Polycab India Research Report By Prabhudas Lilladher

Rewiring into a B2C giant

We initiate coverage on Polycab with a BUY rating and target price of Rs1,247 on SOTP basis. We believe Polycab is fast emerging as a B2C player given 1) strong potential in FMEG and Retail wires segment 2) sustained investments in brand building and 3) steadily increasing distribution network. We believe Polycab is well placed to capitalize on uptick in demand for housing construction given wide product range in Cables, Wires, Switchgear, Switches, Conduit Pipes, Lighting, Fans and Water heaters etc.

We estimate 13% and 24% CAGR in sales of B2C wires and FMEG which will increase sales contribution mix (currently at 40%) to ~50% over next 5 years. Increase in scale of operations and improved mix will improve FMEG margins by 600bps over FY20-23. We estimate Sales/PAT to grow at a CAGR of 16.7%/ 15% over FY21-23E led by 14.4% and 28.8% sales CAGR for wires and cables and FMEG segments and 30bps margin expansion led by scale/mix. We value the stock on SOTP basis and arrive at a target price of Rs1,247(derived PE of 18x FY23 EPS; W&C/ FMEG valued at 18x/ 25x). Polycab trades at 14.9x FY23 EPS, which is at a premium to Finolex/KEI (12.4x/11.6x), but at a significant discount to ECD players like Havells/Crompton (46.8x/ 35x). Steady increase in B2C mix will likely rerate the stock in long term. We initiate coverage with BUY rating.

Investment Arguments

 Fast emerging as a B2C player: Polycab has evolved itself from being B2B player to a fast growing B2C brand, given increase in FMEG share by 680bps to 9.4% over FY15-20. B2C mix (FMEG/ retail wires), currently at 40% is set to breach 50% in the medium term given 1) strong growth potential in FMEG and & Retail wires segment 2) investments in brand building and 3) increase in distribution reach (from 100,000 to 137,000). We believe presence in large FMEG categories like Fans, Lighting, Switchgear, Switches, Pumps and Appliances (Coolers, Water heaters and Irons) will enable sales to grow at a CAGR of 28.8% over FY21-23.

 Market leader in Wires & Cables with most versatile range: Polycab is India’s largest and most versatile manufacturer of Wires and Cables (12%/ 18% overall/ organized share) with presence across segments like Power cables, Control cables, Optic fiber cables, Instrumentation cables and Solar cables. We expect W&C segment sales CAGR of 14.4% over FY21-23 led by 1) Infrastructure schemes (like Smart Cities, Housing for all etc.) 2) Entry into newer segments (like EVs, defence) and 3) Distribution led export model.

 Valuation & Outlook: We estimate Sales/PAT CAGR of 16.7%/ 15% over FY21-23 led by 1) improving business mix, 2) gains from operating leverage and cost optimizing initiatives 3) sustained investments in brand building and 4) increasing distribution reach. At current valuations of 14.9x FY23 earnings, it trades at a premium to Finolex/KEI (12.4x/ 11.6x), but at a significant discount to ECD players like Havells/Crompton (46.8x/ 35x). Steady increase in B2C mix will rerate the stock in long term. Initiate coverage with a BUY rating and a SOTP derived target price of Rs1,247, a 21% upside.

Polycab – Evolving into a formidable FMEG player

Polycab is India’s largest player in wires and cables (W&C) segment with formidable brand presence. It is one of the fastest growing FMEG (Fast Moving Electrical Goods) player, aiding its transformation from a B2B company to a B2C company.

 Polycab is a market leader in domestic wires & cables (W&C) segment with over 12% market share (18% organized market share).

 A forward extension to its W&C business, Polycab is also present in EPC business bidding for projects with ~40-60% cabling requirement.

 In 2014 Polycab entered FMEG space by selling fans, lights, switches, switchgears, irons, water heaters, coolers, solar, pumps and conduit pipes etc.

 Polycab’s fundamental strategic priorities are built around five axes: 1) strengthening business and product offerings 2) growing distribution network 3) enhancing technological competence 4) augmenting brand visibility & customer satisfaction and 5) improving operational efficiency

 Polycab manufactures majority of its products in-house through 25 plants (4 for FMEG) across 7 locations. High degree of backward integration enables it to maintain full control over quality and supply chain, lower operational costs and deliver products at competitive prices.

 Contribution of B2C business increased from 30% since few years ago to present 40%. We expect it to breach 50% in medium term led by 24%+ growth in FMEG business and 13% growth in Polycab branded wires business.

Over FY15-20, Polycab’s sales grew at a CAGR of 13.4% with W&C segment growing by 11.4% and FMEG by 46.7%. Within W&C, Polycab is focused on consolidating its presence by entering in new categories (special cables) while also establishing a distribution led export business. In FMEG, focus is on improving the mix and profitability by introducing more premium offerings in large categories (like fans, lights, switches, switchgears) and achieving scale in remaining categories.