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VP Research: Vinod Chari Associate: Pranav Lala

Tel: +91 22 40969776 Tel: +9122 40969722

E-mail: [email protected] E-mail: [email protected]

September 08, 2020

Polycab India

September 08, 2020 2

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Polycab is an established player in the wires and cables business with more than 5 decades of experience and is a market leader with more than 12% share. Polycab has been improving its mix over the last few years from a relatively commoditized cable and wire business to making inroads in the FMEG (Fast Moving Electrical Goods) segment, which currently contributes 9.4% to the revenue mix. Over the last 4 years, its cable business has grown at a ~9% CAGR while the FMEG business has grown at ~43% CAGR though from a low base, resulting in a profit CAGR of 37% over the same period. It has backward integrated to manufacturing copper rods, which helps it have control over quality and timing of manufacturing. It targets to grow the FMEG business majorly though inhouse manufacturing and expanding distribution. Increasing B2C mix should help stock rerating Polycab has transitioned itself well over the past five years from being majorly a B2B player to currently having a 35% B2C mix and targeting a 50% B2C mix over the medium term. The B2C segment comprises mainly of the retail wires and FMEG business. The FMEG business has grown at a 43% CAGR over the last 4 years with a 2.5x jump in the revenue mix from ~3.8% in FY16 to ~9.4% in FY20. Though a late entrant in the FMEG segment, it had the advantage of pre-existing brand value from its wire business. The investment in branding (A&P spends) has grown at a CAGR of 37.2% over the last 6 years and now forms 1.2% of FY20 sales and ~3.4% of B2C sales. The focus on increasing the distribution network, which currently comprises of more than 3,500 dealers (of this 34% are exclusively for wires and cables and 50% are exclusively for FMEG) should aid its scale up.

Stage set for scale benefit and operating leverage The cables & wires business is currently operating at ~65% capacity utilization levels and we expect secular growth to come from diminishing share of unorganized market and the focus to expand distribution and increase exports. For FMEG segment, with major upfront investments completed, we expect current margins of 2% to expand at an average pace of ~100 bps a year over the medium term as the company scales.

Initiate coverage with an Accumulate, buy on dips While the business environment in FY21 is impacted by the pandemic, we expect it to bounce back in FY22 with a YoY profit growth of 28%. We value the company at 18x FY22E, giving us a TP of Rs.950 and recommend buying it on dips. We also expect the stock to get rerated in line with its mix changing from being 35% B2C to 50% B2C over the medium term. FINANCIALS (Rs Mn) Particulars FY18A FY19A FY20A FY21E FY22E

Revenue 67,703 79,856 88,300 78,950 90,715

Growth(%) 23.1 17.9 10.6 (10.6) 14.9

EBITDA 7,289 9,528 11,350 9,479 11,460

OPM(%) 10.8 11.9 12.9 12.0 12.6

PAT 3,586 5,003 7,656 6,088 7,780

Growth(%) 54.1 39.5 53.0 (20.5) 27.8

EPS(Rs.) 24.1 33.6 51.4 40.9 52.3

Growth(%) 54.1 39.5 53.0 (20.5) 27.8

PER(x) 35.3 25.3 16.5 20.8 16.2

ROANW(%) 16.5 19.3 22.9 15.0 17.1

ROACE(%) 15.0 20.0 23.3 15.2 17.2

CMP Rs 849

Target / Upside Rs 950 / 12%

BSE Sensex 38,506

NSE Nifty 11,334

Scrip Details

Equity / FV Rs 1,489mn / Rs 10

Market Cap Rs 127bn

US$ 2bn

52-week High/Low Rs 1,182/Rs 570

Avg. Volume (no) 3,57,056

NSE Symbol POLYCAB

Bloomberg Code POLYCAB IN

Shareholding Pattern Jun'20(%)

Promoters 68.6

MF/Banks/FIs 12.9

FIIs 4.5

Public / Others 14.0

Polycab India Relative to Sensex

VP Research: Vinod Chari Tel: +91 22 40969776

E-mail: [email protected]

Associate: Pranav Lala Tel: +9122 40969722

E-mail: [email protected]

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POLYCAB SENSEX

Polycab India

Accumulate

September 08, 2020


Investment Thesis

Increasing B2C mix from 35% currently to 50% over the medium term, could rerate the stock.

The capacity utilization levels for the wires and cables business is 65%-70%. We expect the benefit from operating leverage to play out as the company scales.

Most upfront investments in the FMEG business are completed and we expect current margins of ~2% to improve by an average of 100 bps a year over the medium term.

Catalyst

Higher than expected improvement in working capital leading to better cash flows.

Margin improvement in the FMEG business through operating leverage and pricing power.

Company Background

Starting mainly as a cable and wire company, Polycab has now forayed into FMEG. 84% of its revenues and 90% of its EBIT still come from cables and wires where it is the market leader with more than 12% share. It has a wide range of offerings across cables and FMEG products. The promoter family has been in this business for over 5 decades and the CMD Inder Jaisinghani has been a part of the team running the company since inception.

Risk

Further pandemic related lockdowns and any increase in uncertainty in the business environment.

Cables and wires form 84% of the revenues currently and any headwind here could pose a risk.

There is a risk that increasing A&P spends may not yield desired results as the wires and cables business is largely commoditized and the FMEG space is highly competitive.

Event

Q2 earnings in October/November 2020.

Assumptions

We expect revenues and PAT to decline by 10.6% and 20.5% YoY respectively in FY21, in a year affected by the pandemic.

