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Capex tailwinds leads to continued outperformance; maintain Neutral

Result Synopsis

Wires and Cables continues to witness strong growth with cables outperforming wires. Volume growth for cables and wires in Q2 stood at ~30% and 20% respectively. Margins continues to remain strong remains higher than the management guidance of 11-13%. Favorable product mix along with higher operating leverage has led to higher margin trajectory. FMEG has remained subdued, with its key categories like Fans and lighting witnessing de-growth on back of poor consumer demand, while switches and conduit pipes have seen healthy growth. Company’s GTM initiatives and rejig in distribution network is done with, company now expects growth momentum to return as company is planning to launch new products and SKU’s and demand to pick up in 2H. The company continues to focus on brand building, new product development, premiumization of offerings and influencer management program which will lead to industry leading growth. 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 especially in its core category of wires and cables as continued capex, increased in real-estate constriction and exports opportunity will benefit company immensely. Also, now with distribution transition largely completed FMEG segment should see growth going forward. We estimate the company to now deliver FY23-25E revenue/EBITDA CAGR of 23%/24% respectively. Given the strong traction seen in distribution led business, company should command higher multiple. We have increased our earnings estimates of FY24 and FY25 by 7% and 3% respectively on strong 1H performance resulting in PT of Rs5,234 valuing the company at 40x. We continue with our NEUTRAL stance as stock has seen significant rally in past quarter and would wait for some correction to make a fresh entry.

Result Highlights

* Quarter summary – Polycab continues to deliver strong performance in Q2 with revenue growing 26.6% yoy. Gross margin and EBITDA margin stood at 27.1% and 14.4% respectively expanding on yoy basis.

* Wires & cables – Wires and cables revenue grew 28.9% yoy as demand for cables continues to remain strong with company getting strong traction in the export markets. Margins improved on yoy basis led by higher operating leverage and favorable product mix.

* FMEG –FMEG business saw muted growth of 8.1% YoY. Fans and lighting witnessing de-growth on back of poor consumer demand, smaller business of Switches and conduit pipes has seen strong growth.

* Working Capital – Net working capital has improved in Q2. Improvement is largely on back of lower inventory and higher payables days. Company is consistently focusing on improving the efficiency as bringing down its working capital requirements  

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