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

Stock Opportunities Not-so-Hidden Gems
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Good Numbers from POLYCAB

Q3FY23 Results Press Release

Highest Ever Quarterly EBITDA and PAT
Highest Ever 9M Revenues, EBITDA and PAT

:black_small_square: 9M FY23 Revenue at ₹ 97,841 mn; up 19% YoY
:black_small_square: 9M FY23 EBITDA at ₹ 12,397 mn; up 58% YoY
:black_small_square: 9M FY23 PAT at ₹ 8,538 mn; up 64% YoY

:black_small_square: Q3 FY23 Revenue at ₹ 37,152 mn; up 10% YoY
:black_small_square: Q3 FY23 EBITDA at ₹ 5,030 mn; up 39% YoY
:black_small_square: Q3 FY23 PAT at ₹ 3,608 mn; up 45% YoY

Mr. Inder T. Jaisinghani, CMD, said:

  • Strong quarterly performance, registering highest ever 3rd qtr rev and the highest ever quarterly PAT as well as the highest ever nine-months revenues and PAT in the history of the Company.

Key Highlights (Q3 FY23)
• Revenue grew 10% YoY to ₹ 37,152 mn in spite of high base, lower commodity prices
and higher inflation on the back of healthy volume growth in Cables & Wires business.

:black_small_square: Wires and Cables business revenue grew 11% on YoY basis to ₹ 32,878 mn, which was largely driven by domestic distribution business. The outperformance was primarily on account of benefits realized through the merger of HDC and LDC verticals last year. The Company also registered
highest ever quarterly production volume in Q3FY23.

  • FMEG business was almost flat YoY and grew 12% QoQ despite challenging business environment. While October and November were stronger compared to the months of Q2FY23, demand picked up considerable pace in December.
    • EBITDA margin continued to improve, increasing by 73 bps QoQ to 13.5% on the back of better operating leverage despite input cost pressures and almost 4x increase in A&P spends
    • PAT grew by 45% YoY to ₹ 3,608 mn from ₹ 2,484 mn in Q3 FY22. PAT margin stood at
    9.7% for the quarter .
    • As of 31st December 2022, net cash position improved to ₹ 18.7 bn against ₹ 6.7 bn
    net cash during the same period last year.

Key Highlights (9M FY23)
• Revenue grew 19% YoY to ₹ 97,841 mn from ₹ 82,338 mn in 9M FY22
:black_small_square: Wires and cables business revenue grew 20% on YoY basisto ₹ 86,022 mn from ₹ 71,843 mn in 9M FY22. Domestic distribution driven business grew by 25% YoY on the back of strong volume growth of over 26%.
:black_small_square: Exports revenue exports grew by 32% YoY. Overall, exports business contributed to 8.6% of consolidated revenue in 9MFY23.
:black_small_square: FMEG business grew 8% YoY to ₹ 9,483 mn from ₹ 8,752 mn in 9M FY22. Work
on realignment of distribution channel, brand building, new product
development, premiumization of offerings and influencer management
program are progressing well. These initiatives will help drive revenue growth
and margin expansion for the FMEG business
:black_small_square: EBITDA grew 58% YoY to ₹ 12,397 mn from ₹ 7,867 mn in 9MFY22. Margins improved
by 312 bps to 12.7%.
:black_small_square: Reported PAT increased by 64% YoY to ₹ 8,538 mn from ₹ 5,199 mn in 9MFY22. PAT
margin improved by 241 bps to 8.7%.

4ce53286-8d29-4f8c-b382-1b558a6f6e3a.pdf (bseindia.com)

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Another good result by Polycab. 31% increase in PAT and 9% increase in topline. Margin is at 14%. FMEG is still underperforming and reported loss for FY23. They mentioned in the presentation that it should improve from here.

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In the Q3’FY23 earnings call, the management mentioned that FY23 would be the base year for FMEG and profitable growth should materialize from FY24. So I think it’s worth watching a few quarters, at least, to see how they scale and whether the levers mentioned (realignment of distribution channel, premiumization of offerings, brand marketing, etc.) do in fact aid in scaling up this business.

I’m faithful of said scale-up, given:
a. management’s demonstrated track record in entering new segments
b. when asked about the possibility of entering kitchen appliances segment

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this shows focus and gives me confidence that the entry into FMEG wasn’t a spur of the moment decision

That said, FMEG scale-up should be thought of as an optionality and not part of the core investment thesis for this business.

Disclosure: Invested from 2100 levels; Forms a ~10.5% position at a portfolio level. Keen to hold with the expectation that it could compound at 15% CAGR for 3-4 years.

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Is it good time to buy now… im tracking from 750 levels… didnt had conviction to buy… but it is continuosly zooming up… will we have margin of safety now ? im not asking buy recommendation… need advise on bussiness valuation at current levels ?

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Valuations are high if we consider only the W&clC business. They have to show FMEG growth with improved margin to move higher on valuation charts. If they can’t do that in next 1-2 years, I reckon market correcting the valuation.

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current valuations are high or low , will depend on the investment time horizon too. A person who wants to hold it for 5 years, for him , valuation will be different and for a person who wants to hold it for 10 years, for him, it will be different.

