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Strong revenue growth; high inflation drags margin…

About the stock: Polycab is the largest manufacturer of wire & cable in India. The company also entered the fast moving electrical goods (FMEG) space in 2014 and has recorded strong segment revenue CAGR of 43% in the last five years.

* Polycab is the market leader in the wire & cable business with organised market share of 23%. In the FMEG segment, it is growing through new product launches and dealer addition across India. The company has ~4100 dealers, serving.65 lakh retail outlets

* Robust b/s with RoE, RoCE of 19%, 26%, respectively, (three-year average)

Q3FY22 Results: Strong show on the revenue front but delay in price hikes drags the EBITDA margin.

* Strong revenue growth of 23% YoY to | 3372 crore led by 25% growth in wire & cable segment. FMEG revenue growth of 11% came on a strong base

* EBITDA margin declined ~200 bps YoY to 10.7% due to delay in price hikes and higher other expenses. Sequentially, margin improved 100 bps

* PAT from continued operation at | 248.4 crore was up 1.4% YoY

What should investors do? Polycab’s share price has grown by ~2.5x over the past two years (from ~| 1019 in January 2020 to ~| 2510 levels in January 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We revise our target price to | 3000/share valuing stock at 35x P/E on FY24E EPS.

Key triggers for future price performance:

* Set a target to achieve | 20,000 crore revenues by FY26 (18% CAGR)

* Beneficiary of the government’s plans to invest ~ | 111 lakh crore in FY20- 25 under its National Infrastructure Pipeline

* Total ~1.7 crore new houses under PMAY, urbanisation and rising aspiration level will give a significant boost to demand for home appliances

* Model revenue, earnings CAGR of ~17%, ~13%, respectively, in FY21-24E

Alternate Stock Idea: Apart from Polycab, we also like Havells in the same space.

* Trigger for Havells’ future revenue growth would be revival in Lloyd’s revenues and improvement in margin

* BUY with a target price of | 1515

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