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Focus on market share over margin improvement

* Polycab’s topline came in stronger than expected, with C&W and FMEG segments beating estimates by 7% and 21%, respectively. C&W growth was largely driven by price increases, while value and volumes contributed equally to FMEG growth.

* Gross margins contracted 690bps yoy, adversely impacted by insufficient price hikes (in low-single digits) vs. commodity inflation (in mid-single digits). EBITDA margin fell 510bps yoy, mirroring the trend in GM.

* C&W margins in H2FY22 are expected to be at the lower end of their medium-term guidance of 11-13% due to competitive intensity in cables. Focus is on gaining market share in C&W, while FMEG segment will see a balanced approach on revenue and margin.

* We raise our revenue assumptions by 6-13% for FY22-24. Maintain Buy with a revised Dec’22 TP of Rs.2,620 vs. Rs.2,060 earlier (30x Dec’23E EPS vs. 25x Sep’23E previously). Our target PE is now derived from a two-stage DCF model (Exhibit 17).

Revenue beats estimates, RM inflation dents EBITDA:

Polycab reported a 12% beat on revenues, with contribution from across segments. The C&W business grew 44% yoy, with uniform growth seen for Cables and Wires. FMEG grew by 41% yoy, with all categories recording healthy growth, except for Fans. As commodity inflation continued to create headwinds, gross margins shrank by 690bps yoy. EBITDA margin contracted by 510bps yoy, reflecting the dip in gross margins. The net debt position, including acceptances, improved to Rs900mn from Rs2.5bn in Q1. The cash cycle improved to 69 days vs. 81 days in Q1 and 84 days in Q2FY21.

Outlook:

The rise in competitive intensity in the cable business and the resultant lower-thanexpected cost pass-through was a surprise. This has led to a lowering in company’s margin guidance for H2FY22 and FY22. We remain positive on C&W industry growth, backed by the revival in government capex, along with private sector spending. Polycab, being the market leader, is poised to benefit the most through healthy industry growth and sustained focus on market share gains.

The company’s FMEG revenue growth should be aided by new product launches, premiumization and reach expansion. The progress on ‘Project Leap’ along with strong revenue growth, margin delivery and balance sheet improvement should continue to help boost investor interest and valuations of the company. Polycab trades at ~26% discount to established ECD peers, which could narrow with consistent delivery on the above-stated parameters.

Key risks: weak government spends on infra, power and other key sectors; delayed private capex recovery; market share losses; moderation in FMEG revenue growth; inability to improve margins and adverse commodity price movement.

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