Polycab India: Leveraging leadership and tailwinds in C&W

30 Jun 2023 , 11:22 AM

Recommendation: Buy

Target Price: Rs. 3,838

Management is banking on cyclical uptick in capex, thrust on infra and real estate recovery to drive growth in Core C&W portfolio and is recalibrating strategies in B2C portfolio. With favorable tailwinds in C&W portfolio, Polycab has consistently delivered robust FCF and RoCE despite drag from its FMEG portfolio. Strong cash chest further strengthens its balance-sheet to pursue strategic M&As. Analysts at IIFL Capital Services have rolled forward their 12-month Target PER to June 2025 estimated EPS, implying 6% upside.

Well placed to achieve Project Leap targets

Polycab seems to be in a comfort zone to achieve Project Leap sales target of Rs. 200 billion by FY26, with implied 12% CAGR in FY23-26. Export share at 10% is on track aided by acceleration from developed markets in C&W. While FMEG profitability lags by a mile with operating loss in FY23 versus targets of 10-12% by FY26, management believes consolidation and rejig in FMEG strategies was required to drive long term priorities and sustainability. With the distribution rejig largely done, Polycab aims to outperform the market in C&W and FMEG by strengthening B2C presence through NPD & brand positioning.

Nuggets from AR

In their AR, the company underscored having pricing options in raw material (RM) procurement contracts, allowing them to counter commodity price volatility and maintain margins within their guided range (11-13% in C&W). Our analysis confirmed this, showing that while competitors’ C&W margins declined due to commodity price fluctuations, Polycab’s OPM expanded in FY23, complemented by robust exports and improving profitability in the cables portfolio.

Strategic M&A + Buyback/ dividends to boost ROE

Strong net-cash position of ~Rs. 19 billion (up 74% YoY) owing to robust FCF of Rs. 9.7 billion (76% PAT conversion) in FY23 and relatively low capex requirement lends ample space for strategic acquisitions. Management intends to use surplus cash balance for Dividends/Buybacks to improve its RoE profile which is (~21%) softer than its RoCE (28%).