Q1FY24 Review: Polycab India: Standing tall and firm in C&W

20 Jul 2023 , 11:11 AM

Analysts of IIFL Capital Services raise FY24/25/26 EPS by 14/10/6%, respectively for Polycab after a robust start to FY24. Strong underlying demand from public and private capex, increasing export footprint and resultant operating leverage amidst softening commodity prices has driven solid earnings growth for Polycab. With 17% EPS Cagr over FY23-26and robust FCF profile, cash chest of ~Rs10bn is being used to support organic and inorganic growth alongside steady increase in dividend pay-outs. Valuation re-rating is in sync with other capital goods peers. Polycab is a preferred pick with 18% upside potential.

C&W on a firm footing: 

Timely capacity expansion prior to the up-cycle is driving market share gains for Polycab in the domestic market. Further, increasing footprint in Intl market for special application cables is aiding OPMs and widening long term avenues. Cost leadership, favourable mix, strong demand tailwinds and operating leverage continue to support strong growth in C&W. Analysts of IIFL Capital Services raise forecasts for C&W assuming a modest 16% volume growth for rest of FY24 (keeping headroom for upgrade if momentum picks up closer to General Elections) and expect revenue/ Ebit Cagr of 20/17% in FY23-25.

Strategic realignment is helping, but yet to turn FMEG positive: 

Multi-brand strategy to target price sensitive customers and premium segment with various new product introductions, aggressive GTM & reach expansion and ASP spend to drive brand awareness should drive healthy volumes for Polycab. But managing respectable OPMs in FMEG is essential to drive sustainability of the portfolio; the key lies in rebalancing portfolio skew from fans to switches & switchgears which has greater synergies with its core C&W portfolio.

Valuations are comparable to cyclical peers: 

1YF PER of 35x for a category leader delivering 17% EPS Cagr in FY23-26, 30% RoCE profile and annual FCF of Rs9-10bn (55-60% cash conversion rate) is not outlandish. Polycab is clearly a quality cyclical play on last mile capex connectivity vs FMEG, justifying the recent re-rating. FMEG portfolio provides a defensive option value, if successfully turned around.