We see healthy recovery in FY22 with revenues and PAT rebounding with a growth of 14.9% and 27.8% respectively.


Polycab is an established player in the wires and cables business with more than 5 decades of experience and is a market leader with more than 12% share. Polycab has been improving its mix over the last few years from a relatively commoditized cable and wire business to making inroads in the FMEG (Fast Moving Electrical Goods) segment, which currently contributes 9.4% to the revenue mix. Over the last 4 years, its cable business has grown at a ~9% CAGR while the FMEG business has grown at ~43% CAGR though from a low base, resulting in a profit CAGR of 37% over the same period. It has backward integrated to manufacturing copper rods, which helps it have control over quality and timing of manufacturing. It targets to grow the FMEG business majorly though inhouse manufacturing and expanding distribution.

Increasing B2C mix should help stock rerating Polycab has transitioned itself well over the past five years from being majorly a B2B player to currently having a 35% B2C mix and targeting a 50% B2C mix over the medium term. The B2C segment comprises mainly of the retail wires and FMEG business. The FMEG business has grown at a 43% CAGR over the last 4 years with a 2.5x jump in the revenue mix from ~3.8% in FY16 to ~9.4% in FY20.

FMEG Sales and as a % of total sales

Source: Company, DART

Though a late entrant in the FMEG segment, it had the advantage of pre-existing brand value from its wire business. The investment in branding (A&P spends) has grown at a CAGR of 37.2% over the last 6 years and now forms 1.2% of FY20 sales and ~3.4% of B2C sales.

A&P spends and as a % of total sales (CAGR 37%)


2,167 3,356

4,853 6,433

8,536 7,270

9,814

3.8

5.5

7.0

8.1

9.4 9.2

10.8

3

5

7

9

11

13

1,500

2,500

3,500

4,500

5,500

6,500

7,500

8,500

9,500

10,500

FY16 FY17 FY18 FY19 FY20 FY21E FY22E

FMEG Sales (Rs. mn) As a % of total sales - RHS

163

427 579 581

937 966 1,087

0.4%

0.9%1.0%

1.0%

1.4%

1.2% 1.2%

0.3%0.4%0.5%0.6%0.7%0.8%0.9%1.0%1.1%1.2%1.3%1.4%1.5%

100200

300

400500600700

800

9001,0001,1001,200

FY14 FY15 FY16 FY17 FY18 FY19 FY20

A&P spends (Rs. mn) A&P spends as % of sales - RHS


The focus on increasing the distribution network, which currently comprises of more than 3,500 dealers (of this 34% are exclusively for wires and cables and 50% are exclusively for FMEG) should aid its scale up. The dealer network reduced from FY16 to FY19 as the company made a strategic decision to discontinue some smaller dealers and to focus instead on larger distributors who in turn would also cater to these smaller dealers. With the major part of the shift being completed, we expect the dealer network to only expand going forward.

Dealer network and % of exclusive Wires & Cables (W&C) and FMEG dealers


Stage set for scale benefit and operating leverage The cables & wires business is currently operating at ~65% capacity utilization levels and we expect secular growth to come from diminishing share of unorganized market and the focus to expand distribution and increase exports. For FMEG segment, with major upfront investments completed, we expect current margins of 2% to expand at an average pace of ~100 bps a year over the medium term as the company scales. Its wires and cables business dominates the mix, accounting for ~85% of its revenues and ~90% of its profits (EBIT) currently. This has grown at a ~9% CAGR over the last 4 years. The CAGR from FY20 to FY22 appears to be low due to a down year in FY21.

Wires and Cables segment revenues (Rs. mn)


3,825

3,678

3,372

3,100

3,500 44.9

39.0 38.7 35.034.0

36.1

43.6

45.9

49.050.0

30

35

40

45

50

55

3,000

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

3,900

FY16 FY17 FY18 FY19 FY20

Dealers Exclusive W&C % - RHS Exclusive FMEG % - RHS

52,634

56,079

62,423

69,295

75,192

66,921

74,952

50,000

52,500

55,000

57,500

60,000

62,500

65,000

67,500

70,000

72,500

75,000

77,500



FY20 Revenue split FY20 EBIT split

Source: Company, DART Source: Company, DART

FY22 Revenue split FY22 EBIT split

Source: Company, DART Source: Company, DART

It is a market leader with more than 12% market share in the overall wires & cables market and more than 18% market share in the organized market. It also increased its backward integration by acquiring the other 50% of its JV with Trafigura in FY20 and is now a 100% owner of Ryker, that manufactures copper rods. It has a wide range of products across customers with limited customer concentration risk. Its EPC business is a strategic forward integration where it seeks to bag those projects with 40%-60% cabling requirements. The EPC exposure helps the company set up a base in this segment for any future focus on this segment and helps in acquiring pre-qualifications. The Government’s push on infra, digitization, smart cities, etc. augurs well for the company’s EPC segment prospects. Similarly, India has less than 1% share in the global wire market of $145bn and the China+1 strategy presents strong export opportunities for the company. To pursue exports, the company has identified 10-12 new geographies with good business potential and has created 2 subsidiaries, one each in Australia and US.

Initiate coverage with an Accumulate, buy on dips We initiate coverage on the company with an Accumulate rating, valuing it at 18x of FY22E which gives us a target price of Rs.950. We assign a higher multiple to Polycab compared to closest peer KEI which is trading at 16x FY22, on account of the expected scale up in its FMEG business. We are structurally positive on the transformation story and while we have an Accumulate rating due to our rating methodology, we recommend to buy this stock on dips.

