Updated: May 18, 2022
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Polycab is India’s leading manufacturer of cables and wires. Established in 1996, the company has recently launched a wide range of consumer electrical products like fans, switches, switchgear, LED lights and luminaries, solar inverters, and pumps.
Currently, the company has 23 manufacturing facilities at six different locations, alongside a network of approximately 4,000 dealers and distributors. The company reaches approximately 165,000 retail outlets. With an aim to control supply chain, product quality, and generate higher margin, there is a significant focus on backward integration. This has allowed the company to control a considerable 20 to 22% of the organized wires and cables market, and 13 to 14% overall. Based on company estimates, the size of the industry is in the region of 45,000 to 50,000 crore rupees, as of Fiscal Year 2021.
The company’s revenue streams in Fiscal Year 2021 include an 81% share from Wires and Cables, 7.5% from copper and EPC among others, and 11.5% from fast-moving electrical goods (FMEG).
Polycab is being sold at FMEG story. Is it factually accurate?
The company has a vision of increasing its revenue from 9,000 crore rupees to 20,000 crore rupees by Fiscal Year 2026. Polycab had 25-30% revenue growth in FMEG over the last couple of years. Assuming that this growth rate continues up to Fiscal Year 2026 and company achieves its revenue target, FMEG business would have grown from around 1,000 crore rupees in Fiscal Year 2021 to around 3,800 crore rupees in Fiscal Year 2026 (30% annualized growth). It would still be approximately 15% of revenue vs current level of 11.5%. Cables and wires would still account for more than 70% of the revenues by then.
The company benefits from having a strong management team, and looks to the industry to hire professional talent. The relationships they’ve developed with distributors allow it to maintain product availability.
Polycab spends high amount on advertisement and promotion spending which has allowed it to have a high brand recall even in a very competitive market. The company’s financial situation looks good, with a net cash balance of around 900 crore rupees as of March 2021.
So, what is our view on company valuation?
Polycab came out with its IPO in April 2019 at a share price of 538 rupees. The share price has increased by over 4.5 times in the period where the profitability has approximately doubled. Polycab trades at Price to Earnings (TTM) multiple of 40 times vs KEI Industries of 30 times and Finolex Cables at 11 times.
Business looks good for the long term and is a market leader in the wires and cables segment but not so strong in the FMEG space, so investors should evaluate entering the stock after a significant correction.
As for the risks to the analysis, the ample liquidity in the market can keep the stock price at elevated level in short and medium term. Moreover, the strong revival in the real estate industry can push the revenue and profit growth higher.
So, would you invest in Polycab? Share your views in the comments section and like the video if you liked our analysis.
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