Equity Research: Polycab India Ltd.

Summary

Polycab looks fundamentally strong in the field of FMEG at 28x FY23E EPS for further upside potential from its CMP.

Polycab is one of India's leading manufacturers of cables and wires and allied products such as uPVC conduits and lugs and glands. Polycab is engaged in the business of manufacturing and selling wires and cables and fast moving electrical goods ‘FMEG’ under the ‘POLYCAB’ brand. Apart from wires and cables, we manufacture and sell FMEG products such as electric fans, LED lighting and luminaires, switches and switchgear, solar products and conduits & accessories.

Polycab's mainstay business is electricals (81% of revenue mix). The company is a key player in cables & wires in India, with an organized market share of 20-22% in FY21, ahead of most peers. The company's overall cables & wires industry (sized at ~Rs450-500bn) market share was at 13-14% in FY21, as 30-35% industry is unorganized. The top-10 customers account for 22% of Polycab's revenue share; top-five customers account for 14% of sales share. In Annual Budget 2022, the Indian government proposed to boost capex spend on its own books by 25% (adjusted capex growth of 15%), which bodes well the investment cycle recovery. 

In FY14, Polycab also entered the fast-moving electrical goods (FMEG) market, which includes B2C appliances including fans, lighting, and heaters. In FY21, this category contributed about 11% of total revenue, with sales increasing at a +37% CAGR over the previous five years. Fans, lighting luminaires, IOT products, switches, switchgears, water heaters, pipes, conduits, agricultural pumps, solar, etc. are all included in the FMEG category. Polycab's goal in this area is to attain internal production and pan-Indian distribution. With 52 warehouses in India and 23 manufacturing sites spread over 7 locations, Polycab demonstrates a significant manufacturing footprint. The business has a well-established distribution network that includes more than 4,100 dealers, 165,000 retail locations, and 180,000 electricians. The "Polycab Galleria," "Arena," and "Shoppee" are part of Polycab's multi-format retail strategy. The company has around 16,000 SKUs, and domestic manufacture accounts for 99% of revenues. 11,800+ workers are employed (on-roll plus contractual). The amount spent on research and development (R&D) in FY21 was Rs208 million, or 0.2% of revenue.

Polycab is one of the key manufacturers of cables & wires in India, with an organized market share at 20-22% in FY21, ahead of most peers (overall industry market share at 13-14% in FY21). While the mainstay business is Electricals (81% of revenue mix), Polycab has also forayed in FMEG (Fans, Switches, Switchgears, Lighting). This segment accounted for 11-12% of revenue mix in FY21, having grown at +37% CAGR over past 5 years. Recently in Nov 21, Polycab signed an agreement with a wholly owned subsidiary of Hindalco to divest its entire equity shareholding in Ryker (a wholly owned subsidiary of Polycab) - approximate EV consideration at Rs3.2bn. 

Key growth drivers:

1) Consumption - demographic dividend, rising disposable income, nuclearization, evolving consumer behavior.
2) Infrastructure - national infrastructure pipeline, Electrification, private capex, urbanization, smart cities, 'Housing for All'. 3) Capex push - Annual Budget 2022 outlined a notable boost for capex revival in India.
4) Policy Reforms - state industrial promotion schemes Tax, Land and Agriculture reforms, export subsidy schemes.
5) Emerging levers - digitalization, renewable energy, electric mobility, IoT. 

In Annual Budget 2022, the Indian government has proposed to boost capex spend on its own books by 25% (adjusted capex growth of 15%), which bodes well for investment cycle recovery. Volumes traction led by housing upcycle - could translate into improved operating leverage, boosting margins and profitability. Overall capex / B2B revival augurs well for power cables / industrial cables & wires. Synergies from initiatives / Projects - 'Shikhar', 'Leap' and ‘Udaan'. Faster traction in the new products launched, mostly in the FMEG segment. Price hikes - ability to pass-on raw material volatility in cables and wires business. Expansion of existing product lines, with consistent new launches. Utilization of existing cash pile for tapping future growth opportunities. 

Polycab forayed into FMEG segment in FY14, with a view to diversify the portfolio with focus on upcoming industry trends. The company is currently present in the following segments - Fans, Lighting Luminaires, IOT products, Switches, Switchgears, Water heaters, Pipes, Conduits, Agro pumps, Solar etc. Within this category, Polycab's focus is on achieving pan-India distribution and in-house manufacturing. 

