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Strong revenue growth; input 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)

Q2FY22 Results: Higher input costs weighed on profitability.

* Reported revenue growth of 48% YoY to | 3129 crore led by price hikes

* Gross margin declined ~700 bps YoY, resulting in a sharp fall in EBITDA margin by 510 bps YoY to 9.7%. Sequentially, margin improved 227 bps

* PAT declined ~10% YoY to ~| 200 crore, tracking lower EBITDA margin

What should investors do? Polycab’s share price has grown by ~4x over the past two years (from ~| 643 in October 2019 to ~| 2310 levels in October 2021).

* We revise our rating on the stock from HOLD to BUY

Target Price and Valuation: We introduce FY24E estimates, roll over our valuation on FY24E and value Polycab at | 2710 i.e. 30x 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 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 20%, 14%, respectively, in FY21-23E

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 | 1545

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