B2C revenue tilt to improve margins for Polycab India

The company seeks to double revenues by FY26

Strong performance in the March quarter across key segments, plan to double revenues by FY26 and earnings upgrades led to 17 per cent gain in the stock prices of Polycab India over the last month.

Most brokerages have increased their earnings estimates by 9-13 per cent for FY22 and FY23 while giving the largest player in the cable and wire (C&W) segment a higher valuation multiple.

The immediate trigger for the stock has been the Q4 show aided by market share gains in the C&W segment and margin improvement in the fast moving electrical business (FMEG).

The market leader expanded its share in C&W by 200 basis points with current share at over 20 per cent; gains were aided by the shift to the organised segment since the start of the pandemic last year.

While overall growth was strong aided by higher contribution from the business to consumer business across segments, gross margins were down sharply due to higher raw material costs. The impact on financials however was lower given price hikes and tighter control over costs.

Over the medium term, the ability of the company to stick to its targets of more than doubling its revenues to Rs 20,000 crore (FY21 revenues at Rs 9,000 crore) in the next five years will be critical. This translates to an overall annual growth of about 17 per cent.

Analysts at Axis Capital believe that the C&W growth at 12-13 per cent is reasonable aided by exports and improvement in real estate demand driving growth for housing wires. They however believe that the FMEG growth expectations at 20 per cent along with margin improvement to 12 per cent appears an uphill task.

They expect a rerating based on higher contribution from the B2C business, uptick in FMEG margins and better cash conversion. The share of B2C business increased from 32.6 per cent in FY20 to 40.2 per cent in FY21. The company could also pursue inorganic expansion and is well placed with cash of Rs 900 crore.

Brokerages are positive on the company’s prospects given market share gains, higher share of B2C segment and pick up in construction activities. "Considering a strong execution track record, five year plan and increasing proportion of B2C business, we increase our target multiple to 28 times from the earlier 25 times," says Himanshu Nayyar of Yes Securities.

While growth in newer businesses such as FMEG has been strong at 37 per cent annual growth over the last five years on a lower base, its ability to execute on its growth plans for its various segments will be key. Given the recent price run up and the fact that near-term gains are factored in, investors should await consistent improvement in margins and share gains before considering the stock.