Updated: Jun 9
Company Name – Polycab India Limited (Polycab)
Current Share Price – INR 2,394 (May 10, 2022)
Market Cap – INR 35,773 cr
[Updated for Q4FY22/FY22 results]
1. What is interesting about the stock?
"We are the only mammals that can cooperate with numerous strangers because only we can invent fictional stories, spread them around, and convince millions of others to believe in them." Yuval Noah Harari in the book Sapiens.
I was trying to look for some information on Polycab. I came across a couple of YouTube videos with Warren Buffett quotes in the background and some other places in the video. YouTube, WhatsApp, Twitter, and Telegram have schools of investment giving compounding knowledge. Learning basics is good but one should do their analysis before investing – don’t fall for storytelling. I can say from experience in the last 20 years of seeing the market closely. I saw power generation companies with capped ROEs sold as multi-baggers in 2008. Many other instances come to mind – IT, Telecom, Infra, NBFC, etc.
Who doesn’t love a story?
Stories sell. We often believe them without thinking or questioning. And they can have an unjustified weight on our perceptions. Consequently, stories often impact markets and our investment decisions when they shouldn’t.
Polycab is India’s leading manufacturer of cables and wires. More recently Polycab has also launched a wide range of consumer electrical products like fans, switches, switchgear, LED lights and luminaries, solar inverters, and pumps. Polycab has 23 manufacturing facilities at four locations. It has a network of ~4,600 dealers and distributors and reach ~205,000 retail outlets. Company focuses on backward integration to control the supply chain, and product quality and generate a higher margin. Company has a 22-24% market share in the organized cables and wires space and 15-16% in the overall market. Based on company estimates, the industry size is INR 60,000 – 65,000 cr in FY22.
Is it an FMEG company?
FMEG stands for fast-moving electrical goods company. Company revenue share in FY22 from various segments is:
Cables and Wires – 87%
FMEG – 10.2% (fallen from 11.5% in FY21)
Other (EPC, Copper) – 3%
Company has a vision of increasing its revenue from INR 9,000 cr in FY21 to INR 20,000 cr in FY26. Polycab had 30% revenue growth in FMEG over the last five years on a lower base with a growth of 21-23% in the last couple of years. Let’s assume that this growth rate continues up to FY26 and the company achieves its revenue target. FMEG business would have grown from ~ INR 1,250 cr in FY22 to ~INR 3,060 cr in FY26 (25% annualized growth). It would still be ~15% of revenue vs the current level of 10%. Cables and wires would account for more than 80% of the revenues in FY26 – so is it an FMEG company?
Strong management. Company is adding professional management talent from the industry
Backward integration to control the supply chain, and product quality and generate a higher margin
Relationship with the distribution network – maintaining product availability
High brand recall – Polycab spends a high amount on advertisement and promotion spending
Financial strength – Company has a net cash balance of ~INR 900 cr as of March 31, 2021
Revival of the real estate sector could add tailwinds
The highly competitive market through the unorganized market is shrinking
A commodity like Copper and Aluminum forms a significant portion of the raw material cost – Company can pass on some costs to the customer with a lag. But high prices could impact demand and shift the market to unorganized players in the short/medium term
2. Key Historical Financials
Polycab recorded solid growth of 37% in FY22 and 35% in Q4FY22 on a YoY basis
EBITDA margin has come down in Q4FY22 and FY22 due to
higher raw material price of copper and aluminum. Company has increased its end product prices to partially compensate for these increases
lower margins in the FMEG business where EBIT margins have fallen from 4.7% in 9MFY21 to 1.0% in 9MFY22
Company has guided towards 11-13% EBITDA margin for both cables & wires and FMEG business in long term
Company had high-profit growth in FY19 and FY20 – and increase in margins (12% to 13%), higher other income, and deleveraging leading to lower interest costs. Profit growth has slowed down significantly in FY21 (16%) and FY22 (3%)
Polycab has ROE of 18% in FY22, which is quite healthy but has fallen vs FY22
Cash flow convertibility (CFO/EBITDA) is poor at 41% in FY22 - due to higher working capital in the business
3. What is my view on company valuation?
Polycab came out with its IPO in April 2019 at a share price of INR 538. The share price has increased 4.3x in the period where the profitability has increased by ~2x so the predominant source of share price increase has been multiple expansion on the back “FMEG” narrative.
Company trades at P/E (TTM) multiple of ~40x vs KEI Industries of 28x and Finolex Cables at 10x. The long-term average (5-year) P/E multiple of these companies is ~23x.
Let’s assume that Company can deliver on its revenue target and the EBITDA margins of both businesses remain in the 13% range, Company will have 15% profitability from the FMEG business and remaining mostly from the cables and wires business. Cables and wires business trade at a P/E multiple of ~20x and FMEG business trade at 45x (long term average of Havells). The weighted average multiple of the business comes to (15% X 45 + 85% X 20) or ~24x which is 40% lower than the current multiple. Even this is after attaching 100% probability to the management plan (both revenue increase of FMEG business and increase in its margins).
Company is looking at a revenue CAGR of ~13% up to FY26 based on their plan so the PAT growth rate can be assumed to be ~15% as the EBITDA margins are expected to remain ~13%. So, the current valuation implies a PEG ratio of ~3x which is very expensive.
Business looks good for the long term and is the market leader, so investors should evaluate entering the stock after a significant correction.
4. What are the risks to the investment analysis?
Risks to the analysis are:
The narrative of being an FMEG stock and ample liquidity in the market can keep the stock price at an elevated level in the short/medium term
Strong revival in the real estate industry can push the revenue and profit growth higher to the 20-25% range
About the Author
I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.