Wires and Cables

85%

FMEG9%

Others6%

Wires and Cables

90%

FMEG1%

Others9%

Wires and Cables

83%

FMEG11%

Others6%

Wires and Cables

90%

FMEG3%

Others7%


How Polycab compares with its peers (based on FY20 earnings and ROE)


While FY21 is going to see pandemic impacted de-growth for Polycab, like all its peers in the industry, we expect it to bounce back in FY22, posting a YoY sales growth of 14.9% and a YoY profit growth of 27.8%. While the stock is currently bracketed alongside peer wire and cable companies like KEI, we believe the stock to get rerated in line with its continuous transition with a higher mix of the FMEG business.

Valuation band for Polycab

Source: DART, BSE

PolycabKEI

Finolex Cables

Havells

Crompton Cons

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10.0 12.5 15.0 17.5 20.0 22.5 25.0 27.5 30.0 32.5 35.0

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Background The business started in the 60’s as a small electric shop at Lohar Chawl, an electric goods market in Mumbai. It got listed on the Bombay Stock Exchange and National Stock Exchange in Apr’19 at a valuation of ~Rs.94 bn. Polycab is the market leader in the domestic wires and cables business with more than 12% share overall and more than 18% share in the organized segment.

Historical Dateline


The Business Polycab’s business is spread over 3 segments: wires & cables, FMEG and EPC. It has managed to give a branding flavour to an otherwise commoditized wires and cables business. It has diversified into the FMEG segment in the past 5 years and forward integrated into the EPC segment. The segment-wise discussion of the business follows.

Cables and Wires This is the mainstay business of the company that contributed 84.7% to the topline in FY20.


Diversified product mix


Capacity The company has 25 manufacturing facilities (4 of these are for FMEG products).

Product Location Annual Capacity

Wires and Cables Gujarat/Daman 3.7 mn kms

Copper Rods Gujarat 2,25,000 tonnes

Backward Integration The company has built manufacturing facilities for all key raw materials, including aluminum rods, copper rods and various grades of PVC, rubber, XLPE compounds, GI wire and strip. It acquired remaining 50% stake in the Ryker from its 50:50 JV with Trafigura and the copper rod plant began commercial operation in Q1FY20 with an annual capacity of 2,25,000 tonnes. The current utilization is at ~50% and for a part of the unutilized facility, the company is looking at alternatives and is open to partnerships. There is negligible dependence on China for raw materials as, for metals, most of the procurement is done from Japan and domestically and for non-metals, most of the procurement is done domestically and suppliers spread across the globe.

• Transmission and distribution of electricity from power generators to sub-stations and thereon

• Demand to be driven by investments in power T&D, capacity addition in solar and wind energy, smart cities mission

Power Cables

• Process control applications

• Demand to be driven by increased focus on automation and rising industrial capex across auto, steel, oil & gas, power

Control and Instrumentation Cables

• Cables with glass fibre core used for long distance telecommunication, providing high speed data connectionOptical Fibre Cables (OFC)

• Interconnection cable used in photovoltaic power generationSolar Cables

• Electrical wiring of residential and commercial buildings such as metro, hospitals, offices, etc.Building Wires

• Electrical cables specially designed to cope with the tight bending radii and physical stress associated with moving applications.

• Demand to be driven by railways electrification, growth in auto, construction, household appliances

Flexible Wires

• Various other cables that don't fit in the above classificationsOther Cables


Growth Strategy for wires and cables The plan for the company is to continue to invest in improving technology and drive revenues through secular business growth, garnering share from unorganized and increasing sustainable exports to 10% of total revenues. In FY20, the revenues from outside India seem higher on account of a one-time large order of Rs.9.5 bn from Dangote refinery in Nigeria. In FY20 Rs.7.5 bn of the Dangote order has been executed and the remaining order of Rs.2 bn is expected to be executed in FY21. The Dangote order is of great significance as the company proves itself as capable of handling large and complex orders and delivering it within a timeframe.

Revenues from outside India as % of total revenues


Profitability should improve as the company achieves more scale and widens and deepens its distribution network. Debottlenecking in the cables and wires business and focus to improve working capital through better inventory management and increased channel financing should further aid the margins and profitability. The plan is to merge the switchgears and wires business to drive synergies and increase cross-selling. The strategy to increase exports is through identified geographical clusters and penetrating business in those clusters. The company has identified 10-12 geographies where it can penetrate to achieve good business. There have been areas identified in Africa, Europe and the Middle East. It has also incorporated 2 subsidiaries, one each in Australia and US. For example, in Africa, a lot of World Bank projects get implemented and there is no import duty barrier, which provides an edge and a level playing field for Indian players.

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FY18 FY19 FY20

Dangote Refinery portion Revenues from outside India as % of total revenues (Ex-Dangote)


Fast-Moving Electrical Goods This is the FMEG business of the company contributed 9.4% to the FY20 topline. We expect this share to go higher over the next few years starting with 10.8% of the mix in FY22.

