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Buy Polycab India Ltd For Target Rs.2,326

B2C growth momentum to accelerate in 2H; maintain BUY

Our view

Valuation and view – 1Q saw normalcy returning to B2B business, while B2C product categories saw challenges due to extended lockdown in key markets of South and West India. B2C business continues to remain on a strong footing and its contribution is expected to increase going forward. Polycab has been focusing on enhancing its dealer/distributor network across the country. Its dealer/distributor count has been steadily increasing, while its retail reach is now quite strong at 1,65,000 retailers.      

Polycab is undertaken a journey of transforming itself into a strong B2C player and we expect the trend to continue in future as well with increase in its distribution presence. We expect strong growth momentum to return in ensuing quarters; furthermore, it is looking at five‐year vision Project Leap where it plans to double its revenue to Rs200bn by FY26E. We estimate the company to deliver FY21‐24E revenue/EBITDA CAGR of 14%/12% respectively. Rolling over our valuation to FY24 and considering a strong execution track record, 5‐year vision plan and increasing proportion of B2C business, we value company at 28x FY24 EPS and reiterate our BUY rating with a TP of Rs2,326. Polycab still trades at a significant discount to players like Havells, Crompton which should continue to narrow gradually, in our view.

Result Highlights

* Quarter summary – Polycab delivered lower than expected revenue growth as its key markets of West and South was under extended lockdown restrictions. Gross margins contracted by 390bps yoy as company has not fully passed on commodity inflation to customers. Cost control measures and higher operating leverage have resulted in EBITDA margin expansion.

* B2B business returning to normalcy – Company’s B2B business has seen faster growth than its B2C business in Q1 as institutional business saw a marked pickup   as construction activity was allowed during the second lockdown.     

* FMEG – FMEG business suffered on the back of poor consumer sentiment especially in South and West. Negative operating leverage and higher employee costs resulted in EBIT loss during the quarter.  

* Working capital – Net working capital has deteriorated to 73 days vs 67 days in FY21. This increase is on account of higher inventory which has resulted due to volatility in copper prices in June.

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