Management Speak: Polycab India (Unrated) - Consolidating leadership position

We met Polycab India (Polycab) management. Key takeaways:

• Export and government orders to drive FY20 wires & cable (W&C) revenues: Polycab is a leading player in India’s W&C market, with 18% organised market share. In Q2FY20, slow construction activity and floods led to muted demand in domestic cables. However, management believes execution of Rs10bn Dangote export order (60% done in FY20) and fibre-optic cable (OFC) orders from Gujarat and Bihar state governments would drive FY20 revenue growth in W&C. Long term growth would be driven by sustained shift towards organised players (quality products), extensive product portfolio (10,000+SKUs), deep reach (added 15,000 retailers in Q1FY20 to 115,000; project Josh to increase retail reach) and brand loyalty (A&P spend at 1.5% of FY19 sales). Polycab continues to expand capacity (Rs2.5bn capex/year) to cater to Rs550-570bn market.
• Products, reach and brand to drive FMEG growth: Leveraging on its W&C strengths, Polycab entered the FMEG segment (fans, switchgears, lighting, etc) in 2014, focussing on premium economy customers, offering them end-to-end product range for their electric infrastructure needs. The segment (8% of revenues) saw 38% revenue growth in FY19 to Rs6.4bn, which management believes will sustain over next 2-3 years, led by increase in reach and product portfolio.
• Margins to be range bound: W&C EBIT margins have expanded from 7% FY17 to 12.1% in FY19 led by price hikes, improved mix towards high margin wire (45% of W&C) segment and cost efficiencies (backward integration). Further, favourable commodity prices and consequent pricing actions by management boosted margins in FY18 and FY19 (quarterly margins spiked to 16-17%). Long-term margins in W&C should sustain at 10-12% based on commodity, product mix and operating leverage. Also, scale and improved FMEG mix would aid 150-200bps annual margin expansion over next few years and drive long-term margins to 10%+ (FY19 FMEG EBIT margin at 1.2%).

Valuation and view

Polycab is India’s largest W&C player with 18% share, given its extensive product portfolio, deep reach and brand loyalty. Sustained focus on improving reach and shift to high-margin wires and customised cables for high-end applications should drive steady growth in Polycab. Efforts to improve reach and expand product portfolio would continue to drive revenue momentum in FMEG. Improvement in working capital and FCF too have boosted return ratios, which management believes should sustain. The stock trades at 13.7x FY21E consensus earnings. Unrated.