Near-term outperformance likely to sustain for Polycab and Havells

Polycab's Q1FY25 revenue stood at Rs 4,700 crore, up 21 per cent Y-o-Y, with the operating profit margin up 6 per cent Y-o-Y to Rs 580 crore

Polycab India and Havells India are the two businesses that work in more or less in the same space and both have outperformed the market in the last 12 months. However, the Polycab share price is up by nearly 80 per cent while Havells’ has risen by 39 per cent. The Sensex has gained 26 per cent in this period.

The Q1FY25 results were in line for both companies. Havells India's revenue and operating profit grew 20 per cent and 42, respectively year-on-year (Y-o-Y) to Rs 5,810 crore and Rs 570 crore. Subsidiary Lloyd’s revenue rose 47 per cent Y-o-Y to Rs 1,930 crore and profitability was better than estimated, with a segment profit of Rs 63.6 crore. Overall, the operating profit margin was 10 per cent with a net profit of Rs 410 crore.

The management commentary was positive on demand, pricing, and Lloyd. Demand for wires came back to normal levels in July, and there were price hikes across categories. Though management avoided guidance for Lloyd’s FY25 profitability, it mentioned that Lloyd was on a strong footing as its own manufacturing has helped in offering differentiated products and led to margin improvement. In the switchgear segment, the contribution margin will stay around 38-41 per cent.

The cable division registered double-digit growth, while demand for wires was hit due to inventory destocking as commodity prices declined sharply. The aforementioned price hikes will likely offset a surge in raw material costs. Capex in FY25 will be between Rs 800-900 crore with around 40 per cent towards cables and Rs 100 earmarked for Lloyd.

Polycab’s Q1FY25 revenue stood at Rs 4,700 crore, up 21 per cent Y-o-Y, with the operating profit margin rising 6 per cent Y-o-Y to Rs 580 crore. The margin contracted 170 bps Y-o-Y to 12.4 per cent and net profit declined 1 per cent Y-o-Y to Rs 400 crore. Institutional business outpaced the distribution business in the domestic market while growth in cables continued to outperform wires. International business declined 28 per cent Y-o-Y, which had a negative impact on overall margins.

Revenue for the cable and wire segment (C&W) was up 12 per cent Y-o-Y at Rs 3,940 crore, while the segment margin declined 5 per cent Y-o-Y to Rs 500 crore. International business contributed 5.3 per cent to the revenue as compared to 7.7 per cent in Q4FY24. The revenue for the electrical consumer durable segment increased 23 per cent Y-o-Y, while operating loss stood at Rs 2.8 crore against a loss of Rs 5.7 crore in Q1FY24. Revenue growth was driven by strong seasonal sales in fans. The switches & switchgears and conduit pipes & fittings segments also posted good growth, led by strong real estate demand. The lights & luminaires segment remained weak due to pricing pressure. Losses here reduced during the quarter due to lower advertising and promotional expenses. Revenue for the EPS business surged 9 times Y-o-Y (flat Q-o-Q) to Rs 370 crore, while segment profits jumped 5 times Y-o-Y (60 per cent Q-o-Q) to Rs 42.5 crore.

 Polycab has leadership in the C&W segment, good growth given a policy thrust on infra, and healthy return ratios with free cash flows despite higher capex as it is trying to increase in-house manufacturing. The weaker margins are a cause for some concern. Havells expects the turnaround in Lloyd to strengthen and is looking for export revival. Analyst consensus seems to favour both companies.