Polycab India ~ Connection Zindagi Ka - W&C, FMEG and EPC Player

sujay85 · August 16, 2019, 7:05am

About Polycab India Ltd.

Established in 1964. Incorporated in January 1996. Listed in April 2019.

Domestic leader of W&C Industry:

86% of revenue [Power cables, control cables, instrumentation, building wires and industrial cables]

Polycab (PIL) is a leading player in India’s wires and cables (W&C) industry with ~18% / ~12% market share in the organized / total market.
Despite being a highly commoditised and extremely price sensitive segment PIL has able to gain market share due to a robust distribution network, wide product offerings, efficient supply chain management, strong manufacturing capabilities and brand image.
W&C revenue growth at a CAGR of 14% from FY15-19.

Quickly scaled FMEG Segment:

8% of revenue [Fans, LED lightings and luminaires, switches, switchgear, solar products, heaters, pumps and electrical conduits]

PIL forayed into multiple Fast Moving Electrical Goods (FMEG) product categories from 2014 (FY15) and was therefore required to invest behind manufacturing capabilities, distribution network expansion and brand building exercises; this led to EBIT losses during FY15 and FY16.
However, the business attained breakeven in merely three years (FY17) and turned profitable in FY18 with an EBITM of 3% (as per company reporting), showcasing PIL’s strong focus on this space.
FMEG revenue increased at a CAGR of 44% over FY16-19.
Intends to concentrate on street lighting, agriculture pumps, air purifiers, and water purifiers.
It is working on strengthening its after-sales service. As of June 2018, PIL has ~ 230 customer-care franchisees.

Emergent EPC Player

6% of revenue [Projects requiring a large supply of cables, wires, and conductors]

PIL entered the engineering, procurement and construction (EPC) business in 2009.
It provides electrical turnkey solutions comprising project management, onsite execution and resource management through specialized erectors and financial management.
Their solutions are largely provided for the transmission and distribution sectors involving projects in extra high voltage and high voltage levels for various government utilities in India.
These projects typically require a large supply of cables, wires and conductors, which they supply.

Competitive Strength

Market Leadership in W&C:

Institutional and retail customers in different industries: power, oil & gas, construction, IT parks, infrastructure, metal and cement industries.
Customer base is well diversified while none of the customers contributes more than 5% to its topline, which reduces dependency on any single customer.
Made-to-stock: based on demand forecasts from customers and/or company sales team.
Made-to-order: customized products for varied applications.

Synergistic expansion to FMEG

Common raw materials, economies of scale, higher negotiating power.
Cost-savings in transportation & distribution
Opportunity to cross-sell to a larger customer base.
Leverage distribution network across diverse product offerings.

Manufacturing with strong focus on backward integration:

PIL has built strong manufacturing capabilities in the W&C and FMEG segments with 24 facilities in operation (3 for FMEG), with stringent control over costs & quality.
It has incurred a capex of Rs11bn in the past 5 years, including plants for FMEG. Currently capacity utilization stands between 70-80%. In-house manufacturing will provide flexibility in improving the quality and range of FMEG. Backward integration into polymers, wire rods, cable/wire colors reduces costs and improves the quality which will continue to drive superior growth and margins.
Joint venture with Techno Electromech Private Limited (2017), a manufacturer based in Vadodara, Gujarat, to manufacture LED lighting and luminaires.
Joint venture with Trafigura Pte Ltd (2016), a commodity trading company, to set up a manufacturing facility in Waghodia (Gujarat), India, to produce copper wire rods.

Strong distributor network:

PIL has well entrenched distribution, 2800+ distributors and over 100,000 retailers, with long standing relationships and stickiness, some of them being with them for 3 generations.
It has the largest network of 29 warehouses in 20 states & UT, typically located close to distributors, dealers, and direct customers, which enables PIL to mitigate transportation costs.

Exports:

PIL has a presence in 40 countries (5% revenue is from exports); it has received a US$ 143mn order from the international market recently.

Powerful Branding:

Over the years, Polycab has evolved from a largely B2B play to a fast-growing B2C
brand.
Advertising and sales promotion expenses increased to 1.4% of sales in FY18 from 0.4% in FY14.
Featured in Superbrands of India in 2016, 2017 & 2018.
Endorsing Indian Premier League (IPL) since 2016.
Brand endorsers are Paresh Rawal, Rajpal Yadav, R Madhavan, Ayushmann Khurrana.

