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Robust demand and strong strategies driving growth

Set to achieve Project Leap goals a year ahead; awaiting the next fiveyear guidance

We met with the management of Polycab India (POLYCAB) to get an update on the demand for Cables and Wires (C&W), key demand drivers, RM price trends, and competitive intensity in the industry.

competitive intensity in the industry.

* The management reiterated strong demand momentum in the domestic C&W segment, complemented by growth in the international business. Going forward, major demand drivers are expected to be power Transmission and Distribution (T&D), growth in private capex, and continuous demand from the real estate sector. Meanwhile, the demand growth from railway and road projects is estimated to be moderate due to a higher base impact.

* In the first week of Oct’24, the industry implemented a 4-8% price hike for cables to pass on the impact of higher copper and aluminum prices. Competitive intensity is higher in the wires segment due to excess capacity. In the cables segment, despite ongoing capacity additions, the demand momentum is expected to remain strong, potentially outpacing the industry’s available capacity. In the FMEG segment, the company experienced healthy growth during the festive season, aided by a low base and various initiatives, such as the introduction of products across various price points, brand-building activities, and a rejig in its FMEG business leadership team.

* The company is currently working on its next five-year guidance, which will be communicated soon. We maintain our earnings estimates and reiterate our BUY rating on the stock.

Domestic C&W demand remains strong; outlook optimistic

* The management expressed its positive outlook on the domestic demand for C&W. Despite general elections, it has not seen any demand slowdown in the domestic markets. However, exports were muted in 1HFY25 due to a shift to the distribution-led business model in the US and global headwinds (disruptions in trade routes, higher freight, etc.) due to war situations.

* Earlier, key drivers of the C&W industry included railway, road, airport, and port projects, along with strong demand from the real estate segment. Currently, the industry’s demand is driven by power T&D, growth in private capex, and continuous demand from the real estate segment. Moreover, growth shares from railway and road projects are estimated to moderate.

* In India an investment of INR9.2t is projected in power transmission infrastructure by FY32, which will require high-voltage power cables. The company is also setting up a greenfield EHV manufacturing plant in Halol, Gujarat. The plant is expected to be operational by FY26-end and begin commercial production in FY27E. Hence, the company will benefit from EHV cable supplies from FY27 onwards.

*  POLYCAB has a comprehensive and diversified product portfolio with 11,000+ SKUs (probably the largest in the industry). Its offering includes LV, MV power cables, EHV power cables, optical-fiber cables, solar cables, and various specialized cables catering to various sectors, such as power, construction, oil & gas, chemical, telecom, and transport. It has also started the production of Optical Ground Wire (OPGW) cables, which provide a two-in-one solution for dependable power transmission and high-speed data communication. Moreover, the company is expanding its presence in EV charging cables. In future, it aims to develop new products, such as HVDC cables and deep-sea cables.

* The company has secured large contracts under the BharatNet initiative (Phase III), which is worth INR56.5b so far. The contracts include the supply of cable for the initial period of three years (recognitions will be based on the milestone achievement) and maintenance work for the next 10 years (major part will be recognized in the EPC segment, except for the supply of cables during this period, if any). It expects the margin in this business to be within 12-14%.

* POLYCAB brings relevant expertise, having executed few projects under Phase I & II of BharatNet. The company will require to supply optical fiber cables. It has already secured long-term contracts for the supply of optical fiber at fixed prices. Currently, its EPC book has major orders from the RDSS scheme. We will review our assumptions and earnings once the company shares more details.

* The management believes that the incremental demand in the segment will surpass the incremental supply. Further, it expects export demand to improve. Though the company has experienced a slowdown in the US market, it is witnessing healthy demand from other geographies. Currently, it is supplying in 80 countries and will continue to expand its exports business.

* The wires segment continues to witness growth, supported by strong demand from real estate. POLYCAB is gaining market share from larger players as well as unorganized players. The contribution of Etira wires, launched to target unorganized markets, is steadily increasing. The other wires categories – Green wires, Suprema wires, Maxima+, Optima+, and Primma – are also performing well.

* In the wires segment, the west region is the largest revenue contributor for the company, followed by north, south, and east. In the cables segment, the west region remains the largest, followed by south, north, and east.

Strategic changes in the FMEG segment to bolster growth

* In the first seven years, POLYCAB reported robust growth (revenue CAGR was at ~43%). Post FY21, it set a target to become among the top three FMEG companies. It has taken various initiatives to bolster growth and improve operational efficiencies, which are as follows:

* 1) The company has changed its distribution policy and partnered with large dealers and distributors (completed in Mar’24). This initiative helped the company enhance its scalability and achieve higher sales volume. It will also enable the company to improve utilization and gain positive operating leverage.

* 2) The company expanded its product portfolio through innovation and R&D. It is introducing products across various price points to fill the gaps in its product portfolio. With this initiative, the company aims to increase its total addressable market.

* 3) The company is placing greater focus on branding activities and A&P spending. It is scaling up its structured influencer program through frequent engagements, organizing workshops to educate dealers and distributors, and incentivizing its marketing initiatives.

* 4) There was a rejig in its FMEG business leadership team, with the company appointing a unified business unit head for the B2C business vertical. This promotes decentralization of decision-making within that business. Further, the company appointed deputy business heads, each overseeing specific product categories. It has also established a separate sales team to enhance market penetration, build brand recognition, and leverage synergies.

* With these initiatives, the company has improved its product mix. The fans’ contribution reduced from ~60% to 50-55%, while the switches’ contribution increased to high teens from single digits. In the switchgear business, it is leveraging synergies within its existing wires business.

Valuation and view

* We are structurally positive on POLYCAB due to its leadership position in the cables and wires segment, strong growth trajectory, and healthy return ratios. We estimate a CAGR of 16%/15% in EBITDA/EPS over FY24-27. POLYCAB has benefitted from continuous capacity expansions and strategic initiatives toward margin expansion (the margin in the cables & wires segment expanded to 13.1%/14.7% in FY23/FY24 from 9.9% in FY22 and ~12% over FY18-21). We estimate the EBIT margin of this segment to slightly moderate to ~12%/13% in FY25/FY26, attributed to higher RM prices and a lower margin in the wires segment due to higher competitive intensity. The margin is estimated to stand at ~14% in FY27, aided by an increase in contribution from the newly added EHV capacity and growth in exports business.

* The company has consistently generated free cash flows over the years despite higher capex (due to continuous capacity expansions in the C&W segment and a focus on in-house manufacturing). Its cumulative OCF is expected to stand at INR57.5b over FY25-27, whereas cumulative is likely to stand at INR30.0b in the same period. Cumulative FCF generation over FY25-27 will be at INR27.5b, which will further improve its liquidity position.

* RoE and RoIC are expected to be at 20% and 27% in FY27 vs. an average of 16% and 17% over FY15-24. We expect the company to maintain its premium valuations. We reiterate our BUY rating on POLYCAB with a TP of INR8,340 (based on 50x Sep’26E EPS).

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