FMEG Sales


Diversified Product Mix

Fans and Home Appliances

LED Lighting and Luminaires

Switches and Switchgears

Conduits and Accessories

Solar Products

Pumps, Pipes and Fittings

Capacity

Manufacturing facility in Maharashtra for switchgears and water heaters

Manufacturing facility in Uttarakhand for ceiling fans

50:50 JV owned facility in Gujarat for LED products

Third-party arrangements with manufacturers for other products

Product Location Annual Capacity (mn units)

Lighting and Luminaires Gujarat 18.2

Switchgears Maharashtra 7.2

Fans Uttarakhand 3.1

Growth Strategy for FMEG The plan for the company is to drive synergies from the wires and cables business where it can also leverage on the brand and distribution network. 34% of the dealer network is still exclusive wires and cables. This provides the company with an opportunity to push its FMEG products through these dealers. The company’s inhouse manufacturing strategy helps it get better control over the supply chain and quality of the products. This should help strengthen its position in the market where it can continue to garner share in this highly competitive space.

2,167 3,356 4,853

6,433

8,536 7,270

9,814

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FMEG Sales (Rs. mn) As a % of total sales - RHS


The company has already laid down the groundwork, set up adequate manufacturing facilities, got the distribution network going and has been investing in A&P. The returns on this investment and the operating leverage will only play out as the company scales. The efforts to work on improving working capital will also drive profitability higher over the medium term. The company started with bigger segments like lights, fans, switches and switchgear. However, as these segments achieved a strong foothold in the market, the company moved its focus on improving profitability. To grow further and achieve economy of scope, the company entered smaller segments like pipes, pumps, etc. It now targets to quickly grow revenues of these smaller segments to reach Rs.1 bn each, post which it will focus on improving profitability in these segments.

Other Opportunities

EPC business This is a strategic forward integration for the company where it seeks to bag those projects with ~40-60% cabling requirements. The EPC exposure helps the company set up a base in this segment for any future focus on this segment and helps in acquiring pre-qualifications.

Exports The company has identified 10-12 geographies where it can penetrate to achieve good business. There have been areas identified in Africa, Europe and the Middle East. It has also incorporated 2 subsidiaries, one each in Australia and US. Due to different specifications internationally, the company plans to invest further in modifying existing machinery as well as buying new ones. The medium-term target of the company is to have 10% of sustainable revenues coming from exports. As of FY20, the number stands at 12.3%. However, since the Dangote order was a one-time large order, we look at the ex-Dangote number as a reference point, which stands at 3.9%.

Key Strengths of Polycab Experience and management know how Polycab has been in the wires and cables business for more than 5 decades and is a market leader with more than 12% share. The management know how about the business gives it a lead to be conservative when required and at other times to go and seize opportunities and even create opportunities.

Better control on supply chain Backward integration helps the company maintain control over quality and timing of production of raw materials and thus deliver products at competitive prices.

Huge Distribution Network The company has a robust network of more than 3,500 dealers and distributors and more than 1,30,000 retailers across India.

Strong Brand Presence Polycab has a powerful legacy and has established itself in the areas of safety and quality. The consumer financing boom of the last decade has changed the mindset of the consumers, especially the millennials, to move towards branded products. We see this benefitting the B2C business of Polycab.


Management

Chairman and MD – Mr. Inder Jaisinghani He has been working with the company since its inception. He has worked in different areas of Strategy & Planning, Administration & Management, Sales & Marketing, Governance, Operations and other support services.

CFO – Mr. Gandharv Tongia He was appointed CFO with effect from 31st May 2020. He is a CA and has completed his bachelor’s degree in commerce from University of Rajasthan. He joined the company in Jul’18 and prior to that he has worked at S R B C and CO LLP and A.F. Ferguson & Co.

Key Personnel

Name Designation Joining

Date Remuneration

(Rs.mn) Commission as % of Remuneration

Stake – 30th Jun’20

Inder Jaisinghani* Chairman and MD Dec’97 115.13 65.4% 14.40%

Ajay Jaisinghani* Whole-Time Director Apr’06 31.15 0% 14.28%

Ramesh Jaisinghani* Whole-Time Director Jan’97 31.15 0% 13.88%

Gandharv Tongia CFO Jul’18 Not known** Not known -

Subramaniam Narayana Company Secretary &

Compliance Officer Dec’12 4.71 0% -


* Inder, Ajay and Ramesh Jaisinghani are brothers.

** For the last CFO, remuneration was Rs.39.41 mn, of which stock options were Rs.8.07 mn, variable pay was Rs.6.16 mn and incentive was Rs.3 mn. Mr. Gandharv Tongia became CFO in May’20.


Industry Review

Wires and Cables

Industry size

Cables and wires form ~40-45% of the electrical equipment sector, valued at Rs.518 bn as of FY20. It also presents a strong export opportunity with the global market valued at US$145bn. With global markets looking at a China+1 strategy for sourcing, Indian players can capitalize on these export opportunities.

Size of domestic wires and cables industry (Rs bn)

Source: IEEMA, Company, DART

Growth drivers

One of the main growth drivers for wires and cables is Government spending with sectors like power, urban infra and railways being big consumers. With increasing power connectivity across the country, demand for cables and wires should continue. The industrial sector also drives demand for its process control equipment. In railways, segments such as network decongestion, electrification and high-speed rail, will boost demand for cables and wires. CRISIL expects construction expenditure in railway projects to be Rs.4,069 bn from FY19-FY23. Urban infra is another demand driver for wires. The government had allocated Rs.480 bn for 100 smart cities in 5 years (in FY17) of which investment in underground cables is expected to be 5.2%. This would also go into areas like metros, airport etc. which are part of urban infra. Rural construction and affordable housing are also important demand drivers especially for domestic wires. Similarly, industrial construction especially in current high capex segments like oil & gas and automobiles should also boost demand for wires. The unorganized segment of the cables and wires industry, which was 39% in FY14 had fallen to 34% in FY18 and further to 30% in FY20. This is expected to fall to 26% in FY23 as per CRISIL research.

