IGI Logo

Buy Polycab India Ltd For Target Rs.2,723

Robust growth performance with market share gains at the cost of margins; maintain BUY

Our view

Polycab saw strong growth across its B2C portfolio led by strong demand for B2C products. Most of this growth in Cables and wires is contributed by price increases on account of increase in commodity prices. Company has decided to let go of some margin in its quest to gain market share as it is set for achieving its revenue target of Rs200bn by FY26 under Project Leap.

We believe this strategy would be adopted in the short run to gain share and then operating leverage and premiumization would be the key drivers for gradually increasing margins. Polycab is on a journey of transforming itself into a strong B2C player and we expect the trend to continue with increase in its marketing spends backed by higher distribution presence, which should continue its ongoing re‐rating.

Result Highlights

* Quarter summary – Polycab delivered higher than expected revenue growth led by strong traction in house wires and pricing action in cables on back of high commodity prices. Gross margins contracted by 690bps yoy as company has not fully passed on commodity inflation to customers in quest to gain market share.

* Institutional cables business dents margin – Company’s B2B business has seen increased competition. Lower utilization across industry players have led to margin contraction as industry has been vary of passing on increased RM prices. This has led to 514bps contraction in wires and cables.      

* FMEG – FMEG business continued its strong growth momentum and delivered growth of 41% yoy. It has grown by 71% as compared to pre‐Covid levels which is encouraging. Premiumization and calibrated pricing actions have led to sequential improvement in margins.   

* Working capital – Net working capital has improved to 52 days vs 67 days in Q2FY21. This is on back of sharp decrease in inventory days where the company is working with the external consultant to reduce it further.

Valuation

We expect strong growth momentum to continue in the ensuing quarters; furthermore, the company is looking at five‐year vision Project Leap where it plans to double its revenue to Rs200bn by FY26E. We estimate the company to deliver FY21‐24E revenue/EBITDA CAGR of 19%/18% respectively.

Given the strong traction seen in B2C business, we now value the company at 30x FY24 EPS to arrive at PT of Rs2,723 and maintain our BUY rating as we believe the company will gradually close the valuation gap with peers as B2C traction improves further and margin headwinds recede.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632

Above views are of the author and not of the website kindly read disclaimer