Polycab Wires - Connection Bachat Ka. Connection Zindagi Ka.

Polycab Fans - India ka Naya All Rounder.

Polycab MCB - Bharosa Safe Zindagi ka.

Polycab LED - Afwah nahi, Roshni Phailao.

Experienced and committed management team:

PIL‘s success has been, and will continue to be, dependent on its management team. Its management team has collectively many years of entrepreneurial and managerial experience in the electrical products industry and also possesses an extensive network of customer relationships and a deep understanding of its operations, pricing strategies, business development and industry trends.
Salary: Highest salary is paid to Inder T Jaisinghani (₹36.54 mil), then Ajay T Jaisinghani & Ramesh T Jaisinghani (₹28.25 mil).

Note:

Comparison with Key competitors.

Channel financing to ease working capital cycle:

PIL has high working capital (27% of sales) due to penetrative strategy in FMEG and manufacturing focus.
Also the EPC segment serves various sectors with an average working capital of 90-100 days.
However, PIL has started channel financing like Havells - the impact of which is already visible in reduction in receivables.

Intends to become debt-free

PIL has raised Rs 13.5bn through the IPO. The object of the offer was to 1) scheduled repayment of all or a portion of certain borrowings availed by company, 2) to fund incremental
working capital requirements of the company.
With the IPO funds, improvement in margins, and strong cash flow, PIL expects to become debt-free in 2-3 years.

Credit Rating

CRISIL has assigned its ‘CRISIL AA/Stable/CRISIL A1+’ ratings to the bank loan facilities of Polycab Wires Private Limited (PWPL). [13 July, 2019]

Key Financial Ratios

FY	2019	2018	2017
EPS	35.39	23.35	16.99
BVPS	201.62	166.26	141.94
ROCE	27.9	21.0	15.2
ROE	17.5	15.2	12.0
OPM	12.7	11.7	10.2
NPM	6.24	5.24	4.18
D/E	0.10	0.34	0.43
Current Ratio	1.5	1.58	1.34
Revenue Growth	17.51%	23.09%	6.04%
Net Profit Growth	40.22%	53.79%	24%
BV Growth	20.63	17.76	11.64
Receivable days	60.74	64.49	76.14
Inventory Days	76.97	75.87	75.39
Payable days	30.18	68.53	85.17
Fixed Asset Turnover	4.78	4.77	4.94

P/E: 16.81
P/B: 1.97
Price/Sales: 1.06
EV/EBIT: 9.69
Price/Cash Flow: 6.87
Face Value: 10.00
Promoter holding: 68.69% (No Pledge)
Market Cap: ~ 8500 Cr.
Altman Z-Score: 4.70
Piotroski F-Score: 8
Modified C-Score: 0

Opportunity

Various government initiatives to drive cable & wire demand.
Increase in organised pie of W&C industry to benefit market leader Polycab in long term.
PIL manufactures and sells a diverse portfolio of wires and cables and FMEG, which also gives the opportunity to cross-sell its products to its diverse base of customers.
Energy-efficient products gaining traction: Like LED & Energy Efficient Fans.
Improving realizations driven by value-added products especially among the younger generation, owing to increasing disposable incomes and evolving preferences.
Home improvement cycles in urban areas are shortening on account of rising disposable incomes and changing consumer preferences.

Risks

Higher exposure in W&C segment poses business concentration risk.
Macroeconomic slowdown can have a material impact on W&C segment.
Fluctuations in raw material prices pose a key challenge to the cable and wires industry. Realisation and profitability depend on copper and aluminium commodity prices.
Imports of raw materials like copper, aluminium, steel, and insulation materials are exposed to exchange rate fluctuation which can adversely affect the cost, and thus impact margins.
Concentration of suppliers of raw materials in a few sources places the business at risk from disruptions in supply.
Inability to scale up FMEG business division / lower than expected profitability woing to competitive pressure.
Significant increase in WC requirement likely to impact return ratios.
Being part of a labor-intensive industry, the company is subject to stringent labor laws and carries a risk of unexpected strike, work stoppage or increased wage demand.
Short listed history to understand management ethics towards minority shareholders.

Sources

Disclosure:

No holding, tracking.

