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Polycab reported PAT of Rs4.3bn during the quarter, 8%/16% ahead of Emkay/Consensus estimates on account of 130-180bps higher margin. Cables and Wires (C&W) reported 15% YoY sales growth. On a YoY basis, C&W margin improved by ~300bps to 14.5% due to strong growth in the international business, select high-margin domestic products, and judicious price revisions. FMEG performance remained subdued, with a 20% YoY decline in sales and marginally negative EBIT because of higher ad spends, employee costs and input cost pressures. Management indicated C&W margin of 11-13% over the medium term, while it reiterated its project LEAP-led guidance of 10-12% EBITDA for the FMEG business by FY26. Polycab continues to fortify its pole position in the C&W industry. We maintain our BUY rating with a Mar-24 TP of Rs3,600, implying 30x PER (Dec-23 TP: Rs3,147).

C&W sees continued growth momentum

Buoyed by growth in the international business, Q4 sales grew 15% YoY, while margins stood at 14.5% (+298bps YoY/71bps QoQ). The domestic distribution-driven business volume grew 21% for FY23, with growth in cables outpacing that of the wires business. Polycab continued to maintain 22-24% market share, with utilization levels at sub-70%. Polycab has strong margin levers to maintain (if not grow) its margin trajectory from current levels, given increased focus on B2C verticals with an aim to expand the share of B2C verticals to 50% of the total revenue by FY26. Polycab is confident of becoming one of the top five global players in the industry, given higher contribution from the international business (B2B) in Q4 (12.5% of total vs. 5.9% in Q3).

FMEG business

The FMEG segment ended on a tepid note, as the fans business remained subdued due to heavy channel inventory in Q3 done ahead of the transition to new BEE norms. The company is, however, confident of growth led by volume recovery (as inflation recedes) and pricing (mid-single digit price hikes taken in Q4). The company is investing in brand building to attain its FY26 target of achieving 10-12% EBITDA margin despite ad spending expected to rise 2-3x from current levels. The company’s strategy to improve revenue for the FMEG business is focused on distribution expansion, product innovation, and brand building, while profitability will be aided by premiumization, focus on highmargin products, backward integration, and economies of scale.

Valuation and outlook

We factor in 15% sales CAGR over FY23-FY25E, C&W margin of 12.5-13%, and FMEG margin of 4%/6% in FY24E/FY25E, which lead to a change in our EPS estimates by 11- 12% over FY24E/25E. The company’s increasing focus on the B2C segment bodes well for better margins and cash-flow profile ahead. We roll forward and raise our Mar-24 TP to Rs3,600, implying 30x PER (unchanged) vs. earlier Dec-23 TP of Rs3,147. In our view, any deviation in ramping up of FMEG business or margin trajectory are key risks.

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