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FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E


Organized vs Unorganized market share in the domestic wires and

cables industry

Source: Company, DART, CRISIL Research

Fast-Moving Electrical Goods Fast-Moving Electrical Goods (FMEG) can also be referred to as consumer electrical goods, where electrical products are traditionally sold through retail trade network. The industry has seen growing participation of organized players with emphasis on branding over the years.

Industry size

Switches

This industry is more dependent on the real estate sector which has slowed down currently but there is some amount of uptrading witnessed with increasing demand for modular switches, which have higher price points. Modular switches have ~4x better realization than ordinary ones. As per CRISIL research this segment is expected to inch to ~70% of total switches by FY23 from the 60-62% in FY18.

Size of domestic switches industry (Rs. bn)


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Organized Unorganized

3032

3537

4043

46

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48

56

65

74

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50

55

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65

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75

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Switchgear

The switchgear industry, estimated at Rs.210 bn in FY20 has also experienced a slowdown due to the slowing real estate sector, especially for the LV gears. The MV/HV segment is driven by industry and power distribution. As the expected revamp of power distribution happens, demand for MV/HV switches should go up.

Size of domestic switchgear industry (Rs. bn)


Lighting

This segment which is estimated to be Rs.223 bn in FY20 is mainly driven by growth of LED lighting. LED has by and large replaced traditional lighting with ~70% penetration. However, this industry has also seen rapid LED price declines with prices having fallen almost 80%, though it has stabilized at lower levels.

Size of domestic lighting industry (Rs. bn)


Fans

Fan market is estimated to be Rs.93 bn in FY20 and is highly penetrated. Its growth has been driven more by replacement and preference for premium fans due to slowing real estate sector.

139 144 150

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Size of domestic fans industry (Rs. bn)


Industry players like CG Consumer, V Guard etc expect the shift to premium category to drive growth in the medium term.

Segment-wise share of ceiling fans

Source: IEMA, Company, DART

Growth drivers for FMEG

The per capita GDP of India has been on a linear growth trajectory growing at 10% CAGR over last 6 years and this augurs well for increased market penetration of FMEG products.

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FY14 FY18 FY23E

Economy Base Premium


Per capita GDP (Rs.)

Source: RBI The increasing gross savings of households creates the potential for a bigger domestic market size for FMEG products. It has grown at 9% CAGR over last 4 years.

Gross savings of households (Rs. bn)

Source: RBI GST rates were brought down in July’18 and have been maintained since. This has also provided a boost to the shift from unorganized to organized.

Change in GST rates from Jul’18 Segment (%) Initial GST rates Revised GST rates

Electrical wires 28 18

Switches 28 18

Lightings 28 18

Fans 28 18

Water heaters 28 18

Switchgears 18 18

LED lights and fixtures 12 12

Source: Ministry of Finance

80,518

89,796

98,405

107,341

118,263

129,901

142,719

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

FY13 FY14 FY15 FY16 FY17 FY18 FY19

24,391 24,749

27,871

32,773

34,468

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,000

32,000

33,000

34,000

35,000

36,000



Competition and Peers Polycab has a relatively lower A&P spends as % of sales when compared to peers, though currently only 35% of its business is B2C. However, as the FMEG business scales up, we expect them to increase investments in A&P over the medium term. Polycab’s A&P spends for FY19 and FY20 total Rs.966 mn and Rs.1,086 mn respectively and we expect this runrate to continue. IPL (Indian Premier League) is an important part of its branding initiative. Usually Polycab is an associate sponsor, who typically pay ~Rs.500-700mn, thus accounting for more than half its A&P spends.

A&P spends as % of FY20 sales

Source: Company, DART Polycab fares well as compared to peers in terms of their dealer network considering a lower mix of B2C at 35%, though it had consciously rationalized dealers three years ago. It continues to focus on its dealers/distributors and retailers with higher penetration in Tier 2 and Tier 3 cities. This number should increase with scaling up of the FMEG business and the growth in the cables business.

Number of Dealers/Distributors


1.2%

2.2%

1.9%

3.4%

0.5%

0.2%

0.7%

1.2%

1.7%

2.2%

2.7%

3.2%

3.7%

Polycab CG Consumer Bajaj Electricals Havells KEI Industries

10,000

5,000

3,500 3,500

1,600

500

300

1,300

2,300

3,300

4,300

5,300

6,300

7,300

8,300

9,300

10,300

11,300

Havells Finolex Cables Polycab CG Consumer KEI Industries Bajaj

Electricals


Number of Retailers


Polycab is working to improve its working capital cycle by managing its inventory better and increasing the channel financing moderately in the wires and cables business (currently ~65%) and significantly in the FMEG business (currently ~12%). We can clearly see the effect on higher channel financing on Havell’s cash conversion cycle. Havells has the lowest DSO (Days of sales outstanding) amongst the peers compared here. Bajaj Electricals’ DSO is unusually high due to its EPC business which is still recovering post the pandemic hit.

