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Increased competition and business mix change dents margin; reiterate NEUTRAL

Result Synopsis

Polycab performance has been mixed bag with revenue coming 8% higher than estimates, while margins missing the estimates. Revenue grew 30% on yoy basis, with wires and cables, FMEG and EPC segment growing by 24%, 21% and 240% respectively. Margins have contracted on back of 1) Higher losses in FMEG business on account of increased A&P spends and fixed costs; 2) Increase in employee cost as company has added manpower to focus on vertical wise business and 3) Increased competition and 4) higher growth in lower margin business. Growth in its key segment of wires and cables was driven by strong volume growth in wires which grew 2x of that Cables. Channel expansion, changes in product architecture and influencer management program has resulted continued growth in FMEG. 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 (Both government and private 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 FY24-27E revenue of 19%. We have trimmed down the margin expectation given the change in business mix, increased competition, 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 Rs7,639. This stock should be bought on every correction.

Result Highlights

* Quarter summary – Polycab has delivered better than expected revenue growth in Q2 with revenue growing 30.4% yoy. Gross margin and EBITDA margin stood at 23.6% and 11.5% respectively.

* Wires & cables – Wires and cables revenue grew 24.1% yoy, driven by strong volume growth in wires which has seen growth of ~25% in volume terms and 40% in value terms. After many quarters wires have outperformed cables.

* FMEG –FMEG business revenue grew by 20.5% YoY. Strong growth in FMEG has been attributed to higher demand for fans on low base and healthy switchgear demand.

* Working Capital – Net working capital on average basis has seen improvement. Company’s gross borrowings in 2Q has marginally inched up to Rs1103mn vs Rs984mn in 1QFY25.

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