Healthy near-term growth outlook for Polycab India after record Q3 profit

Weak margin trajectory of the FMEG segment and valuations could limit upside

Led by growth in the wires and cables segment, Polycab India posted a better-than-expected performance in the December quarter. Revenues of the country’s second-largest listed consumer electrical maker by market capitalisation were up 10 per cent over the year-ago quarter to Rs 3,715 crore and was broadly in line with street expectations.

The gains were driven by 18-20 per cent volume uptick in the wires and cables segment amid a high base and falling prices of commodities. The segment reported an 11 per cent growth with volumes offsetting the price corrections. The wires and cables segment is the largest business of Polycab accounting for 87 per cent of consolidated revenues.

Revenues in the sector continued to remain strong; cable revenue of peer Havells also increased by 17 per cent y-o-y in the December quarter and was supported by healthy demand from the industrial and infrastructural sectors.

The company indicated that there is demand traction from both business-to-business as well as business-to-consumer segment. The key driver for the wires segment is the growth in the real-estate sector while cable demand is being led by the increase in private and government capital expenditure.

Going ahead, the company expects good volume growth in Q4FY23 on the back of a strong demand environment with additional gains expected from the infrastructure push by the government in the upcoming Budget.

Among other segments, the fast-moving electrical goods (FMEG) business growth was flat. The ‘others’ segment which includes the engineering, procurement and construction business saw a growth of 27 per cent. While the company’s FMEG business posted a loss at the operating level, the company aspires to take profitability to 10 per cent over the next three years.

Though two-thirds of its revenues in this segment comes from fans and lighting, the company is looking at improving the mix with a focus on switches which enjoys higher margins. The additional revenue from switches and switchgear would be an important factor to watch, says Nirav Vasa of Anand Rathi Research, adding that its peer, Havells, is strong in switches and reported segment margins of over 25 per cent.  

The company’s gross margins saw an expansion of 310 basis points year-on-year (YoY) led by the change in revenue mix of the wire segment. The contribution of the wire business has now increased to 40 per cent of sales as against 30 per cent earlier. The overall operating profit margins increased 284 basis points to 13.6 per cent; the richer mix of wires which have a higher profitability at 15 per cent aided overall margins.

Going ahead, an additional revenue trigger could be its foray into high voltage and extra high voltage cable segments which are a Rs 4,000-Rs 5,000 crore opportunity; it expects a meaningful contribution to the topline by FY26.

Abhijit Akella and Prasenjit Bhuiya of Kotak Institutional Equities have raised their FY2023 E-25 earnings estimates by 1-5 per cent due to the company’s better-than-expected performance and positive near-term outlook.

However, the brokerage believes that valuations at 30 times FY2024 earnings estimates are quite full, particularly given rising interest rates and the still-dominant share of the wires and cables segment, which may face some pressure from slowing economic growth. The FMEG segment remains work-in-progress, with execution still awaited in what is an intensely competitive category, they add.