IGI Logo

Business mix change dents margin; reiterate NEUTRAL

Result Synopsis

Polycab performance has been mixed bag with revenue coming in line with estimates, while margins missing the estimates. Revenue grew 20% on yoy basis, with wires and cables, FMEG and EPC segment growing by 12%, 22% and 240% respectively. Margins have contracted as there was shift in business mix towards segment with lower margin and contribution from international business which carries higher margin has been lower. Growth in its key segment of wires and cables was lower as there has been channel de-stocking on back of volatility in commodity prices. FMEG growth on the other hand has been strong driven by robust demand for fans, followed by strong demand from switchgears and conduit pipes. Other’s segment has seen strong growth led from execution from government’s RDSS scheme. Inventory in the channel has normalized as commodity prices have stabilized and there has been improved offtake from the channel. The company is confident of strong demand to continue given the buoyancy in the real-estate, with infrastructure spends and capex continues to remain healthy resulting in strong demand for wires and cables. We expect strong growth momentum to continue 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, FMEG segment should start to pose double digit growth as re-structuring has largely done with. We estimate the company to now deliver FY24-26E revenue of 18%. We have trimmed down the margin expectation given the change in business mix and lower contribution of exports. We continue to maintain our target multiple to 40x as we see strong demand for wires and cables to continue and margins continue to remain higher than the management guidance. We remain NEUTRAL on the stock with PT of Rs6,413. This stock should be bought on every correction.

Result Highlights

* Quarter summary – Polycab has delivered inline revenue growth Q1 with revenue growing 20.8% yoy. Gross margin and EBITDA margin stood at 24.6% and 12.4% respectively. Business mix change has resulted in margin contraction.

* Wires & cables – Wires and cables revenue grew 11.6% yoy, which is lower than estimates. Sharp commodity price movements led demand fluctuations in channel sales in later part of the quarter curtailed the positive impact of higher average commodity prices. Cables continue to outperform wires growth.

* FMEG –FMEG business revenue grew by 22.6% YoY. Strong growth in FMEG has been attributed to robust demand for fans amid heat wave in several parts of the country. Switches, Switchgears, and conduit pipes has also demonstrated growth.

* Working Capital – Net working capital on average basis has seen deterioration. Company’s gross borrowings in 1Q has marginally inched up to Rs984mn vs Rs898mn in FY24.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632.