Growth concerns amid the economic slowdown hit Polycab India stock

Firm trading at 19x its FY21 earnings, with peers trading at 35-45x

The stock of Polycab India, maker of power and telecom wires and cables, cracked over 8 per cent even after the firm reported 24 per cent YoY growth in revenues to Rs 2,507.3 crore and net profit of Rs 221.4 crore for Q3, visibly ahead of the consensus estimates of Rs 2,349 crore and Rs 176 crore. 

One reason could be that the stock has seen a sharp rally since August, having almost doubled to the Rs 1,082-level as per Tuesday’s closing; this includes the near-12 per cent gains in the past fortnight. The bigger reason stems from growth concerns amid the slowdown.

The wires and cables segment, which contributed 85 per cent to its overall revenue, grew a strong 20 per cent YoY to Rs 2,150 crore. This was ahead of the 17 per cent clocked in the first nine months of FY20.

However, the growth in Q3 was largely led by a large export order received at start of the year. The Street is worried over growth after the completion of an export order looking at the current slowdown and project delays. 

Apart from the export order, newer segments such as optical cables continue to grow well; the international business is seeing increasing traction from few developed geographies. 

The FMEG (electrical goods) segment continued growing at a fast pace of 34 per cent YoY and 11 per cent sequentially. Products such as fans and lighting & luminaries are driving growth, offsetting the softness in switches and switch gears in the back of slowdown in construction and realty sector. 

Analysts say that while near-term growth concerns have cropped up, from a medium-term perspective Polycab is moving in the right direction looking at improving retail sales and distributor base, strong traction in FMEG business and even exports to developed economies. 

Tarang Bhanushali at YES Securities says that over time, the valuation gap between Polycab and other diversified FMEG players should reduce. At Rs 994, Polycab is trading at 19x FY21 estimated earnings versus 35-45x for peers. 

Ronald Siyoni at Sharekhan expects the cable and wires segment to beat industry growth, while growth in FMEG business will be driven by new product launches.