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1HFY23 likely to witness realization decline and demand deferment

The prices of copper and aluminium have declined sharply in June’22 and are currently 16%/24% lower from the average price of 4QFY22. The cable & wire industry has to pass on this price decline fairly quickly, thereby impacting its realization along with volumes as the trade channel starts de-stocking. We have analyzed the impact of change in copper and aluminium prices over the past 20 years on revenue growth and operating margin of the five large cable companies. We believe 1HFY23 is likely to be a challenging period for cable industry due to a double whammy of demand slow down and sharp reduction in realization. We cut FY23/24 revenue estimates of Polycab by 8.3%/11% leading to cut in earnings estimates by 4.2%/7.5%. We present a detailed sensitivity analysis of the impact on realization, revenue and earnings at various copper and aluminium price levels. Retain Buy with revised target of Rs2,740.

Channel checks suggest demand deferment, 8-9% price cuts, dealer de-stocking

The key findings of our channel checks are: (1) the pass through of copper and aluminium price decline has already started in June 2022, with the cable and wire industry likely to have taken price cut of 8-9%, (2) the demand scenario in June 2022 is very weak due to deferment of purchase. The buyers across private sector, government projects as well as real estate projects are postponing purchases in the hopes of procuring cables & wires at much lower prices few months later, (3) the trade channel has started aggressively de-stocking the inventory, as is normally the case during rapidly declining copper and aluminium price regime, (4) As construction activity in monsoon quarter remains low seasonally, 1HFY23 is likely to be very challenging for the cable & wire industry. However, the trade channel is hopeful of demand bounce back in 2HFY23 as off-take will pick up in seasonally stronger period for construction with prices likely to have stabilized. This similar trend repeats itself once in every four to five years.

Revised estimates and sensitivity analysis for FY23 and FY24

We change the copper price assumption for FY23E/24E to US$8,600/MT and US$8,300/MT, respectively, and aluminium price assumption to US$2,600/MT and US$2,400/MT, respectively. This would lead to 10.7%/4% YoY decline in average realization for Polycab’s wires & cables segment in FY23E/24E. We retain our volume growth estimate of 12%/13% YoY for FY23E/24E, but a decline in realization would mean a value growth of only 1.3% for FY23E and 9% for FY24E for the wire & cable segment. This would lead to a cut in our consolidated revenue estimates by 8.3%/11% and consolidated earnings estimates by 4.2%/7.5% for FY23E/24E, respectively. We also highlight a detailed sensitivity analysis of the impact on realization, revenue and earnings for Polycab for FY23E/24E at various copper and aluminium price levels.

Outlook and valuation

Lower realization would restrict POLYCAB’s revenue CAGR to 7% over FY22-24E, however, a 190bps operating margin expansion would lead to 18% earnings CAGR over the same period. Healthy long term growth prospects, margin expansion in FMEG, improving balance sheet and FCF generation will continue to support its valuation.

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