Cash Conversion Cycle (no. of days)

Source: Company, DART Please note: DSO = Days of Sales Outstanding, DIO = Days of Inventory Outstanding, DPO = Days of

Payables Outstanding

We have taken averages for receivables, inventory and payables to minimize the impact from the

lockdown at the end of FY20

220,000

150,000

130,000

100,000

50,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

Bajaj Electricals Havells Polycab CG Consumer Finolex Cables

87

58

96

38

12

144

0

20

40

60

80

100

120

140

160

180

DSO DIO DPO CCC

Polycab KEI Finolex Cables Havells CG Consumer Bajaj Electricals


Cables and Wires Peers The peers chosen for comparison are KEI Industries Ltd, Finolex Cables Ltd., Havells India Ltd., where only the Cables and Wires segment of each company is used for comparison. Polycab ranks better than most peers barring KEI with a ~9% CAGR in the cable and wire business over the last 4 years.

Cables and Wires Revenues (Rs. mn)


However, over the same period, in terms of profitability it has shown the best margin improvement among peers with its EBIT margins improving by almost 500bps on account of increasing operative leverage and cost control.

Cables and Wires EBIT Margin

Source: Company, DART It still lags peers in terms of generating higher ROCE in the business. One reason in our view, is that it has been a relatively new entrant in the business compared to more established peers like Havells and KEI, which have more vintage and more depreciated assets which helps them generate better ROCEs.

75,898

41,235

27,701 29,942

CAGR, 9.3% CAGR, 17.3% CAGR, 2.8% CAGR, 5.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Polycab KEI Industries Finolex Cables Havells

FY16 FY17 FY18 FY19 FY20 CAGR

12.3%

10.9%

14.6%

16.3%495 bps

29 bps

-62 bps

376 bps

(100)

0

100

200

300

400

500

600

4%

6%

8%

10%

12%

14%

16%

18%


bp

s

EBIT

Ma

rgin

FY16 FY17 FY18 FY19 FY20 Improvement bps


Another reason for this lag in ROCE could be the higher working capital needs of Polycab as compared to peers. However, it is actively working to remedy this and is only expected to improve over the medium term with internal efforts as well as change in external business mix with increasing FMEG. The company has been doing debottlenecking exercises at the manufacturing facilities, and this is expected to add to the current peak capacity and aid ROCE.

Cables and Wires ROCE


31

60

40

126

10

30

50

70

90

110

130

150

170

190




FMEG Peers The peers chosen for comparison are Crompton Greaves Consumer Electricals Ltd, Bajaj Electricals Ltd., Havells India Ltd., where only the FMEG segment of each company is used for comparison. Polycab is growing faster than its peers, though off a lower base.

FMEG Revenues (Rs. mn)

Source: Company, DART Polycab’s FMEG business has lower margins due to higher upfront investment in setting up manufacturing facilities, setting up distribution networks, organizing supply chains and A&P spends. We expect operating leverage benefits to drive the number closer to its peers.

FMEG EBIT Margin


Polycab has gone the inhouse manufacturing way and has the lowest purchase of stock in trade as % of cost of goods sold compared to the peers. Manufacturing helps the company get better control on supply chain and quality of products.

8,356

45,203

30,948

48,558

CAGR, 43.3% CAGR, 25.7% CAGR, 4.5% CAGR, 10.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Polycab CG Consumer Bajaj Electricals Havells

FY16 FY17 FY18 FY19 FY20 CAGR

2.0%

16.5%

6.5%

30.4%284 bps

184 bps

90 bps

0

50

100

150

200

250

300

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%


bp

s

EBIT

Ma

rgin

FY16 FY17 FY18 FY19 FY20 Improvement bps


FY20 Purchase of stock in trade as % of Cost of Goods Sold


The ROCE is expected to improve over the medium term as the company scales its FMEG business and get more in line with its peers.

FMEG ROCE


11.7%

22.0%

72.2%

87.0%

5%

15%

25%

35%

45%

55%

65%

75%

85%

95%

Polycab Havells CG Consumer Bajaj Electricals

4.4

50.6 47.6

135.1

(25)

0

25

50

75

100

125

150

175




Financial Analysis

Historical Snapshot Polycab has seen secular growth over the past four years, growing at a CAGR of 14%. Going forward while we expect the pandemic to impact FY21, we expect FY22 growth to get back to normalized levels and for Polycab to continue its secular growth story.

Revenues (Rs. bn)


Though the pandemic-hit business environment has derailed the company’s margin improvement efforts in FY21 and FY22, we expect it to further improve from the current normalized numbers and reach a higher sustainable number over the medium term, on a combination of cost control initiatives as well as scaling in the consumer facing business.

EBITDA and EBITDA Margin


52.0 55.0

67.7

79.9

88.3

79.0

90.7

45

50

55

60

65

70

75

80

85

90

95

FY16 FY17 FY18 FY19 FY20 FY21 E FY22 E

4,908 4,799

7,289

9,528

11,350

9,479

11,460

9.4

8.7

10.8

11.9

12.9

12.0

12.6

8

9

10

11

12

13

14

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000


EBITDA (Rs. mn) EBITDA Margin % - RHS


We expect PAT to improve over the medium term as the company’s FMEG business scales along with gains from cost improvements and better working capital management.

PAT and PAT Margin


The company has done well over the last few years to improve its ROANW (Return on Average Networth) and ROACE (Return on Average Capital Employed). Though it will remain subdued in FY21 and FY22, we expect them to return to normalized levels over the medium term as the FMEG business scales and capacity utilization levels pick up at the plants.

