Recession, Recession, Recession!
Fear sells faster than any blockbuster product, indeed.
Some experts are now predicting a full-blown global recession triggered by rising inflation and rising interest rates.
As a result, copper and aluminium prices have declined more than 20% and 30% respectively over the last 3-4 months. Now should you worry about a potential recession or get excited about some manufacturing companies that extensively use these base metals?
Well, frankly, we don’t have any definite answer to this. However, some manufacturing companies that may benefit from India’s structural growth story are worth tracking hereon.
Today, we decided to talk about one such company, Polycab India.
Polycab India is a leading manufacturer of wires and cables in India. Although Wires and Cables business is the mainstay of Polycab, it has been rapidly growing its presence in the Fast-Moving Electric Goods (FMEG) space. FMEG is an intensely competitive space, but Polycab has been working on aggressive expansion plans.
Over the years, the company has brought down its dependence on B2B (Business-to-Business) segment. From nearly 70% until five years ago, the contribution of B2B segment to the company’s top line has come down to 58%-60%.
The company aspires to claim the number one position, across all product categories. At least that’s the vision.
At present, 4,600 distributors and 2.5 lakh retail outlets sell Polycab products. The company has also developed an alternate sales channel by partnering with leading e-commerce platforms such as Amazon, Flipkart and JioMart amongst others.
Growth trends in infrastructure, housing and manufacturing sectors largely decide how strong the demand trends are for Polycab. At the current stage of development, India is likely to witness a substantial growth in infrastructure and housing.
Moreover, the company is eyeing some niche opportunities in sunrise sectors such as Electric Vehicles (EV), defence, data centres and digital connectivity amongst others.
Raw material costs accounted for 74.1% of Polycab’s revenue in FY21 which shot up to 77.6% in FY22.
Copper and aluminium are the key raw materials for the company. Now it remains interesting to see if cooling base metal prices offer tailwinds to Polycab.
Despite a 19% correction over the last 2 months, Polycab is up 12% from its June 2021 levels. Moreover, the stock has generated 4X returns for those who invested in the Initial Public Offering (IPO) of Polycab India in April 2019. The offer price was Rs 538/share, mind you.
At the time of IPO, Polycab commanded a Price-to-Earnings (P/E) multiple of 20. Now the valuation multiple has swollen to 36 times.
Oh, does that mean the company is overvalued even after recent correction?
There are always more facets to a story than what we think initially.
In that context, Polycab is no different.
At the time of IPO, the company had an 18% market share in the organized market of wires and cables. This has now increased to 24%. The company’s net profit has jumped from Rs 500 crore in FY19 to Rs 917 crore in FY22.
The Project Leap—Polycab’s transformation programme—has set out a clear cut objective of achieving Rs 20,000 crore of revenue by FY26. In other words, the company is targeting a top-line growth of 14% on compounded annualized basis, here onwards.
On the margin front, the company aspires to clock a 12% EBITDA margin on FMEG portfolio and wants to maintain EBITDA margins of 11%-13% in the Wires and Cables business.
However, more than the top-line growth which is vastly affected by a rise/fall in the commodity prices, you should keenly track the bottom line and margin performance of the company.
4 pillars of Project Leap
Growing its presence in the smaller towns, increasing the contribution of premium products and offering products across price-points remain some near and medium term objectives of the company.
Polycab is planning to incur an annual capex of Rs 300-400 crore for the next few years. The company has earmarked 2/3rd of the capex amount for Wires & Cables business and 1/3rd for FMEG business.
Moreover, Polycab is willing to take an inorganic route, if required, and acquire suitable companies having superior technological preparedness and robust regional distribution networks.
By adopting data-driven production and planning strategies, Polycab has managed to reduce its time-to-market, optimize costs and thereby gain a market share. It’s working on the end-to-end digitalization of the entire distribution system.
Polycab has launched a new sub-brand Etira for the economy segment. Its progress will be crucial to watch out for.
Moreover, the company recently merged heavy duty and light duty cable divisions to unlock cross-selling opportunities and achieve better economies of scale.
Such initiatives take time to fructify.
Will Polycab deliver as per its own guidance? Do let us know what you think!
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.
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