Q4FY23 Review: Polycab India: C&W outperformance continues

16 May 2023 , 10:25 AM

Polycab’s strong performance in FY23 was driven by structural tailwinds in Cables portfolio, increased penetration of B2B sales in developed markets and improving profitability in wires. The company is realigning FMEG operations to focus on higher margins, premiumisation and brand building — to drive sustenance and profitability; results of which are expected in FY24-26. Strong tailwinds in C&W portfolio, healthy profitability and FCF generation (~Rs30bn in FY24-26) provide cash chest to invest in new opportunities (incl. inorganic) and steady increase in dividends.

Infra thrust driving C&W: 

Strong traction from GoI’s spend on Infra and capex outlay augur well for double-digit growth in Cables (70% of C&W). Merger of LDC and HDC verticals in FY22 has aided delivering strong 21% volume growth and 17% revenue growth in the domestic distribution, during FY23. Exports grew 52% YoY (9.8% of C&W sales, achieving targeted mix under Project Leap) led by increasing penetration in developed markets (US being 50-60% share), supporting higher growth and margins for C&W. Ebit margins of 13.1% were driven by favourable sales mix (exports, higher OPMs in domestic cables and better OPM in wires) just breaching margin guidance of 11-13% range.

FMEG continues to drag: 

Revenue was flat YoY due to realignment of distribution (Project Leap), competitive pressures, weak demand and impact from BEE transition. Higher A&P spends, staff costs and input costs pulled FMEG in operating loss. Investments in brand, premiumisation, new launches, focus on higher-margin categories like switches & switchgear, and increasing share of in-house manufacturing — are expected to aid double-digit growth and gradual OPMs recovery (10-12% targeted by FY26).

Strong core portfolio driving healthy return ratios: 

Analysts of IIFL Capital Services forecast revenue/PAT Cagr of 15%/13% in FY23-FY26 with FCF of Rs8-10bn p.a. and ROCE of ~27%. Strong returns and FCF profile with NWC cycle of ~60 days make it a quality bet to play the cyclical capex story with FMEG as an Option value.

Analysts of IIFL Capital Services raise FY24 EPS by 6%. Valuations remain rich, limiting 12-month TP upsides to 9% at Rs 3681.