ROANW and ROACE


1,847 2,327 3,586

5,003

7,656

6,088

7,780

3.6

4.2

5.3

6.3

8.7

7.7

8.6

3

4

5

6

7

8

9

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


PAT (Rs. mn) PAT Margin % - RHS

10.8 12.3

16.5

19.3

22.9

15.0 17.1

17.2 15.6

21.9

28.2 30.2

20.1

22.8

10

15

20

25

30

35


ROANW (%) ROACE (%)


Most of the current debt is short term in nature and working capital related. We expect debt/equity to remain subdued as the company works on improving its working capital and targets to do CAPEX through internal accruals.

Debt/Equity


The CAPEX plans for FY21 are conservative and we expect the company to gauge the recovery of the pandemic hit business environment before going aggressive on its CAPEX plans. The CAPEX for FY21 is lower at Rs2bn, and is mainly budgeted for debottlenecking for cables and wires business, additional capacities for FMEG business like fans, modification to existing machinery & purchasing of additional machinery to cater to specific requirements of exports.

CAPEX (Rs. mn)


It has consistently delivered double digit ROEs. With its asset turnovers peaking in FY19, it is expected to fall over FY21E and FY22E because of its capex plans, before it picks up again. We expect asset to equity to remain stable at ~1.0.

0.45 0.41

0.31

0.07 0.03 0.02 0.02

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50


2,464

2,789

1,832

2,814 2,891

2,000

2,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900



DuPont Analysis

Particulars FY16 FY17 FY18 FY19 FY20 FY21E FY22E

PAT/Sales 3.6 4.2 5.3 6.3 8.7 7.7 8.6

Asset TO 2.0 1.9 2.2 2.6 2.2 1.8 1.8

Asset to Equity 1.5 1.4 1.3 1.1 1.0 1.0 1.0

ROE 10.4 11.7 15.3 17.6 20.0 14.3 16.1


Dealing with the pandemic affected business environment The businesses got impacted due to the pandemic related lockdown. With the lockdown restrictions easing mid-May, trade sentiments improved and business started progressing. June ended sales down ~15% YoY. The first half of June was good, but the second half lost steam as the company increased prices to pass on some of the copper price increase. July had been growing strong with slight growth YoY till the first 3 weeks. Most of this could be attributed to pent up demand and some due to stocking on account of rising copper prices. Till 3rd week of July, sales in metros had returned to 30%-40% of normalcy while that of Tier 2 cities had returned to 80% normalcy. In a bid to gather sufficient liquidity to derive some financial comfort in this pandemic created uncertain business environment, the company resorted to initiatives like conserving liquidity through prudent cost management, deferring non-critical spends and availing additional credit lines. The company has strengthened its net cash position from ~Rs.1.6 bn at Mar’20 end to ~Rs.2.0 bn at Jun’20 end.

Risks

Raw Material Costs Copper and Aluminium form ~59% and ~14% of total cost of materials consumed respectively. PVC compounds/HDPE/LDPE/XLPE/Resin form ~13% of total cost of materials consumed. The total cost of materials consumed form ~67% of total revenues as of FY20. Prices of copper and aluminium are linked to prices on the London Metal Exchange while price of PVC compounds are linked to crude oil price. The company stores three to four weeks of inventory for all their primary raw materials. Usually the company is able to pass on the prices.

High dependence on one segment 84.7% of the company’s sales comes from the wires and cables segment. The company is on the path to diversifying this risk by increasing the FMEG business. Increase in exports too should provide some geographical diversification benefits in the wires and cables segments.

Working capital intensity is higher The cash conversion cycle is at ~87 days, which is much higher than that of KEI at ~58 days. This is on account of higher DIO (Days Inventory Outstanding) and lower DPO (Days Payable Outstanding). The impairment allowance for trade receivables as a % of current receivables is high at 9.8%, both in FY20 and FY19.


However, the company is working on improving working capital and we should start seeing the same reflect in the bottom line soon.

Net working capital and as % of sales


Focus on branding and increasing A&P spends A&P expenses form ~1.2% of sales. This has grown at a CAGR of 37.2% over the last 6 years. The company has strategized to increase A&P spends over the medium term. There is a risk as it may or may not translate to the desired bump up in sales as the wires and cables business is still a highly commoditized business and the FMEG space is highly competitive.

7,035 7,772 10,715

13,052

20,408

13.514.1

15.816.3

23.1

12

14

16

18

20

22

24

6,000

7,500

9,000

10,500

12,000

13,500

15,000

16,500

18,000

19,500

21,000


Net Working Capital (Rs. mn) As % of sales - RHS


Profit and Loss Account (Rs Mn) FY19A FY20A FY21E FY22E Revenue 79,856 88,300 78,950 90,715 Total Expense 70,328 76,949 69,472 79,255 COGS 59,660 63,686 57,160 65,496 Employees Cost 3,002 3,657 3,434 3,901 Other expenses 7,666 9,606 8,877 9,858 EBIDTA 9,528 11,350 9,479 11,460 Depreciation 1,414 1,609 1,777 1,879 EBIT 8,113 9,741 7,701 9,581 Interest 1,167 495 276 272 Other Income 638 928 711 1,089 Exc. / E.O. items 23 74 0 0 EBT 7,561 10,100 8,135 10,397 Tax 2,558 2,444 2,048 2,617 RPAT 5,003 7,656 6,088 7,780 Minority Interest 0 0 0 0 Profit/Loss share of associates 0 0 0 0 APAT 5,003 7,656 6,088 7,780

