Recovery in private capex, government expenditure and higher exports led to strong revenue growth of 10.2% YoY. While increase in ad-spends led to margin decline in FMEG segment, margin expansion in C&W segment pushed up the EBITDA margin of Polycab by 309bps YoY. Notably, the company plans to steadily increase the share of B2C business (to 50% by FY26) in the overall revenue mix, which will be a key factor for the superior margins and re-rating of the stock. We revise our earnings estimates upwards to factor in Q3FY23 results and correction in copper prices and model Polycab to report revenue and PAT CAGRs of 15.3% and 26.5% over FY22-FY25E. 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 (24.3x FY25E). Maintain HOLD with an unchanged DCF-based TP of Rs2,700 (implied P/E: 24x FY25E EPS).
- Q3FY23 performance: Polycab reported revenue, EBITDA and PAT growth of 10.2%, 39.3% and 45.8% YoY, respectively. Gross margin expanded 309bps YoY led by carry-over of price hikes and fall in raw material prices. Ad-spends increased by 42bps to 1.7% of net sales YoY. EBITDA margin expanded 309bps YoY to 13.6%.
- Segment-wise performance: Segment-wise YoY revenue growth rates were as follows: Wires and cables 11.5%, FMEG 0.5% and others (incl EPC business) 27.4%. While EBIT margin for C&W business grew 344bps YoY to 13.7%, FMEG reported an EBIT loss. Exports surged 32% YoY in Q3FY23 contributing 5.9% of the company’s revenue. The company expects exports to contribute 8-10% of revenue in FY23. FMEG segment was impacted due to slowdown led by high inflationary environment.
- Steady efforts to expand the portfolio: We like Polycab’s strategy to continuously explore gaps in the offerings. The company plans to foray into the business of high-voltage and ultra-high voltage wires and cables. It is also investing in the expansion of its Nashik facility to increase production capacity of B2C products. We note the company plans to achieve 50% of its revenue from B2C segment by FY26.
- Maintain HOLD: We model Polycab to report PAT CAGR of 26.5% over FY22-FY25E and RoCE upwards of 20% over FY23E-FY25E. 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 an unchanged DCF-based target price of Rs2,700 (implied P/E 24x FY25E).