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Market share gains continue and launch of new brand targeting value-for-money consumers

Polycab India’s double digit volume growth led by distribution expansion and new product launches resulted in market share gains in organised wires and cables segment in FY22. It also launched an economy segment brand Etira, with housing wires and plans to expand its product portfolio aggressively to gain market share in semi-urban and rural areas. Due to large capex and high working capital investments, its FCF generation was impacted in FY22, and will likely continue to remain muted in next 2-3 years (our view). We model Polycab to report revenue and PAT CAGRs of 15.7% and 20.8% over FY22-FY24E. We remain structurally positive on the company due to its competitive advantages and growth opportunity in consumer durables, but over-dependence on wires and cables segment remains a key concern. Maintain HOLD with a revised DCF-based target price of Rs2,250 (implied P/E 27x of FY24E EPS; earlier TP: Rs2,500).

* Market share gains – DCF accretive: Polycab continued to gain market share in organised wires and cables segment during the year, driven by double digit volume growth. We note its current market share stands at 22-24% of the total organised market (based on company data). It has also gained market share in almost all categories in FMEG portfolio.

* Distribution expansion continues: The company increased its distribution network to 4,500 dealers and 205,000 retailers in FY22. It is now building strong online presence as well as over 600 SKUs are available on major e-commerce websites. We believe investments in distribution expansion will likely result in faster growth of FMEG portfolio and market share gains.

* Launch of new economy segment brand - Etira: Polycab has introduced a new sub-brand Etira to deepen its presence in semi-urban and rural areas, where demand is relatively price sensitive. We note the company has already launched housing wires under the brand. This will provide the company a level-playing ground to compete with unorganised sector and hence result in higher volume off-take.

* Negative FCF generation: In FY22, Polycab’s FCF/PAT ratio declined to -2% due to higher working capital investments and large capex. To fuel its growth and reach Rs200bn revenue by FY26, Polycab will continue to invest heavily in capex and working capital, and thus, FCF generation will likely remain lower.

* Maintain HOLD: We model Polycab to report PAT CAGR of 20.8% over FY22-FY24E and RoCE to be upwards of 18% over FY22-24. We remain positive on the company’s business model due to strong moats and growth opportunities, but at current valuations we believe the upside is capped. We maintain HOLD rating on the stock with a revised DCF-based target price of Rs2,250 (implied P/E 27x for FY24E)

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