Polycab India Limited (PIL) (NSE: POLYCAB, BSE: 542652) is the largest player in India’s wires and cables (W&C) industry. The investment thesis on PIL is based on its continuing leadership position in W&C industry and rapid growth and transformation into a multiproduct player in the high margin Fast Moving Electrical Goods (FMEG) industry. However, with the recent COVID-19 outbreak and subsequent lockdown announced by the government, the company’s business in the near term will be sluggish.
Investment Thesis
Leadership in Wires and Cable Industry – PIL is the undisputed market leader of India’s W&C industry, with an ~18% market share in the organized sector and a ~12% overall share. Its W&C business is more than twice the size of its nearby competitors. The W&C segment continues to be the dominant contributor to the total revenue and I expect this trend to continue in the medium term. The company has continuously led the W&C market owing to robust distribution network, wide product offerings, efficient supply chain management, strong manufacturing capabilities and strong brand image.
The W&C industry’s key growth drivers include: (1) rural electrification, (2) investments in T&D systems for modernization and increasing efficiencies, (3) rising demand for renewable power, (4) Government of India - driven infra projects such as Smart Cities Mission, Metros, etc. and (5) higher consumer spending. This industry volumes are expected to grow at a ~12% CAGR, from 14.5mn kms in FY18 to 26.2mn kms in FY23P, and industry size at a ~15% CAGR from Rs 525 bn to Rs 1,033 bn. Overall, the organized segment’s share grew from 61% in FY14 to 66% in FY18 and is expected to touch 74% in FY23P. The organized-unorganized price gap is also likely to narrow down owing to structural reforms such as GST along with gains in efficiency and cost structures.
PIL has a pan-India distribution network of 3,450+ distributors and dealers with a reach of 1,25,000+ retail outlets. 80% of the company’s sales are through distributors. The number of dealers and distributors has declined over the years as the company discontinued direct supplies to smaller distributors and dealers, who are instead serviced by larger channel partners. In terms of regions, the major share of dealers is in the South followed by the North. While there is limited scope for product differentiation in the W&C industry, PIL has set itself apart from its branded competitors by providing timely service to distributors. This competitive advantage is an outcome of its efficient supply chain management. The company has also undertaken various initiatives with its channel partners like Bandhan, Project Josh etc. to build strong distribution network and also to understand its end customers. 35% of the topline is derived from B2C, while the rest is derived from B2B.
PIL has 24 manufacturing facilities across India. The company has a capacity of 32,94,463 km of cables and wires. As per management’s commentary, capacity utilization of W&C is hovering around 70-75%. Further, the company has a high degree of backward integration, ensuring a reliable and consistent supply of quality raw materials while reducing the risk and reliance on external procurement and being cost efficient.
The company plans to incur a capex of INR 300 crores in the coming fiscal year towards strengthening backward integration, debottlenecking and investments in few of the FMEG facilities.
Improving FMEG segment – PIL forayed into the FMEG business in FY14 by launching the switch business. It further diversified into fans, LED lightings and switchgear in FY15. With a strong distribution network already in place for wires and cables, it was able to rapidly scale up the FMEG business as the products were a part of the same ‘electrical’ ecosystem. The retail touchpoints for wires & cables, switches, lightings, switchgear, fans and conduits are largely overlapping as electrical stores often stock most of these product categories.
PIL shifted from outsourcing model to in-house manufacturing to have a tight control over manufacturing planning, costs and quality. As a result of these efforts, the FMEG business has grown at a staggering 43.72% CAGR during FY16-FY19. Out of the 24 manufacturing facilities, four facilities specially cater to the FMEG segment. Capacity utilization of FMEG segment is around 60 - 80% as per management’s commentary. The utilization is comparatively higher for fans segment since it is the largest contributor to the consumer business revenue. A new facility for water heaters was commissioned at Nashik in Q3 FY20.
PIL’s FMEG business segments have been witnessing strong value migration from unorganized to organized sector backed by various initiatives of the Indian government like affordable housing and rural electrification. Awareness on energy efficiency and safety have also led to the growth of the organized players. GST rollout has reduced the organized-unorganized price gap.
