Sharekhan retained Buy on the stock with a revised price target of Rs 1530. Polycab, being the market leader in wires & cables (W&C) segment, remains the major beneficiary to reap benefits from a pick-up in real estate demand and a revival in government spending in power, infrastructure, railways and housing. The company has presence across segments like power cables, control cables, optic fiber cables, instrumentation cables and solar cables to cater to various requirements.
A combination of low interest rates, tax benefits, lower stamp duty, attractive developer schemes and low property prices are positive for housing and housing-related products in the near to medium term. A gradual demand recovery across residential is being witnessed and can be substantiated from the fact that the pan-India residential segment (comprising seven major cities) has seen a steep rise in new launches and sales during Q3 FY21 by 62% qoq and 72% qoq respectively.
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Further, registration of documents in Mumbai and Maharashtra rose by 166% qoq and 52% qoq respectively. Polycab’s B2C segment (FMEG & housing wires) that fetches over 35% of revenue is seeing better growth led by the strong housing sector. The government’s thrust on the Atmanirbhar Bharat scheme will drive sustained capex across key sectors and private capex with more focus on automation from key industries should aid demand for power cables, along with other electrical products benefitting the company.
On the FMEG front the company remains focused with its diverse product basket wherein the addressable market opportunity is huge for the company. The company targets to be in the top five FMEG players and eventually in the top three. The same would be achieved through premiumisation of existing products, deepening penetration in semi-urban and rural markets, and increasing share of FMEG sales in existing networks (currently 18% of 3,650 dealer/distributors cater to FMEG). On the export front, Polycab is witnessing good traction in developed geographies (US, Australia, Asia, and Middle East). It has been receiving orders from CIS, Russia, south Asian countries. The global cables & wires market is estimated at $140-150 billion with imports at $35-40 billion. The company’s addressable market is estimated at $15 billion.
The company has earlier stated that it is targeting double digit contribution from exports over next two to three years. The company would be incurring Rs 250-300 cr capex in FY2021. Going ahead, it would be incurring Rs 300-350 cr capex per year. The capex would be done for exports growth in C&W and increasing capacity in fans and de-bottlenecking. Polycab also has enough leeway in improving working capital cycle, as currently, 65% of C&W revenues is done through channel financing while 18-20% in FMEG. Both segments have the potential to reach 85%. Due to sustainable demand and growth across its FMEG business Sharekhan expects Q3 FY21 to be better than Q2FY21.
Sharekhan believes the company is on a healthy growth trajectory owing to its leadership position and a strong product portfolio both in the wires & cables and FMEG businesses along with strong distribution and in-house manufacturing capabilities. The stock is currently trading at a P/E of 23.9/21.6x its FY2022E/FY2023E EPS.
Fluctuations in raw-material prices would affect margins sharply.