Recommendations From Consumer Cables - Power Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

POLYCAB INDIA LIMITED : AN ‘ELECTRIFYING’ PRESENCE

HERE IS WHY
☛Good growth potential
☛Healthy financial performance
☛Strong market position

Polycab India is the country’s largest manufacturer and seller of an extensive range of cables and wires, and a fast-growing player in the fast-moving electrical goods (FMEG) industry, along with an established export presence. The company has a diverse customer base across a wide range of industries, including healthcare, oil and gas, renewable energy, IT digitalisation, infrastructure, metal, defence, mass transit system, electric vehicles and real estate. It is a market leader in the domestic wires and cables segment with over 12 per cent of the overall market share.

Backward integration in manufacturing enables the company to maintain full control over quality and supply chain, lower operational costs, and deliver products at competitive prices. With this in mind, the company in FY20 acquired 50 per cent stake of its partner Trafigura in the Ryker plant. Now Ryker is a wholly-owned subsidiary of Polycab India. The transaction will further allow Polycab India to have complete control of Ryker’s manufacturing operations and thereby have control on the supply side of one of its important raw material – copper. 

Infrastructure development schemes such as Smart Cities, Housing for All; thrust on rural electrification projects and digitisation; and a boost to domestic production of electrical equipment will augur well for the wire and cable industry.Another important factor propelling demand for housing wires is the growing urbanisation and growth in the number of nuclear families. The market is also witnessing a rapid shift from the unorganised to the organised sector with evolving consumer preferences, superior offerings by branded players, and reduced price differential after GST implementation. Polycab India is well-placed to capitalize on these opportunities. 

The growth in FMEG segment offers scope for natural product diversification, allowing it to leverage the advantages of common raw materials (for production) and economies of scale, and thereby achieve cost-savings in production, logistics and distribution. Polycab India has a robust network of 3,500 dealers and distributors and 125,000 retailers supplying their products across India. It has 30 warehouses across 20 states and union territories in India to support a large distribution network.

The company has shown consistent growth over the last few years. It has posted growth in sales and profits along with reduction in debt over the years. Profit margins too have improved over time with healthy ROCE. Its net sales have increased from Rs 6,770.31 crore in FY18 to Rs 8,829.96 crore in FY20. EBITDA in the same period increased from Rs 793.32 crore in FY18 to Rs 1,227.82 crore in FY20. PAT increased from Rs 358.46 crore in FY18 to Rs 773.03 crore in FY20. ROCE improved from 22.02 per cent in FY18 to 30 per cent in FY20. EBITDA margin improved from 11.47 per cent in FY18 to 13.9 per cent in FY20. PAT margin improved from 5.18 per cent in FY18 to 8.75 per cent in FY20. The company is trading at PE of 16.62x. On PB multiple, it is trading at 3.14x. The debt to equity for FY20 stood at a healthy 0.04x. By virtue of these factors, our recommendation to reader-investors is to BUY this stock.