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Sequential margin recovery a key positive

Polycab India (POLYCAB) reported highest ever quarterly revenue of Rs33.7bn, up 23% YoY and 6%/3% above our/consensus estimates. Wires & Cables sales grew 25% YoY to Rs29.9bn. While cables saw good uptick owing to pick up in private capex across industries, wires growth was impacted due to weak trade sentiments amid copper price volatility and fear of lockdown. FMEG sales grew 11% YoY to Rs3.4bn on a high base and amidst a challenging environment. Commodity cost inflation led to 140bps YoY decline in gross margin to 22.6%. However, POLYCAB was able to take higher price hike in Q3FY22 compared to mid-single digit rise in input cost inflation QoQ. Thus, it managed to improve margin sequentially with gross margin rising 70bps QoQ to 22.6% and EBITDA margin improving 100bps QoQ to 10.7%, above our estimate of 9.8%. EBIT margin for wires and cable rose 160bps QoQ to 10.3%, while FMEG margin were weaker at 1.8% (down 320bps QoQ), partly due to higher ad-spends. PAT was flat YoY at Rs2.5bn, but above our/consensus estimates of Rs2bn/Rs2.2bn. We have marginally tweaked our earnings estimates by 2%-4% and maintain BUY rating on the stock, with a revised target price of Rs3,000 (Rs3,110 earlier) based on 38x H1FY24E EPS.

Wires & Cables: Pick-up in institutional activity led Cables surpass Wires growth

Wires & Cables sales grew 25% YoY to Rs29.9bn with HDC and LDC cables posting volume growth. For cables, institutional segment growth was robust (up 150% YoY) due to pick up in private capex, while distribution led sales were also healthy. Growth was driven by sectors such as real estate, infrastructure, renewables and manufacturing. Exports grew 24% YoY (ex-Dangote) led by Africa, Asia & Australia and formed 8.1% of total sales. EBIT margin was up 160bps QoQ to 10.3% and is expected to improve in FY23E.

FMEG: Non-fans categories posts volume growth amidst industry slowdown

FMEG sales grew 11% YoY to Rs3.4bn. Growth moderated in December due to weaker trade and consumer sentiments. While lights, pumps, conduit pipes and switchgears witnessed healthy growth, the largest category of fans was subdued. The sales mix was Fans (35% of sales), Lighting (30%), Switchgears (10-15%) and Conduit pipes (10-12%). EBIT margin was lower at 1.8% (down 320bps QoQ). POLYCAB has a 5 year target of 12% EBIT margin by FY26 along with healthy ROCE expansion led by rising scale, improving capacity utilization and premiumization.

Key concall takeaways: (1) Total dealers and distributors strength is 4,100, of which 50% are for FMEG. Channel financing is 70% in Wire & Cable and ~50% in FMEG. (2) POLYCAB is setting up a second plant of fans as the first plant has reached full capacity. (3) Prices are revised monthly based on change in commodity costs and USD/INR rate. (4) POLYCAB divested its 100% stake in Ryker Base Pvt. Ltd for Rs1.8bn.

Maintain BUY with a revised target price of Rs3,000

We expect POLYCAB to register 20%/18% revenue/PBT CAGR over FY21-24E. Earnings CAGR will be lower at 14% due to lower tax rate of 16.8% in the base year of FY21 (owing to Rs1bn tax write-back). We assign a P/E of 38x H1FY24 earnings (30% discount to sector leader, Havells) and arrive at a target price of Rs3,000. Maintain BUY.

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