This is not a recommendation. Please do your own research. I am a novice & is bound to make mistakes.

This is my first thread on a company. Learned a lot from ValuePickr, learned even more while doing the necessary homework for starting a thread.

reachvk · August 16, 2019, 12:51pm

Company has an impeccable balance sheet and great return ratios with improving performance YoY. If price slips under 500 it will be an attractive buy.

Migom · August 19, 2019, 4:55am

sujay85 · August 19, 2019, 5:03am

Hi, which document is this, please? Can you please link it?

Update: Found it. Its the DHRP.
https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/nov-2018/1541160009196_6.pdf

pankajdewan · August 20, 2019, 11:26am

Interest Paid Rs 117 Crores. Borrowings 272 Crores doesn’t gel. Trade payables could actually be disguised short term borrowings. Leverage is amplifying RoE. With low net profit margins, reversal in economic cycle will amplify the losses also. May be that is why they went for IPO. That money can reduce the debt.

rao13 · August 29, 2019, 9:53am

Brokerage firm Citi initiated coverage on the stock with a ‘Buy’ rating. Also, the target price was fixed at Rs 736 per share, indicating a 28.9 percent upside from previous close. Here’s what the brokerage firm had to say on the stock:
• Well placed to capitalize on growth opportunities in cables, wires and fast moving electrical goods.
• More successful than others in the FMEG business. Strong balance sheet and cash flow with improving working capital.
• Expect earnings per share to grow at a compounded-annual growth rate of 26 percent over financial years 2019-21.

Source: Bloomberg Quint

sujay85 · October 24, 2019, 6:42pm

Q2 FY20 Result

PAT doubles YoY.

Earnings Presentation

Corporate Presentation

spartan · October 26, 2019, 1:40pm

Polycab Q2FY20 con-call notes:

Sluggishness across industries in the domestic market continues in Q2.
Improvement expected over medium to long term lead by Govt policies.

Polycab top Line growth of 24% for Q2 and 20% for H1FY20.
Reason for better growth compared to peers:
Strong distribution network built over the years by initiatives like project bandhan and josh.
Diversification of product portfolio
Backward integration
Improved brand awareness.

EBITDA marginal improvement in Q2…better is to asses on full year basis.
EBITDA margins will be between 11-13% for the year.
Forex loss of 15Cr loss vs gain last year.
PAT 117% growth helped by tax cut.
Finance cost and borrowing reduced. Net cash positive:400Cr

Raw material cost is pass through. Every month product price is updated through distributors based on RM cost.

Capex: 250Cr capex was planned. It may go up as additional cash is available post tax cut.
Revised capex guidance will be shared by Q3.

Overall working capital to improve further. Inventories have been normalized. Taking help of external consultant to manage inventory and better supply to distributors.
Channel financing in C&W segment is 60% and in FMEG is high single digits.Receivables to come down further as channel financing increases.

No of Retailers:1,20,000 and Distributors:3,400.

Cable and Wire(C&W): growth of 20%…after excluding sales to Dangote growth is 13-14%.
Wires showed predominant growth followed by cables.
Cables: institutional sales and exports.
Wires:largely sold through distributors.
Growth of the C&W sector and shift from unorganized to organised players
Additional dealers and distributors helping growth.
1200Cr of capex in last 5 yrs helping polycab in getting additional orders.
East and north regions better growth than other regions.

OFC : good growth and helped in margins.OFC supply value is 61Cr each in Q1 and Q2. Ofc
sales reported under c&w segment.

EPC : High single digit EBIT margins sustainable.
No significant increase in revenue from epc is expected.
Executing profitable epc orders and have healthy order book.
Its strategic business for polycab with 3 to 5% of revenue.
Currently executing EPC ofc business in western India.

Exports: execution of 950 cr order by Dangote was started in Q2.
Expectation of supplying remaining order over the next two quarters or depending on
customer requirements.
polycab to increase export contribution to overall revenue from current 3-5%
progressively.
Supply to Dangote 100 cr in Q2…overall export :200 cr in H1.

FMEG: 42% of growth and contributes to 9% of topline. EBITDA margins of 3-5%.
Fans(50% of fmeg) and lighting division has shown good traction.
Polycab experience centres at Pune and Mumbai launched in Q2.
More such centres in future.
Strong growth to continue on low base.industry size is 60k cr…polycab share is just1%.
No new product launches but innovation of existing products to continue.
Water heater production facility initiated in Q2
Polycab gets leverage of common raw materials like copper, steel and aluminum.
Inhouse manufacturing of quality goods,distributor and brand strength.

