We initiate coverage with a ‘buy’ rating and a fair value of Rs 700 based on 15.5X June 2021E P/E.
Polycab is the market leader in the domestic cables and wires industry with 12% market share in FY2019. Steady performance of the core cables and wires segment as well as strong growth in the FMEG segment will likely drive revenue CAGR of 11% over FY2019-22E. Its healthy balance sheet (net cash of Rs 670 crore as of June 2019) and steady return ratios are other positives.
We initiate coverage with a ‘buy’ rating and a fair value of Rs 700 based on 15.5X June 2021E P/E. Polycab’s leadership position is underpinned by a wide distribution network and product range, resulting in a revenue base larger than that of the No. 2 and 3 players combined. We expect this industry to grow at a CAGR of 8% over FY2019-23, driven by, government initiatives such as rural electrification and housing for all, investments in mass transit systems, and urbanisation.
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We believe Polycab’s revenues from this segment can grow at a faster clip of 10% CAGR over FY2019-22E as organised players steadily gain share. We expect the FMEG industry to grow at a CAGR of 8% over FY2019-23E, driven by rising income levels, consumer aspirations and improved availability of electricity. Polycab entered this segment in FY2014 and has posted stellar revenue CAGR of 51% over FY2015-19, driven by its strong brand in the electrical industry as well as extant distribution network. We expect this segment to post revenue CAGR of 28% for Polycab over FY2019-22, lifting its contribution to overall revenues to 12.5% in FY2022 from 8% in FY2019.
We forecast Polycab to report revenue CAGR of 11% over FY2019-22E. Steady margins as well as lower interest costs on account of deleveraging are set to propel net profit CAGR at a brisker 13%. Better working capital management and improved profitability will aid higher FCF generation. Our fair value of Rs 700 is based on June 2021E P/E of 15.5X. Slowdown in demand for cables and wires owing to weak growth in power, infrastructure and real estate sectors is a key risk. Large fluctuations in RM prices and forex are also risks.