As per management commentary, fans contribute to almost 40-45% of the top line. This is followed by two product categories, lights & luminaires and switch & switchgears. These two put together would almost make the next 30-40% and the balance is all small product categories.
The company has significantly scaled up its marketing spend since FY2014 post its entry into FMEG segments. Advertising and promotional (A&P) spend for the company has increased from 0.4% of sales in FY2014 to 1.5% of revenues in FY2019; this will likely increase to 1.9% of revenues over the next three years.
Financial and Operational Performance
|
|
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
9MFY20 |
|
W&C Revenue (INR mn) |
|
52,320.00 |
56,163.00 |
62,423.00 |
69,295.00 |
56,759.00 |
|
FMEG Revenue (INR mn) |
|
2,167.00 |
3,356.00 |
4,853.00 |
6,433.00 |
6,523.00 |
|
Total Revenue (INR mn) |
47,081.00 |
52,075.00 |
54,940.00 |
67,703.00 |
79,560.00 |
67,006.00 |
|
Operating Margins (%) |
9.60 |
9.60 |
10.20 |
11.70 |
12.70 |
12.40 |
|
Net Profit Margins (%) |
3.40 |
3.61 |
4.37 |
5.29 |
6.20 |
8.20 |
|
ROCE (%) |
16.30 |
15.00 |
15.20 |
21.00 |
27.90 |
|
|
ROE (%) |
9.90 |
10.50 |
12.00 |
15.20 |
17.50 |
|
|
Earnings per share (INR) |
11.35 |
13.19 |
16.99 |
23.35 |
35.39 |
|
|
Debt to equity |
0.36 |
0.44 |
0.43 |
0.34 |
0.10 |
|
|
Cash conversion cycle (days) |
|
|
66.70 |
86.37 |
106.87 |
|
Risks/Concerns
Impact of COVID-19 and Outlook
Owing to the recent COVID-19 outbreak and subsequent lockdown announced by the government, the consumer electricals industry will be negatively impacted due to factors such as (1) Temporary closure of manufacturing plants across the country (2) Shut down of shops, modern retail stores and dealers which has impacted sales and (3) Lower demand as consumers will now give more priority to grocery purchase rather than consumer electrical products in the wake of lockdown.
PIL will be negatively impacted in its summer season fans business. The W&C, switches, switchgears and lightings segments are likely to see softer growth due to likely delay in construction activities. As a result, profitability of the company will drag in the upcoming quarters. The company’s trade partners will also face disruptions and would also require support of working capital as all business activities have been stalled. Q4FY20 results season would be mildly impacted by the lockdown; however, the lockdown will have an impact on Q1FY21 earnings and thereafter is expected to weigh on the earnings for FY21; a lot would depend on the tenure of lockdown, and time taken for normalcy to resume.
However, the current crisis provides an opportunity from an investor’s perspective to enter into a superior company for the long-term. PIL’s product categories, dominant position in W&C segment, fast growing FMEG segment and superior brand recall offer investment comfort especially in a competitive economic environment. The company has been showcasing decent growth when the end user industries i.e. real estate, power and infrastructure is in a bad shape. With improved cash flows and margins, I believe PIL will command valuations more than W&C peers like KEI and Finolex, but less than FMEG peers like Havells and V-guard. However, with its continued leadership position in W&C segment, efforts to increase export business and transformation into a multiproduct FMEG player, I expect the valuations to improve in the long term.
Polycab is currently available at a CMP of INR 736.45 (as on April 03, 2020) at a PE of 16.05. Promoters held 68.6% stake in the company as of Dec 2019.
|
Companies |
P/E (As on Apr 3, 2019) |
Debt to equity (FY19) |
ROCE (%) (FY19) |
ROE (%) (FY19) |
|
Polycab India |
16.05 |
0.10 |
27.93 |
19.41 |
|
Finolex Cables |
7.37 |
0.00 |
19.77 |
11.89 |
|
KEI Industries |
10.43 |
0.77 |
29.30 |
26.33 |
|
Havells India |
38.96 |
0.02 |
29.44 |
19.77 |
|
V-guard Industries |
30.43 |
0.02 |
26.50 |
21.36 |
Team 3C Capitals
Sources