FMEG Leveraging Synergies with Core Cables & Wires Business:

1) Common raw materials (eg, metals such as copper, polymer / plastic) typically strengthen negotiating power by the company. 

2) Brand Franchise in the electricals industry; capitalizing on the existing distribution network in the electricals category. 

3) Economies of scale; cost-savings in transportation and distribution. 4) Manufacturing know-how.
5) Cross-sell opportunities to a larger customer base.

Polycab is working on three strategic initiatives for catalyzing growth. They are as follows - 1) Project 'Leap': This project signifies Polycab's vision of crossing sales of Rs200bn by FY25e. This inherently implies revenue CAGR of +18% over FY21-25e, 2) Project 'Udaan': this signifies Polycab's strategic cost optimization initiative, with a view to building a leaner and more sustainable cost structure; company envisages savings worth 80bps (FY21 OPM at 13.1%), 3) Project ' Shikhar' - this sales acceleration programme was initiated in Jan’21. This programme has been rolled out with an intent to strengthen the company’s engagement with retailers, electricians and small contractors. This project targets to reach 300 high potential cities within a span of three years, reach over half of all the retailers directly and drive 3x sales.

Polycab has a healthy balance sheet with net debt/equity at -0.07x as of Mar'21 - we expect net cash levels to improve further over FY22-25e. We project RoCE expanding from 21% in FY22 to 29% by FY25, and RoE from 15% to 22%. Working capital could improve post divestment of Ryker, which was primarily manufacturing copper rods. We estimate inventory days to normalize to 85-90 days over FY23-25e, compared to 100+ days over FY19-21. 

This project signifies Polycab's vision to cross revenue of Rs200bn by FY26e. This inherently implies revenue CAGR of +18% over FY21-25e. Polycab undertook a strategic cost optimization initiative ‘Udaan’, in association with a reputed professional consultant. This is with a view to building a leaner and more sustainable cost structure – the company envisages savings worth 80bps. This project takes a holistic approach analyzing various dimensions of product life cycle for e.g. strategic procurement, manufacturing process, supply chain, design optimization and value engineering, coupled with implementation of digital tools enabling analytics- driven decision-making. Polycab initiated its sales acceleration program - Project ‘Shikhar’ - in Jan’21. This has been rolled out with an intent to strengthen the company’s engagement with Retailers, Electricians and Small contractors. This project targets to 1) reach 300 high potential cities within a span of three years, 2) reach over half of all the retailers directly and 3) drive 3x sales.

Cables & Wires revenue (81% of Polycab's sales mix in FY21) is expected to clock +15% CAGR over FY22-25e. Key structural demand drivers would be infrastructure development (national infrastructure pipeline, electrification, urbanization, smart cities), housing upcycle and capex push (govt. capex push; private capex revival). 

Polycab Multi Format Retail Approach:

Polycab has embarked on a multi-format retail approach - 'Polycab Galleria', 'Arena' and 'Shoppee'. 

Key pointers to highlight: 

1) These are a part of company's strategy to showcase their product offerings, enabling consumers and trade constituents to experience and choose from a wide range of quality products. 

2) These stores are currently present in Mumbai, Pune, Trivandrum, Visakhapatnam, Indore, Ahmedabad, Cochin, Surat, Hyderabad and Patna. 

3) Polycab aims to expand such experimental stores across key cities. 

4) Helps deepen connect with direct customers in the FMEG market, as well as retailers. 

5) Stores equipped with audio-visual facilities for training electricians and retailers on safety, soft skills, technical basics etc. 

Financials:

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Conclusion:

Polycab has maintained a leadership position in the organized C&W segment with a market share of over 24%. With a strong distribution network and a strong brand recall, the company is poised to gain market share from the unorganised players in both Wires & FMEG segments. The management has set a revenue target of ~Rs 20,000 Cr by FY25 led by faster and more profitable growth in the B2C segments (FMEG and Retail Wires) and industry-leading growth in the B2C business. We believe the growth will be driven by demand recovery, new product launches, product premiumization, and increasing contribution of exports over the long run. We value the company at 28x FY23E EPS to expect a good upmove from its CMP.