Discl: invested.

enelay · November 4, 2019, 6:01pm

Tracking this company for a while and it seems to be going from strength to strength. Ticks a lot of boxes so was looking for some disconfirming evidence when I came across this news article from 2010:

Polycab Wires, a Mumbai-based cable company, also came under the I-T scanner on 15 September for alleged violation of tax norms. The firm, according to the department, has disclosed concealed income of Rs114.50 crore.

“We do not want to offer any comments," said an official at the legal and taxation affairs department of the company who identified himself only as Kothari and refused to share his first name or title. Mint was directed to Kothari by D.S. Patel, an accounts executive at the firm.

Could not find any other mention of this case and subsequently there don’t seem to be any integrity issues which have come to light. However, a bit disconcerting to see Polycab’s name amongst such an ignominious bunch - HDIL (massive fraud), ABG Shipyards (massive fraud), and Juniper Networks (https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml). Especially since IFC has been a shareholder since 2008.

Otherwise the company does well on a basic integrity checklist

EY as auditor, to be replaced by KPMG
Insignificant related party transactions
Salary levels look OK
Has a real board
Dividend & tax paying
No crazy litigation disclosed in RHP

Can anyone familiar with the company share insights on management quality & integrity?

bkdoss · November 8, 2019, 4:31pm

Any idea why the receivable days, Inventory days and payable days are different in the company presentation for Q1 FY19 in these two screenshots? First one was in the Q1 earnings presentation, second one in Q2’s earnings presentation. There’s a considerable difference in the figures quoted. Can someone throw light on this.

2019-11-08%20(3)|690x377

YachnaBhatia · November 18, 2019, 7:16am

Numbers calculated based on trailing 12 months are same - See Snapshot 2 - table 2 on right hand side - Net WC / Rec / Inv / Payable days - 46 / 48 / 106/ 108 days

YachnaBhatia · November 18, 2019, 8:39am

Did a quick comparison between Polycab and Havells (summarized below). Despite almost similar topline / bottomline (see H1 FY 20 numbers), much faster growth over 1/3/5 years in topline/bottomline and similar RoCE / RoE numbers, the market cap for Polycab is almost 1/3rd of Havells and looks undervalued on this basis.

Overall Polycab is witnessing stable growth in wires and cables business which is their main business c. 85%-90%. They have been able to scale up FMEG business (fans, lighting, luminaries) well over last 4 years unlike competition and expect improvement in margins from FMEG business going forward.

Promoters hold about 69%, DII c. 17%, FII c. 4% and Polycab has been recently included in MSCI Global small cap index. Overall see scope of both earnings growth and PE rerating.

Would be happy to hear from others. Also does anyone have any insights on management quality and integrity (given 2010 issue on concealed income).

Disc: Invested

Finrahul9 · November 19, 2019, 5:08am

The profitability seems to be erratic . There is some signs of cyclical behaviour . I believe that this will allways put a limit to the upside and inspite of having high ROCE , it will continue to trade at current multiples.
Hopefully it can get rerated if it shows consistent performance going ahead . Will be doing a detailed analysis with havells and post here .

red2red · November 19, 2019, 5:01pm

Why is there so much difference between polycab and havells in amount receivables? Rs 1334 crores vs Rs 406 cr.
Trade payables rs 1509 vs 1559 cr. Havells seems to be managing this aspect well.

YachnaBhatia · November 20, 2019, 5:46am

There are 2 key reasons why Polycab has higher receivables:

Retention money in the EPC business which Havells does not have, this makes up c. 10% of receivables
Channel financing facility
a. Havells had outstanding of c. INR 630 crs in channel finance facility (non-recourse and hence off-balance sheet) as of FY 19 end; Adjusted for that, total receivables will be c. INR 1,050 crs on topline of INR 10,000 crs, i.e. c. 38 days receivables outstanding.
b. Polycab too has a similar facility which they started three years back and are gradually scaling up (exact outstanding not known). Receivable days outstanding (only current, excl EPC portion) as of H1 FY 20 end for Polycab is c. 49 days.
The management has been quite vocal in earning call transcripts of the need to reduce working capital (through scale up of channel financing facility and overall credit mgmt), results of which are also evident in numbers below:

INR mn	Q2 FY 20	Q1 FY 20	FY 19	FY 18
Total receivables (incl EPC)	12,963	12,949	14,694	13,788
Sales	22,544	19,330	79,560	69,150
Avg Rec days	52	60	66	72

bhaskarbora67 · November 20, 2019, 6:50am

How is the promoter??

