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Getting its act together to execute Project Leap, reiterate BUY as we expect further re‐rating

Result Synopsis

Polycab saw growth rebounding in B2B and institutional segments led by increase in private capex in real estate, renewable energy and infrastructure sectors. B2C business has been impacted by material inflation and pandemic uncertainty. Management expects growth in B2C to rebound from February onwards as pick up in new launches and rural/influencer outreach programs continue to take shape. Company has embarked on the ambitious Project Leap to reach revenue target of Rs200bn by 2026 and in that pursuit, has hired several senior experienced personnel to head each department. We believe the company would benefit from their rich experience and attain its targets in a planned manner. The company looks well placed to keep gaining market share and grow faster than the industry, which should lead to continued re‐rating.   

We expect strong growth momentum to continue in the ensuing quarters; furthermore, increased distribution should now benefit company in gaining further market share. We estimate the company to deliver FY21‐24E revenue/EBITDA CAGR of 19%/17% respectively. Given the strong traction seen in B2C business, we now increase multiple to 35x (vs 30x earlier) FY24 EPS to arrive at PT of Rs3,053 and maintain our BUY rating. We believe the company will gradually close the valuation gap with peers as B2C traction improves further and margin headwinds recede.

Result Highlights

* Quarter summary – Polycab delivered higher than expected revenue growth led by strong traction in B2B and institutional business. Gross margins contracted by 136bps yoy, however it has expanded on sequential basis.

* B2C business remains sluggish – B2C business has been impacted by inflation and uncertainty related to pandemic. Exports business has been impacted due to high base of large Dangote order. Ex‐Dangote exports grew 24% yoy.     

* FMEG – FMEG business recorded growth of 11.4% on yoy basis. Fans business was subdued; Lights, Pumps and Conduit Pipes business continued healthy growth momentum. Switchgears and Solar grew about 1.5x on last year’s base.

* Working capital – Net working capital has remained flat at 52 days sequentially on the back of higher planned inventory on account of decline in demand in later part of the quarter and increased sourcing on account of uncertainty related to pandemic.

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