Polycab India — Primary Offer: Wired to grow

In a crowded market for cables and wires, Polycab India has managed to create a niche for itself in the last two decades. The company also sells fast-moving electrical goods (FMEG), a business which it entered into in 2014. Over the last few years, the company has spent a significant amount to increase its brand visibility and has plans to spend around ₹40 crore in the ongoing Indian Premier League to increase awareness of its brand.

The company’s net profit rose at a CAGR (compounded annual growth rate) of nearly 42 per cent from FY16-18 to around ₹371 crore. Revenue in this period rose at a CAGR of 10 per cent to around ₹6,924 crore. The sharp jump in net profit was thanks to the company’s increased focus on the B2C segment paying off.

The company has priced its initial public offering of shares at a price band of ₹533-538 — at the upper band, the issue is priced at a price-earnings multiple (PE) of 16 times its annualised earnings for FY19. This makes it attractive, considering that its peer Finolex Cables trades at 17 times its estimated earnings for FY19.

Companies in the similar business but with a larger FMEG revenue base, such as V-Guard Industries and Havells India, trade at a PE multiple of around 56 times the likely earnings for FY19. But the premium valuation of these players is thanks to their more profitable FMEG business.

For Polycab, it could be another few years until its FMEG business grows and contributes to earnings in a significant manner. Undoubtedly, Polycab is a market leader in cables and wires and is seeing good margin expansion with higher B2C exposure. However, being highly competitive, one needs to wait and watch the company’s prospects in the FMEG space.

A strong distribution network, the 20-year-old brand and its captive manufacturing capacities are a plus. Also, the discounted valuation for the stock even compared to a pure-play cable competitor like Finolex Cables, gives comfort. Hence, investors with a long-term view can invest in this IPO.

The IPO offer comprises a fresh issue of up to 0.74 crore shares and offer for sale of 1.75 crore shares. The total issue size is ₹1,350 crore.

Cables and wires, and more

The cables and wires industry grew at a CAGR of around 23 per cent from FY14-18 and is expected to grow 15 per cent annually from FY19-23, according to CRISIL Research. Polycab India is the market leader in the organised cables and wires space in India. In terms of revenue, the company has 18 per cent of the organised cables and wires market. Including the unorganised players, the company had a market share of 12 per cent in FY18.

In the cables business, the company’s revenue growth has been around 8-9 per cent (annual) in the last three years. This is in tune with the industry. Operating profit margin has also been expanding, thanks to higher B2C sales. For the nine months ended 2018-19, the margin was 12.83 per cent, up from 7.41 per cent in the same period last year.

Polycab has its foot in two other businesses. In 2009, it entered the engineering, procurement and construction (EPC) business, working on rural electrification projects of the government. Then, in 2014, it diversified into the FMEG segment. Currently, while cables and wires make for 87.5 per cent of revenue, a little over 8 per cent of the total revenue comes from FMEG and the balance from EPC.

With its entry into the FMEG space (comprising fans, switches and switchgears, water heaters, LED lighting and luminaires, among others), Polycab has transformed itself into a B2C company over the last four years. Sales growth of the segment has also been strong — at a CAGR of about 58 per cent in the period between 2015-16 and 2017-18.

But at the operating level, the segment’s performance has been lacklustre — the margin was only 1.34 per cent for the nine months ending December for 2018-19. This is a drop from 2.78 per cent in the same period in 2017-18.

The squeeze in margin, the company claims is because of loss of materials in the Kerala floods and expenses on the ESOP plan. But even if this loss is brushed aside, the margin is lower to the industry average in the FMEG space.

Higher marketing and distribution expenses for gaining entry into the highly competitive electrical goods space may be a reason for the suppressed margins. Going ahead, as volumes grow further and there is reduced branding expense, operating leverage will improve and help margins.

What will give the company a competitive edge over peers is its strong distribution network. The number of dealers and distributors totalled to 3,372 at the end of 2017-18, with a third of them in south-India.

In the EPC space again, though there is opportunity, competition is also stiff. Even within the listed space, there are many players — Finolex Cables, Bajaj Electricals, KEC International and V-Guard Industries.

Thus, margins have been shrinking for players. In the nine months of 2018-19, the operating profit margin in EPC business for Polycab was 2.73 per cent; in 2017-18 full year, it was 3.24 per cent.

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