Balance Sheet (Rs Mn) FY19A FY20A FY21E FY22E Sources of Funds Equity Capital 1,412 1,489 1,489 1,489 Minority Interest 84 150 150 150 Reserves & Surplus 27,057 36,875 41,204 46,924 Net Worth 28,470 38,364 42,693 48,413 Total Debt 1,920 1,221 790 907 Net Deferred Tax Liability 231 175 175 175 Total Capital Employed 30,705 39,910 43,807 49,645 Applications of Funds Net Block 12,756 14,220 14,443 15,064 CWIP 1,930 2,412 0 0 Investments 294 255 555 555 Current Assets, Loans & Advances 41,303 42,729 46,483 52,646 Inventories 19,958 19,250 17,856 18,739 Receivables 14,694 15,997 13,843 14,415 Cash and Bank Balances 3,176 2,827 8,720 13,245 Loans and Advances 207 244 244 244 Other Current Assets 3,268 4,011 4,820 5,002

Less: Current Liabilities & Provisions 25,578 19,706 17,674 18,620 Payables 15,202 13,537 12,978 13,669 Other Current Liabilities 10,376 6,169 4,696 4,951

sub total Net Current Assets 15,725 23,023 28,810 34,026 Total Assets 30,705 39,910 43,807 49,645 E – Estimates


Important Ratios Particulars FY19A FY20A FY21E FY22E

(A) Margins (%)

Gross Profit Margin 25.3 27.9 27.6 27.8

EBIDTA Margin 11.9 12.9 12.0 12.6

EBIT Margin 10.2 11.0 9.8 10.6

Tax rate 33.8 24.2 25.2 25.2

Net Profit Margin 6.3 8.7 7.7 8.6

(B) As Percentage of Net Sales (%)

COGS 74.7 72.1 72.4 72.2

Employee 3.8 4.1 4.4 4.3

Other 9.6 10.9 11.2 10.9

(C) Measure of Financial Status

Gross Debt / Equity 0.1 0.0 0.0 0.0

Interest Coverage 7.0 19.7 27.9 35.2

Inventory days 91 80 83 75

Debtors days 67 66 64 58

Average Cost of Debt 25.4 31.5 27.5 32.1

Payable days 69 56 60 55

Working Capital days 72 95 133 137

FA T/O 6.3 6.2 5.5 6.0

(D) Measures of Investment

AEPS (Rs) 33.6 51.4 40.9 52.3

CEPS (Rs) 43.1 62.2 52.8 64.9

DPS (Rs) 3.0 7.0 5.0 8.0

Dividend Payout (%) 8.9 13.6 12.2 15.3

BVPS (Rs) 191.2 257.7 286.8 325.2

RoANW (%) 19.3 22.9 15.0 17.1

RoACE (%) 20.0 23.3 15.2 17.2

RoAIC (%) 27.6 30.2 21.3 26.8

(E) Valuation Ratios

CMP (Rs) 849 849 849 849

P/E 25.3 16.5 20.8 16.2

Mcap (Rs Mn) 1,26,531 1,26,531 1,26,531 1,26,531

MCap/ Sales 1.6 1.4 1.6 1.4

EV 1,25,275 1,24,525 1,17,600 1,13,193

EV/Sales 1.6 1.4 1.5 1.2

EV/EBITDA 13.1 11.0 12.4 9.9

P/BV 4.4 3.3 3.0 2.6

Dividend Yield (%) 0.4 0.8 0.6 0.9

(F) Growth Rate (%)

Revenue 17.9 10.6 (10.6) 14.9

EBITDA 30.7 19.1 (16.5) 20.9

EBIT 36.1 20.1 (20.9) 24.4

PBT 33.4 33.6 (19.4) 27.8

APAT 39.5 53.0 (20.5) 27.8

EPS 39.5 53.0 (20.5) 27.8 Cash Flow

(Rs Mn) FY19A FY20A FY21E FY22E

CFO 12,879 5,941 7,987 8,616

CFI (2,747) (3,916) (488) (2,500)

CFF (7,062) (2,374) (1,606) (1,591)

FCFF 10,109 2,386 8,399 6,116

Opening Cash 106 3,176 2,827 8,720

Closing Cash 3,176 2,827 8,720 13,245 E – Estimates

DART RATING MATRIX

Total Return Expectation (12 Months)

Buy > 20%

Accumulate 10 to 20%

Reduce 0 to 10%

Sell < 0%

DART Team

Purvag Shah Managing Director [email protected] +9122 4096 9747

Amit Khurana, CFA Head of Equities [email protected] +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales [email protected] +9122 4096 9709

Kapil Yadav VP - Equity Sales [email protected] +9122 4096 9735

Yomika Agarwal VP - Equity Sales [email protected] +9122 4096 9772

Jubbin Shah VP - Derivatives Sales [email protected] +9122 4096 9779

Ashwani Kandoi AVP - Equity Sales [email protected] +9122 4096 9725

Lekha Nahar AVP - Equity Sales [email protected] +9122 4096 9740

Equity Trading Designation E-mail

P. Sridhar SVP and Head of Sales Trading [email protected] +9122 4096 9728

Chandrakant Ware VP - Sales Trading [email protected] +9122 4096 9707

Shirish Thakkar VP - Head Domestic Derivatives Sales Trading [email protected] +9122 4096 9702

Kartik Mehta Asia Head Derivatives [email protected] +9122 4096 9715

Dinesh Mehta Co- Head Asia Derivatives [email protected] +9122 4096 9765

Bhavin Mehta VP - Derivatives Strategist [email protected] +9122 4096 9705

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