Why is it better than KEI industries with similar valuation??

ShareFarmer · November 20, 2019, 2:21pm

Apple to mango comparison.is not good. As far as I know kei is mainly into wires. Polycab is more than that. Read this thread from top to bottom.

Feel free to correct.

YachnaBhatia · January 21, 2020, 11:26am

Good results by Polycab
Q3FY20 Revenue at Rs 25,073 mn; up 24% y-o-y
Q3FY20 PAT at Rs 2,214 mn; up 14% y-o-y
Ad costs at 38 cr vs 15.8 cr YoY (Doubled)

9MFY20 Revenue at Rs 67,006 mn; up 21% y-o-y
9MFY20 PAT at Rs. 5,505 mn; up 53% y-o-y

Rahulb · January 21, 2020, 5:31pm

Revenue growth is strong, but margins have slipped yoy, which looks discomforting. But on a closer look, 3QFY19 EBIT margins for wires and cables division was abnormally high, so margin looks depressed in the current quarter. Qoq, the margin is better. Would be interesting to listen to the concall to get more clarity.

spartan · January 22, 2020, 8:28am

Polycab Q3FY20 con-call notes:

Domestic industry and electrical industry remained sluggish in Q3. Demand may remain soft for next 1-2 quarters.

Polycab top Line growth of 24% for Q3 and EBIT margins at 13.5%…Q3 EBIT of FY19 was exceptional. On full year basis EBIT margins of 11-13% sustainable.

Revisiting marketing strategy & increasing ad spend evenly throughout the year. 3.5% -5% of B2C business revenue will BE spent on ads. 90 cr in 9MFY20 and 38 cr in Q3.

Working capital improved with lower inventory and channel financing.Channel financing in C&W segment is 60% and in FMEG is high single digits. No significant changes in inventory for next few quarters as we implement changes suggested by external consultant.

Capex: 300 cr is current year capex for backward integration,debottlenecking and in FMEG.
backward integration to convert copper into rods helps in quality and operational advantages.
2/3rd of capex for C&W backward integration and for export market… Remaining ⅓ rd for FMEG business. Capacity utilisation for C&W is 75%& FMEG range is 60 to80%.

Retailers:1,25,000…Dealers and Distributors:3,450…Project Bandhan has 1,15,000 electricians and 38,000 retailers on board.

C&W segment growth of 20% yoy…driven by exports and higher sales of OFC…channel sales was soft in Q3. Mix of cables and wires sales is around 55 and 45% from last few quarters.
Wires: double digit growth from non metro cities. West and south predominant growth.
Cables: institutional sales was down sharply. Distribution sales were soft in north and other regions are flat.

EPC: executing profitable contracts which helped to improve margins. Less than 5-6% of topline. we get advantages and op leverage in EPC business with our cables supply. Govt projects>50%.
OFC : 150cr in 9M …50cr for Q3 …Bharat net project 50 to 70% executed with JV partner.

Exports: 430cr total export in Q3 . Dangote order of 319cr was executed in Q3. (total export of 610 cr for 9MFY20).40-45% of Dangote order is executed, expect to complete the order execution by q1fy21. We are trying for repeat order and venturing into developed economies…70CR of such export were executed by 9MFY20. We are trying to get distribution lead business than order business in export market.
Payment terms for Dangote order was different and we got 40% as advance.
Products for export market are the same with changes in specific quality norms.

FMEG: 34% of growth in Q3, contributes to 10% of topline. High ad spend in Q3 impacted margins. Yearly 100bps of EBIT margin improvement.
Fans(40-45% of fmeg) and lighting luminaires division grew at a healthy pace. Switch and switchgear(30% of fmeg) growth was soft. Lighting business facing pricing pressure at industry level. New factory of water heater was commissioned. Growth rate of water heater is significant on small base.