Kotak Institutional Equities: Initiating coverage on polycab with ‘buy’ rating

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Published: August 31, 2019 3:21:30 AM

We initiate coverage with a ‘buy’ rating and a fair value of Rs 700 based on 15.5X June 2021E P/E.

Kotak Institutional Equities, Polycab, wires industry, FMEG segment, CAGRIts healthy balance sheet (net cash of Rs 670 crore as of June 2019) and steady return ratios are other positives.

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.

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