Polycab India (HOLD): Strong investments in developing competitive advantages like brands and distribution

Polycab reported strong revenue growth of 34.9% YoY in Q4FY22, but gross margins contracted 354bps YoY due to higher input inflation and limited price hikes. The company continues to steadily expand its distribution network, which will likely result in continued volume growth. It also launched an economy segment brand Etira, with housing wires and plans to expand the product portfolio to gain market share in semi-urban and rural areas. We model Polycab to report revenue and PAT CAGR of 15.7% and 20.8% over FY22-FY24E. We remain structurally positive on the company due to its competitive advantages and growth opportunity in consumer durables. Maintain HOLD with a revised DCF-based target price of Rs2,500 (implied P/E 31x of FY24E EPS; prior TP Rs2,610).

• Q4FY22 performance: Polycab reported revenue, EBITDA and adj. PAT growth of 34.9%, 17.9% and 20.5% YoY, respectively. Gross margin declined 354bps YoY due to commodity cost inflation and limited price hikes. Decline in staff cost and other expenditure as a percentage of sales arrested the EBITDA margin impact to 173bps. PAT margin declined only 100bps YoY to 2.2% due to a lower effective tax rate.
• Strong growth across segments: Segment-wise YoY revenue growth rates were as follows: Wires and cables 39.8%, FMEG 9.3% and others 8.9%. There was a reduction in the EBIT margin YoY in all segments. We note, ~33% of the FMEG revenue are contributed by fans category. “Switches and switchgears” and “Lighting” contribute 15% of revenues each.
• Healthy volume growth continues: Polycab reported total growth of 18% in FY22; volume-value mix of growth was 25:75. It reported increase in its organized sector market share in cables and wires to 22-24% in FY22. We believe distribution expansion efforts from Polycab have resulted in volume growth for the company.
• Launch of new economy segment brand – Etira: Polycab has introduced a new sub-brand Etira, to deepen its presence in semi-urban and rural areas, where demand is relatively price sensitive. We note the company has already launched housing wires under the brand and plans to expand the product portfolio further. While this will likely result in higher volume off-take, we remain concerned about higher brand spends to push a new brand in a highly competitive space.
• Maintain HOLD: We model Polycab to report PAT CAGR of 20.8% over FY22-FY24E and RoCE to be upwards of 18% over FY22-24. We remain positive on the company’s business model due to strong moats and growth opportunities, but at current valuations we believe the upside is capped. We maintain HOLD rating with a revised DCF-based target price of Rs2,500 (implied P/E 31x FY24E).

ICICI Securities