Polycab India – Capex cycle revival, FMEG key for future growth, ICICI Securities

Polycab reported a 100% sales recovery in FY21E despite a 50% loss of revenue in Q1. Strong pent up demand and pick-up in infra spending post easing of lockdown restrictions helped the company cover up the loss of sales. Segment wise, fast moving electrical goods (FMEG) reported strong growth of 24% YoY in FY21E led by new product launches and dealer additions (3000 in FY21 vs. 1750 in FY20). Thus, segment revenue contribution in overall topline has also increased to 12% in FY21 vs. 9% in FY20. On the wire & cable (W&C) front, Polycab reported 100% sale recovery in FY21, better than 86% recovery of KEI Industries. Strong brand and leadership position of ‘Polycab’ in the W&C business (organised market share of 22%) helped in the fast recovery. On the margin front, EBITDA margin has seen marginal improvement in FY21 to 13.1% led by various cost optimisation measures. The balance sheet stayed strong with net cash position at ₹ 906 crore along with stringent working capital management. Over the long term, Polycab aims to achieve ₹ 20,000 crore of sales from present ~₹ 9000 crore through various strategic initiatives (new product launches in the premium category and expansion in newer geographies).

Strong show in Q4FY21
Polycab reported strong revenue growth of 43% YoY in Q4FY21 led by 89% and 38% growth in the revenues of FMEG and W&C segment, respectively. While a favourable base and healthy pick-up in infra spending drove revenue of W&C segment, the FMEG segment revenue growth was driven by new product launches and dealer additions in new geographies. On the expenses front, savings in employee and other costs helped negate the adverse impact of higher raw material prices and limited the fall in EBITDA margin by 25 bps YoY. On the segment front, while EBIT margin of W&C declined ~200 bps YoY, the EBIT margin of FMEG increased notably to 7% in Q4FY21 vs. 0.1% in Q4FY20 through better operating leverage.

Aims to double revenue by FY26
Polycab has set a target to achieve ₹ 20,000 crore revenues by FY26 (18% CAGR) through various strategic initiatives such as strengthening of its B2C product portfolio and maintaining leadership position in the B2B category. On the FMEG front, the company has set a target to expand dealers in top 300 cities growth and grow revenues by 3x in the next five years.

Valuation & Outlook
We revise our revenue, PAT estimate downward by ~4% each in FY22 to factor in lockdown impact. We build in revenue, PAT CAGR of 18%, 16%, respectively, in FY21-23E considering a revival in government’s infra spending along with focus on profitable growth of FMEG business. We believe strong brand and a healthy balance sheet would help it to attain its long term growth target. We reiterate BUY rating on the stock with a revised target price of ₹ 2025/share (earlier ₹ 1385), valuing the stock at 25x FY23E.

Financial story in charts
Conference call highlights

• Demand Outlook: The demand situation is better compared to last year. The management is positive that the performance will significantly improve in the coming quarters given the relaxation of lockdowns in several states.
• B2B (Institutional) – Polycab expects its B2B business (~40% of topline) to grow given the overall recovery in the economy also aided by higher exports
• B2C (Retail): Polycab plans to grow its B2C business (~60% of topline) by improving its distribution network by onboarding new dealers & distributors and opening new retail outlets

• Margins: Despite the sharp increase in input prices, Polycab has guided at maintaining its margins by taking price hikes and through cost optimisation measures. On a long term basis, the company aims to improve its margins given higher contribution from its B2C business
• Capex: The company plans to spend ~₹ 300 crore in FY22 on capex. Total 35% of the capex will be directed towards its FMEG segment while the rest will be used for the wires & cables business, backward integration and maintenance costs
• Project Leap:
• Polycab launched its new project called “Project Leap” in which it aims to achieve revenue of >₹ 20,000 crore by FY26
• Higher focus will be directed towards its B2C business, which will help drive up EBITDA margins and also to increase its exports by adding new geographies and consolidating existing ones

 Financial summary

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