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Weak margin offsets strong revenue growth Expect 2H to be better than 1H; business mix to improve

* Polycab India (POLYCAB)’s 2QFY25 earnings were in line with our estimates, as lower-than-estimated margins offset higher-than-estimated revenue growth. Its revenue grew 30% YoY to INR55.0b (10% beat) while EBITDA grew ~4% YoY to INR6.3b (est. INR6.6b). OPM contracted 3.0pp YoY to 11.5% (est. ~13%). PAT increased ~3% YoY to INR4.4b (est. INR4.6b)

* Management indicated demand momentum to remain strong in the Cables and Wires (C&W) segment and believes that 2H should be better than 1H. Further, the retail distribution and exports businesses are expected to improve. The FMEG business is estimated to pick up in FY26 on account of robust demand from the real estate sector. The company is optimistic about achieving INR200b revenue targeted under Project Leap, a year ahead of schedule. It is currently working on its next five-year guidance, which will be communicated later this year.

* We cut our EPS estimate by 4%/3% for FY25/26E as we reduce C&W segment’s margin by 30-50bp and estimate the FMEG segment to break even in FY26 vs. earlier estimated in FY25. We estimate EBITDA margin in the range of 12-14% during FY25-27. It is currently trading at 47x/39x FY26E/FY27E EPS. We reiterate a BUY rating on the stock and value it at 50x Sep’26E EPS to arrive at our TP of INR8,340. Revenue & EBITDA up 30%/4% YoY; OPM contracts 3pp YoY to 11.5%

* Consolidated revenue/EBITDA/PAT stood at INR55.0b/INR6.3b/INR4.4b (up 30%/4%/3% YoY and up 10%/ down 4%/4% vs. our estimates). Gross margin contracted 3.6pp YoY to ~24%. OPM contracted 3.0pp YoY to 11.5%. Ad spending stood at 0.6% of revenue vs. 1.1% in 2QFY24.

* Segmental highlights: C&W’s revenue rose 24% YoY to INR47.2b and EBIT grew 4% YoY to INR5.8b. However, the EBIT margin contracted 2.3pp YoY to ~12%. FMEG’s revenue rose 20% YoY to INR4.0b. Its loss increased to INR252m vs. INR60m/INR28m YoY/QoQ. EPC and others’ revenue rose 4.6x YoY (+3% QoQ) to INR3.8b. EBIT also jumped 4.6x YoY/19% QoQ to INR507m and EBIT margin was flat YoY at ~13%.

* In 1HFY25, revenue/EBITDA/PAT grew ~26%/5%/1% YoY. OPM contracted 2.4pp YoY to ~12%. Based on our estimates, the implied revenue/EBITDA/ PAT growth for 2HFY25 is ~16%/9%/9%. We estimate EBITDA margin at 12.5% vs. 13.4%/12.0% in 2HFY24/1HFY25. OCF stood at INR13.3b vs. INR2.9b in 1HFY24, led by higher acceptances. Net cash balance stood at INR24.3b vs. INR21.4b as of Mar’24.

Key highlights from the management commentary

* The growth of the wires business outpaced that of the cables business. Volume growth of the wires business stood at 20-25% YoY, whereas that of the cables business was in the low teens

* The company is focused on increasing its switchgear contribution in the FMEG business due to better margins. Within the next five years, it aims to be among the top three players in the switchgear segment.

* Capex stood at INR2.9b in 2Q and INR5.7b in 1HFY25. Capex is pegged at INR10-12b in FY25/FY26.

Valuation and view

* POLYCAB reported industry-leading revenue growth, supported by its leadership position in the C&W segment. However, margin contraction was higher than our estimate due to increased competitive intensity in the retail wires segment, as industry players seek to maximize volume growth during higher demand. We estimate margins to expand with some stability in commodity prices and growth in its retail distribution and exports businesses.

* We estimate POLYCAB’s revenue/EBITDA/PAT CAGR at 17%/16%/15% over FY24-27. The company continues to generate healthy free cash flows despite higher capex and remains a net cash positive company. We estimate a cumulative FCF generation of INR27b during FY25-27 and its net cash balance to increase to INR37b by FY27 vs. INR24b as of Sep’24. We reiterate our BUY rating on POLYCAB with a TP of INR8,340 (based on 50x Sep’26E EPS).

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