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Buy Polycab India Ltd For Target Rs.3,389

The H2 FY23 outlook for Polycab India is robust after strong volume growth in H1. Fewer NWC days have aided cash-flow generation. Restructuring of the FMEG segment is expected to be completed in FY23, an important monitorable.

Volume growth amid falling commodity price aids revenue growth, margin expansion. Volume growth amid falling commodity prices boosted Polycab’s Q2 revenue 11% y/y to Rs33.3bn. EBITDA margin expanded 310bps y/y as the gross margin rose 420bps y/y and other manufacturing expenses, 25% y/y. With a 24% tax rate in Q2 (25% a year ago) net income rose 35% y/y. H1 FY23 revenue stepped up 25% y/y. The 310bp gross margin expansion y/y supported the 340bp EBITDA margin expansion y/y. Net income shot up 82% y/y on the lower tax rate and steady depreciation charges (Rs1bn) for H1 FY23.

Fewer NWC days via consistent efforts. Average NWC days between FY19 and FY22 were 80. At end-H1 FY23, NWC days dropped to 47. The steep drop can be attributed to lower inventory and receivables days while payable days were 45 (vs average of 54).

Rs4bn capex a year targeted for the next few years. As Polycab targets Rs200bn revenue by FY26 under Project Leap, it would be incurring ~Rs4bn capex as year between FY23 and FY25.

Outlook & Valuations. Post Q2 FY23 results, our FY23e and FY24e earnings are intact. We have lowered NWC days post Q2 FY23 to factor in efficiencies which seem to be structural. As we roll over to FY25e, we model revenue/net income recording 15%/25% CAGRs over FY22-FY25, which could result in the RoE expanding from 16% to 21%. At the CMP of Rs.2,708, the stock trades at 30x/25x FY24e/FY25e EPS of Rs91/109.

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