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Ticking all boxes needed for continued re-rating

* Polycab India (POLYCAB IN) is the largest player in wires and cables space with market share of ~22% in organized wires and cables space. It has one of the widest and most diverse product portfolios with highest in-house manufacturing capabilities. Company manufacturers wires and cables at two locations Halol and Daman with cumulative manufacturing capacity of 3.7mn kms. Wires and Cables contribute lion’s share (~84%) to the to the overall revenue.

* Despite being a late entrant in FMEG space, the company is fast making its presence felt in this space. It has seen revenue growth at 37% CAGR in last 5 years. It has product like Fans, Lighting Luminaires, IOT products, Switches, Switchgears, Water heaters, Pipes, Conduits, Agro pumps and solar which covers entire electrical goods value chain. On the margin front, it is expected to reach double-digit margins in next 3 years (from current 5.5%) as the business achieves scale and leverage synergies kick in.

* Polycab has strong distribution network consisting of 4100+ dealers catering to more than 1.65 lakh retailers. Company has been steadily increasing A&P spends from 0.4% of sales in FY14 to 1.2% of sales in FY20. It has not shied away from spending in high profile events like IPL and create strong brand recognition. We expect A&P spends to further accelerate as revenue contribution from B2C increases.

* Polycab has undertaken project leap a multiyear transformation journey where it has targeted to achieve Rs200bn of sales by 2026. Under Project Leap company plans to strengthen its B2B portfolio, accelerate growth in B2C portfolio, focus on exports, refine value proposition and recalibrate business model. This will enable company to double its revenue and achieve the said revenue target in next 5 years.

* Strong sustainable revenue growth with 1) increasing share of B2C business, 2) improving balance sheet with debt reduction and improvement in working capital and 3) increasing efficiencies to induce margin improvement. The above reasons will enable the company to double its revenue and improve margins. We remain positive on the stock and have BUY rating with TP of Rs2,723 valuing it at 30x FY24 EPS. However, we feel given transformation in business towards B2C with increasing FCF trajectory stock should command higher multiple and narrow down discount with peers like Crompton and Orient.

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