Polycab India Ltd. (Polycab) is India’s leading wires and cables (W&C) company with market share of 18%. The company has widened its product offerings with FMEG (fast moving electricals goods) like fans, lightings and luminaries, switches and switchgear, solar products and accessories.
Polycab brand has strong recall in the W&C segment and a wide distribution network reaching more than 1,00,000 retail outlets, which will help the company cross-sell its FMEG products.
The company has 24 manufacturing facilities, including two joint ventures with Techno Electromech Pvt Ltd. (“Techno”) and Trafigura Pte Ltd (“Trafigura”).
Robust Growth in Wires & Cables business with market leadership position (86% of FY19 Revenue)
Polycab is an undisputed market leader in W&C with 18% market share of the organized market and 12% overall. It has an extensive range in W&C, catering to vast applications, including house wires, power cables, communication cables and many others. Its W&C business is more than twice the size of its leading competitors.
A robust distribution network, wide range of product offerings, efficient supply chain management and strong brand image are some of the key reasons for Polycab’s success in the Indian W&C space.
Rapidly scaling up FMEG business: (8% of FY19 Revenue)
Polycab forayed into the FMEG business in FY14 by launching the switches business. It further diversified into fans, LED lightings and switchgear in FY15. Diversifying into FMEG was a logical step as it has synergistic benefits by leveraging existing capabilities. With a strong distribution network already in place for wires and cables, it was able to rapidly scale up the FMEG business as the products were a part of the same ‘electrical’ ecosystem.
Polycab plans to grow its consumer side business (wires and FMEG), which is at about 35% of total revenue, to about 45% - 50% over the long term. FMEG business has huge opportunity to cross-sell to a large customer base and leverage distribution network across diverse product offerings.
Strong backward integration, with focus on research and development (R&D)
Polycab backward integration in manufacturing assures of a dependable supply of quality raw materials and enables to maintain control of the supply chain, lower the cost of operations, and offer products at competitive prices. Polycab manufactures major key raw materials which are used in manufacture of W&C and FMEGs, like copper wire rods, aluminum rods, various grades of PVC, rubber, XLPE compounds, and GI wire and strip.
Polycab places significant emphasis on R&D capabilities to help the company conform to the highest quality standards and thus be self-reliant and customer-centered. In addition to R&D, Polycab has consistently adopted advanced automation systems in their manufacturing process.
Higher capacity utilization and capex to enable future growth
Polycab is currently operating at approximately 80% capacity utilization for its W&C facilities. The availability of excess capacity along with continuous capex will enable Polycab to growth better than its peers. Polycab incurred close to Rs.275 crores on capex in FY19 and expected to incur about Rs.175 - 200 crore in FY20, primarily towards W&C. This capex is aimed at catering to segments where currently there is opportunity for growth or opportunity for import substitution, such as defense, railways, mining and metro.
Strong distribution network and brand building have paid off
Polycab has invested in strengthening its supply chain over the years. It consistently aims for faster delivery to clients. Polycab has a pan-India distribution network of 3,300+ authorized distributors and dealers with a reach of 100,000+ retail outlets.
Polycab spends about 1.5% of sales on advertising and sales promotion. Management sees lot of headroom in terms of building the brand further. Polycab had a strong presence at the IPL and focusing on increasing its visibility on print/social/television.
Fluctuations in Raw Material prices: Sudden fluctuations in raw material prices may affect the company’s margins negatively. Raw material costs form a significant portion of the company’s operating expenses. The key raw materials for Polycab are copper, aluminum, steel and PVC.
Fluctuations in the Rupee-Dollar rate: Majority of the raw materials required are imported and hence Polycab is exposed to foreign exchange volatility risks as well.
Substantial capital expenditure and working capital requirements: Polycab operates in an industry which requires substantial capex and high working capital. This might stretch the company’s debt and working capital cycle putting strain on its cash flows.
Wires & Cables Industry
The W&C industry in India includes power cables, building wires, instrumentation and control cables, telecom cables, elastomeric cables and other flexible and special application cables used in various industrial sectors. The domestic cables and wires industry grew at approximately 11% CAGR (compound annual growth rate) by value during fiscals 2014 to 2018, and according to CRISIL estimates it is expected to grow at 14% CAGR between 2018 to 2023.
The industry’s key growth drivers include: (1) rural electrification, (2) investments in Transmission & Distribution, (3) rising demand for renewable power, (4) infra projects such as Smart Cities Mission and metros, and (5) affordable housing.
The wires & cables industry is witnessing a gradual shift from smaller regional unorganized players towards pan-India branded market players across categories. Overall, the unorganized sector which was at 39% in 2014 came down to 34% in 2018.
The FMEG business has potential for future growth. CRISIL Research expects (i) the switches industry in India to grow at a CAGR of approximately 9% to INR 62 billion by Fiscal 2023, driven by modular switches that have higher realizations, (ii) the lighting and luminaire industry in India is expected to grow at a CAGR of approximately 7% to reach an estimated market size of INR 301 billion by Fiscal 2023 largely due to a decline in LED chip prices, government policies to encourage LEDs and increasing consumer awareness for energy efficient technologies such as LED lighting, and (iii) the electric fans industry in India is expected to grow at a CAGR of approximately 7% to INR 111 billion by Fiscal 2023 largely due to government focus on affordable housing, the introduction of value added products by major fan manufacturers, replacement demand in urban areas, rise in rural penetration and improving economic factors.
|Revenue from Operations||5500.12||6770.31||7955.98||9069.82||10339.59|
|Other Operating Income||75.21||64.44||93.35||93.35||93.35|
|Total Operating Expenditure||5020.17||6041.43||7032.79||8017.72||9140.20|
|EBITDA margins %||10.09||11.72||12.78||12.63||12.50|
|Profit Before Tax||361.33||566.69||758.38||958.19||1096.00|
|Provision for Tax||128.25||208.23||255.76||334.79||382.94|
|Profit After Tax (PAT)||233.08||358.46||502.63||623.40||713.06|
|PAT margins %||4.24||5.29||6.32||6.87||6.90|
|Earnings Per Share||16.46||25.35||35.39||44.15||50.50|
With the government’s focus on housing and infrastructure through various initiatives, the entire W&C industry is poised for growth and Polycab is likely to be one of the biggest beneficiaries. The recently launched FMEG business has grown at a CAGR of 43.7% over FY16-19 and is likely to maintain its momentum with growth strategies in place.
Management expects margins to continue to be in the range of 11% to 13% and improve over time. On year-on-year basis, EBITDA margins have improved from 11.7% in FY18 to 12.7% in FY19. The management expects margin expansion of around 1.5% to 2% p.a. in its FMEG business as this business attains scale. We believe Polycab’s growth prospects are bright and it is well equipped to capitalize on any boost to the industry.
At current market price of Rs.610, the stock is trading at 17x FY19 EPS. We value the stock at 15x its FY21 expected earnings with target price of Rs.765 in 12 months.