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Excellent point in general.
If an investor is investing in any stock from 3-4 years perspective only, then very narrow valuation band should be considered.
For 10-12 years of holding period, some flexibility can be considered.
This is a general perspective, and nothing about Polycab.

Disclosure : Never invested in Polycab since it was listed recently and I was not able to arrive at any proper valuation at the time when it was available at low P/E few years back.

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Well Valuation looks certainly above fair price if someone is looking for 3 to 4 years and for a person who wants to hold to for 10 to 15 years timing doesn’t matter But one must notice that this stock is very volatile and If you track it properly you will get chance to enter.
Disclosure- I am holding it since 2020 so I may be biased about the company.

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Hello,
Is there any mention of the UHV cable business that Polycab has been trying to enter since long now? I couldn’t find any update regarding that in current presentation or concall. KEI is already into that vertical and polycab wants to enter it since long. If you find anything please reply.

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Also, if you find the details of 600cr. capex and how much from it will be brownfield and greenfield and how much revenue and asset turns are they expecting from it, then please tell

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in Jan concall they had shared the details about capex for EHV production facility. In May concall there wasn’t any discussion about that.

Here is the excerpt from Jan concall:
During various past earning calls, we have communicated our intention of entering
the high-voltage, extra-high-voltage space. With power demand multiplying across all Tier 1
and 2 cities, as well as with smart cities coming up, entire overhead high-voltage transmission
line conductors will have to go underground, and thus, the demand for high-voltage, extra-highvoltage cables would grow exponentially. Also, due to ever-increasing load transmission system,
we see 220 KV transmission lines moving to 400 KV and soon expect to even see the 550 KV
transmission lines in India. Being a market leader in the cable industry and looking to capitalize
on this opportunity, we are kicking off investment for a state-of-the-art EHV production facility
in Halol, Gujarat. We will be putting in capex this year towards setting up this facility and expect
the project to be completed and production to get started in 2025. Since EHV is high technology
product, so we have tied up with a leading Swiss company, Brugg Cables, for the technology
procurement. Brugg Cables was founded more than 120 years ago and has grown to be one of
the world’s leading cable manufacturers. Brugg has signed a technology know-how agreement
with Polycab to transfer design, testing, production and installation technology to Polycab for
up to 550 KV voltage system. The investment will open up INR 4,000 crores to INR 5,000 crores
of potential HV, EHV domestic market and also a significant amount of overseas business for
Polycab. Taking this investment into consideration, our capex for the 12-month period from Jan
'23 to December '23 will be roughly INR 600 crores to INR 700 crores. Three-fourth of this will
be utilized for wires and cables and one-fourth for the FMEG business.

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This swiss company Brugg , is the same company with which even KEI also has tie-up from past many years. Is it possible to have tie-up with two competitor companies at the same time? Can KEI take objection to this or anybody can do such tie-ups ?

Disclaimer- invested in both Polycab as well as KEI

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How about the electrical vehicles related cables?
Does polycab & KEI have good business growth in this sector?

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KEI and Brugg Kabel mutually decided to dissolve the tie up they had since 2014. KEI has already mastered the science and engineering of developing HV and EHV cables through the JV. Now it is Polycab’s turn.

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Havells results are out. Profit is almost 50 less than Polycab. Operating margin for Havells is 8% vs 14% for Polycab. Shouldn’t be the market cap of Polycab be higher than Havells as results looks consistent. Though it is not apple to apple comparison but my rationale for investing in Polycab was this only. Any thoughts?

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Havells business is much more diversified, polycab not at all able to grow it’s FMEG segment despite low base.

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Considering Havells FMEG is well established than Polycab, should not they do better than polycab atleast marginwise ? What good is diversified business if it results in slow profit growth ?

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  1. Havells margins are taken down by Lloyds - their AC segment. Otherwise their margins are far superior to Polycab’s.

I will consider Polycab to be at same valuation when it’s FMEG business starts contributing atleast 30-35% with ~10% margins atleast.

  1. Then, consider the brand values of both. Very few people in retail know about polycab branch, but Havells is well established in the minds of common people. Retail-focused branding is needed to sell FMEG part, Polycab has been in B2B mostly which was enough to sell cables.

I feel it will take 7-10 years of consistent marketing spends to reach Havells’ recall for Polycab.

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Havells aquired Llyod back in 2017 .Before that and since then ,except the solitary year of 2021 , when it was 15% , Havells OPM has been 13% or lower . Polycabs OPM has been about the same except at 2022. Even if I accept the dubious logic of shrugging of a low margin business 6 years after its aquisition, where is the “far superior” OPM ??
I am no expert on brands but Polycab surely is lagging as far as B2C is concerned ,but then they started late and as far as FMEG is concerned its early days .
Since I first bought polycab at 830 in 2020 , its PE has expanded from about 18 to 44 while Havells has been stuck in the range of 60 and 70 in the same period.
Atleast , Polycab has things to achieve and can do so organically,Havells seem to have outgrown that phase and more dependent on inorganic growth .
Only time will tell if ever polycab will get same PE as Havells but as far as I am concerned Polycab has more left in its tanks .

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