Over 350% return since listing! Should you invest in this bluechip FMEG firm ahead of festive season?

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Robust growth prospects in the cable and wire segment and rise in Fast Moving Electrical Goods (FMEG) portfolio have managed to attract investors towards Polycab India on Dalal Street. As a result, shares of the company have climbed 175% to Rs 2,440 in the past one year. On the other hand, the benchmark BSE Sensex has gained 50% during the same period. Overall, the scrip has advanced nearly 354% since listing in April 2019. Analysts retained their bullish view on the company as well as the sector despite the recent outperformance.

Polycab is the market leader in the wires and cables space with an extensive product portfolio and distribution reach coupled with accelerated growth in the FMEG space, which augurs well for growth visibility. Polycab’s five-year roadmap to achieve Rs 20,000 crore in FY2026E with more focus towards brand positioning, operations and business growth along with a strong emphasis on governance and sustainability outpacing the industry’s growth provides healthy visibility ahead. Revenue from the wires and cable segment has seen a decent 9% CAGR during FY2017-FY2021 and FMEG posted by a 33% CAGR during the same period. Further, the increasing market share of organised players, which grew from 61% in FY2014 to 66% in FY2018, is expected to touch 74% in FY2023E, which augurs well for the industry leader.

Sectoral outlook

Market watchers believe that the domestic demand side is improving with unlocking, infrastructure, and construction back in action with labour issues largely resolved, which provides a positive outlook ahead. The wires and cables industry contributes 40-45% to India’s electrical equipment industry. In terms of volumes, the Indian wires and cables industry (including exports) has grown from 6.3 million km in FY2014 to 14.5 million km in FY2018, posting an around 23% CAGR over the period.

“The industry registered an 11% CAGR in value terms from Rs 34,600 crore in FY2014 to Rs 52,500 crore in FY2018. The cable and wire (C&W) industry was expected to register a 14.5% CAGR from Rs 52,500 crore in FY2018 to Rs 1,03,300 crore by FY2023. However, the slowdown in infrastructure growth and uncertainty in real estate will lead to moderation in growth for the C&W segment,” Sharekhan said in a report adding gradual resumption of normal economic activity and infrastructure projects will push recovery to H2FY2021.

The government has envisaged Rs 111 lakh crore capital expenditure in infrastructure sectors in India during FY2020 to FY2025. The continued thrust of the government on infrastructure investment is expected to improve the demand environment for the W&C industry. The Indian FMEG industry has many growth opportunities, led by macro drivers such as evolving consumer aspirations, increasing awareness, rising income, rural electrification, urbanisation, and digital connectivity. Products such as energy-efficient fans, modular switches, building and home automation, and LED lights are riding an ever-increasing wave of consumer demand.

Financials

Of late, the company reported a 36% decline in net income to Rs 75.3 crore for the first quarter ended June 30. On a low base, revenue grew by 93% to Rs 1,880.5 crore despite the challenging business environment arising out of the lockdowns.

Pre-tax profit in the June quarter jumped 151% to Rs 98.2 crore, from Rs 39.1 crore in the year-ago period, reflecting improved profitability. However, its net income declined 36% to Rs 75.3 crore compared to Rs 117.6 crore on account of one-off gains in the previous period.

For the financial year ended March 31, the company posted a revenue of Rs 8,926.50 crore against Rs 8830 crore last year. Centrum Broking believes that top line of the company may grow to Rs 11,014 crore in FY22, Rs 12,524.80 crore in FY23 and Rs 14,126.80 crore in FY24. Likewise, the brokerage firm sees adjusted net profit at Rs 1,298.90 crore in FY24 against Rs 882.10 crore in FY21.

Should you invest?

Brokerage Centrum Broking and Sharekhan see over 20% upside in Polycab India. Centrum Broking expects shares of the company may hit a target price of Rs 3,065. “We expect Polycab to register 16.5%/17.8% revenue/PBT CAGR over FY21-24E. Earnings CAGR will be lower at 13.8% due to a lower tax rate of 16.8% in the base year of FY21. We assign P/E of 38x H1FY24 earnings (30% discount to sector leader, Havells),” Centrum said in a report.

On the other hand, Sharekhan said that the management of Polycab India indicated both B2B and B2C businesses gaining traction with pick up in infrastructure, construction and residential demand. Consolidation of copper prices from mid-June is expected to lead to dealer restocking, pick-up in primary sales, and decline in inventory levels. “The upcoming festive season bodes well for its B2C products such as lights, switches, and wires. Management reiterates H2FY2022 to be better than H1. The Project leap to touch Rs. 20,000 crore revenue by FY2026 remains intact,” Sharekhan. It has set a target price of Rs 2,850 for Polycab.