Q3FY24 Review: Polycab India: Steps up Capex to support growth

23 Jan 2024 , 01:37 PM

Polycab’s C&W portfolio continues to chart strong volume growth with industry-leading 14% Ebit margins, while operating at 70- 75% capacity utilisation. With strengthening of end market drivers – Power sector capex alongside Real Estate, Industrial and Infra capex — Polycab has stepped up its FY24-25 capex by >30% to Rs15-16bn. Management acknowledged struggle in driving turnaround in the FMEG portfolio with revised expectation of break-even by the end of FY25, following the recent leadership rejig. We revise FY24/25/26 EPS for Polycab by -2/0/4%. Robust FCF from C&W business (~Rs8bn p.a.) lends strength, so as to drive strategic initiatives across portfolio and reach expansion (esp. Intl – USA) to broad base its growth avenues. Analysts of IIFL Capital Services retain BUY with 12-month TP of Rs5,172, as valuations now are comfortable at 34xFY25 EPS. 

C&W continues with profitable growth: 

Cables sustained double digit growth momentum, while Housing Wires grew by <10%, given tepid demand. After consolidating in the last six months, exports are expected to rebound in 4QFY24, led by a shift towards distributor model in the US and slippages of supplies due to SC disruption. Yet, Ebit margins were healthy at 14% and are likely to sustain in the near term, until new capacity commissions. Analysts of IIFL Capital Services forecast C&W revenue/ Ebit Cagr of 18/11% in FY24-26ii with 160 bps moderation in margins; leaving headroom for upside. 

FMEG turnaround delayed, yet again: 

Muted demand, coupled with aggressive A&P spend (~2x QoQ) on brand building and change in leadership marred recovery in FMEG, despite impressive upgrade in portfolio and new launches. With another set of strategic changes underway, the segment turnaround is now four quarters away. Analysts of IIFL Capital Services cut FY25/26 revenues by 19% and expect marginal breakeven only by FY26; implying 12% sales Cagr in FY24-26. 

Investing aggressively for growth: 

Polycab revised its capex for FY24 to Rs8-9bn, led by C&W segment (varied applications) to be growth ready for domestic (incl. power cables) and export opportunities.