Polycab reported strong revenues in Q2FY23 in-spite of price corrections in its cables & wires business (3-year CAGR: 15.4%). Steep inflation led revenue decline of FMEG segment. While carry-over of pricing actions and correction in raw material prices led to recovery in EBITDA margin (expanded 309bps YoY), EBIT margin of FMEG segment was lower due to likely higher trade and brand building investments. We revise our earnings estimates to factor-in Q2FY23 and model Polycab to report revenue and PAT CAGRs of 15.2% and 28% over FY22-FY24E. We remain structurally positive on Polycab due to its competitive advantages and growth opportunity in consumer durables. However, we see limited stock price upside at current valuations (29x FY24E). Maintain HOLD with a revised DCF-based TP of Rs2,700 (implied P/E: 29x FY24E EPS; earlier target price: Rs2,250).
- Q2FY23 performance: Reported revenue, EBITDA and adjusted PAT grew of 10.8%, 46% and 36.9% YoY respectively, in Q2FY23. Gross margin expanded 418bps YoY led by carry-over of price hikes and softening of raw material prices. Freight cost increased to 40bps to 2.7% of net sales YoY. Higher other expenditure restricted EBITDA margin expansion to 309bps YoY.
- Segment-wise performance: Segment-wise YoY revenue growth rates were as follows: wires and cables 12.3%, FMEG -11% and others 10.5%. While the EBIT margin for C&W business grew 304bps YoY to 11.7%, FMEG reported an EBIT loss. Exports surged 75% YoY in Q2FY23 contributing 13% of the company’s revenue. Strong recovery was witnessed in the institutional business as well; switch and switchgear category grew 123% QoQ. However, FMEG segment was impacted due to slowdown led by high inflationary environment.
- Merger of C&W and switchgear segments to unlock value: Polycab merged: (1) its retail C&W business with the switch and switchgears vertical, and (2) fan business with the lighting vertical, in order to leverage operational benefits. We believe the internal restructuring will likely help to leverage distribution benefits and capitalise on potential cross-selling opportunities.
- Maintain HOLD: We model Polycab to report a PAT CAGR of 28% over FY22-FY24E and RoCE upward of 20% over FY23E-FY24E. We remain positive on the company’s business model due to strong moats and growth opportunities. However, at current valuations we believe the upside is capped. Maintain HOLD with a revised DCF-based target price of Rs2,700 (implied P/E 29x FY24E).