“Local firms with export exposure benefit from rupee depreciation”
The Capital Trust Research team has recommended exposure to ACL Cables (ACL) and Dipped Products (DPL) given price dynamics driven by the depreciation of the currency.
ACL has significant pricing power and DPL has considerable foreign exchange revenues allowing both firms to benefit greatly from the depreciation of the rupees. The recommendation comes with a forecast drop in demand with the slowdown of economic growth. Capital Trust Head of Research Hasitha Leanage was speaking at the Manufacturing Sector FY23 Earnings Outlook for ACL and DPL on September 17. Capital Trust, the parent company, has exposure held as collateral to the banking sector for both ACL and DPL.
ACL owns 79.3% of Kelani Cables and 65% of ACL Plastics which also have very positive outlooks given the decline in the value of the rupees. The cabling sector remains on the BOI negative list and there is expected to be a considerable boom in cabling demand linked to the recent rumoured growth in Indian power projects in the country.
The recommendation on ACL comes with an expected reduction in demand in the coming 6-9 months given the extreme levels of distress in the construction sector. Despite the slowdown, ACL has gained market share and further increased revenues. In the coming period, the total volumes of the business are expected to decline. ACL has been successful in multiple price increases. They have increased prices by 50% from November 2020 to October 2021. A further price increase of 70% has taken place between March and August of 2022. A further price increase is expected given the rise in Value Added Tax and the Social Security Contribution Levy.
ACL currently has dollar reserves that would provide 3 months of import cover. The company has an export base of 25% of its total sales. Due to protectionism, local sales have a higher gross profit margin. ACL has been highly conservative during the crisis and has switched to a complete cash-based payment plan. Copper prices and aluminium prices have declined sharply which are the main cost factors of the business. ACL is expected to have increased finance income given current reserves and further relies on spot pricing for its contracts. The company has a dominant market position. ACL cables have significant investment in solar generation insulating them from the CEB tariff increase. ACL has seen a decline in sales to the CEB. ACL is not operating at maximum capacity.
DPL has benefited both from its plantation sector and glove manufacturing verticals. According to industry opinion, the recent decline in glove prices has hit its low point. Given the levels of global inventory, there is expected to be an uptick in demand in the next 6 months. The company is highly insulated from the increase in the CEB tariff due to the large usage of firewood in its electricity generation.
In the current economic context access to the dollar, and revenues has been an incredible competitive advantage for firms. The current Treasury Bill Yield is at around 30%. (DP)