the hydro generation. With unconfirmed tenders from CEB and after taking into account the positive outlay by the construction industry at large with no drastic adverse moves in the global copper prices, we expect SIRA to exhibit a 63.7% YoY growth in earnings to LKR177.1 mn in FY2011E with a P/E of 11.2X whilst reporting LKR263.6 mn in FY2012E (up by 48.9%) and trading on a P/E of 7.5X FY2012E earnings.
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