Fortune Scrip

Published: Nov 15, 2022
Updated: Nov 15, 2022

Polycab India

B2B SECURE, B2C GROWING

Polycab India Limited (PIL), a leading electrical brand with over Rs 122 billion in revenues, is the largest manufacturer of wires and cables in India and at the same time one of the fastest growing players in the FMEG (Fast Moving Electrical Goods) space. This fortnight, we have selected this company as the Fortune Scrip as it has tremendous growth prospects going ahead.

Promoted by the Jaisinghani group almost four decades ago, the company is engaged in the manufactucture of power cables, control cables, instrumentation cables, solar cables, building wires, flexible cables, flexible/single multi-core cables and round cables, rubber cables and railway signaling cables, speciality cables and green wires in the engineering, procurement, construction (EPC) business.

The company caters to various public and private institutions across the relevant industries as well as small customers through its B2C business. It has a strong pan-India distribution network of over 4,100+ authorised dealers and distributors, which in turn cater to over 170,000 retail outlets. Business operations are managed through a corporate office, 4 regional offices and 16 local offices across the country. The company has 23 manufacturing facilities located across Gujarat, Maharashtra, Uttarakhand and the union territory of Daman. It puts strong emphasis on backward integration of its manufacturing process and R&D capabilities to adhere to various national and international quality certifications. Polycab went into the export business in the last few years, and has succeeded in entering as many as 66 countries.

In 2014, it entered the FMEG segment with the manufacture of switches and switchgears, fans, LED lights, water heaters, coolers and cloth irons, among others. Interestingly, this business has also picked up quite well.

FINANCIAL BOOM

Needless to say, the company is going from strength to strength on the financial front. In 9 years, its sales turnover has more than trebled – from Rs 3,986 crore in fiscal 2014 to Rs 12,204 crore in fiscal 2022, with operating profit shooting up more than four times from Rs 299 crore to Rs 1,264 crore and the profit at net level spurting over 8 times from Rs 89 crore to Rs 766 crore during this period.

The company’s financial position is very strong, with reserves at the end of March 2022 standing at Rs 5,394 crore – over 36 times its equity capital of Rs 149 crore. The company has been continuously reducing its debt, which has come down from Rs 856 crore in fiscal 2017 to Rs 112 crore in fiscal 2022. Thus, it will be virtually a debt-free corporate entity very soon. The company has not only delivered an excellent 30.8 per cent CAGR over the last five years but its debtor days have also improved from 52.6 to 38.8 days. Though it has not made any bonus issue so far, it has been paying handsome dividends, and has been maintaining a healthy dividend payout of 17.9 per cent.

But we have not selected this company as the Fortune Scrip because of its past laurels. We are confident that the future prospects for Polycab are highly promising. Consider:

• Having strengthened its position in the B2B segment (cables and wires), Polycab is now focusing on enlarging its presence in the B2C (FMEG) segment. Having entered the FMEG segment in 2014, the management succeeded in growing it to 10 per cent of revenues in the last five years. During the last three years, the FMEG share has shot up to 30 per cent and this year 40 per cent. The management is confident of taking this share to 50 per cent within the next 3 to 4 years.
• The management’s confidence is based on three drivers. The first is the strong growth potential in FMEG. This is on account of rising incomes and improved standards of living of people, especially the lower and higher middle-income group. The second driver is investment in brand building. The management has realised that brand-building is a must for pushing up sales and has seen proof of the buoyant impact on sales of house wires after appointing actor Paresh Rawal as its brand ambassador, and a similar impact on sales of another two items after engaging actor R Madhavan and actor Khurana. The third driver is expansion of the distribution network. The company has plans to augment its distribution reach from the present 1,00,000 outlets to 1,37,000 outlets by the end of 2023. These steps are expected to push up sales of FMEG products at a rate of 28 to 30 per cent during the next 3 to 5 years.

GOVT INFRA BOOST

• The company has by now emerged as the largest and most versatile manufacturer of wires and cables, enjoying a 12 per cent (overall market) to 18 per cent (organized market sale) marketshare. The pace of growth is expected to improve in view of the government’s emphasis on implementation of infrastructure schemes like ‘Smart Cities’, ‘Housing for All’ and ‘Electrification of All Villages’. This growth will also be propelled by the company’s entry into newer segments like EVs, defence and distributor-led exports.
• Thanks to its aggressive marketing policy the demand for the company’s products in the B2B and B2C segments has been on a steady climb in recent years, notwithstanding the pandemic scare. At a consolidated level, the sales revenues have crossed Rs 10,000 crore to reach over Rs 12,000 crore and the management has targeted revenues of Rs 26,000 crore by fiscal year 2026, indicating a CAGR of 18 per cent. According to the management, this target is to be achieved by pushing up growth in both the B2B and B2C segments through strategic initiatives as well as maintaining the company’s leadership position in the B2B category, with its marketshare in the organized sector being 23 to 24 per cent. In the case of the FMEG segment, its marketshare is growing through new product launches and dealer additions across the country. Today the company can boast of a robust RoE of 18 per cent and an RoCE of 22 per cent.
• As if to support the management’s revenue targets, the company has started fiscal 2023 on a robust note with sales turnover in H12023 amounting to around Rs 6,000 crore. Prospects for the second half are all the more encouraging as the management is seeing a larger volume-based growth in the wires and cables segment. In the first quarter of fiscal 2023, the wires and cables business saw growth of 48 per cent out of which two-thirds was due to higher volume growth and the remainder was value-based, led by calibrated passing on of the price hikes. The management expects the industry to move towards the organized segment and hence expects the same volumes growth momentum to continue in the second half of the year. On the FMEG front, switches saw a decline in revenues due to supply-led challenges. Polycab is currently dependent on third partysuppliers for switches. Having learnt a bitter lesson, the company has now decided to start its own facility to manufacture switches by the end of fiscal 2023 and expects the revenue growth from switches to improve once the facility goes on stream.

The company’s sub-brand ETIRA, which was launched in Q4 FY2022, has reported a 2X growth on a sequential basis. ETIRA caters to the economy segment and the company plans to penetrate the rural market with this brand.

F.M.E.G. FOCUS

• The company’s management is working on four initiatives to drive the FMEG segment: (1) Aggressive market reach expansion, (2) Building the right product portfolio across price spectrums, (3) Improved brand architecture to drive premiumisation, and (4) Augmented influences management programme.
• For the current fiscal year, the company has planned a capex of Rs 300-400 crore out of which an amount of Rs 100 crore has already been incurred in the first half. The company has also decided to explore adjacent categories through either mergers or acquisitions, or starting its own manufacturing facilities. If this happens, the capex figure will be revised upwards.
• Polycab has evolved from being a B2B player to a fast-growing B2C brand, given the increase in the FMEG share by 680 bps to 9.4% over FY15-20. The B2C mix (FMEG/ retail wires), currently at 40%, is set to breach 50% in the medium term, given: 1) Strong growth potential in FMEG and retail wires segment, 2) Investments in brand building, and 3) Increase in the distribution reach (from 100,000 to 137,000). We believe its presence in large FMEG categories like fans, lighting, switchgear, switches, pumps and appliances (coolers, water heaters and irons) will enable sales to grow at a CAGR of 28.8% over the next couple of years.

Polycab is India’s largest player in the wires and cables (W&C) segment with a formidable brand presence. It is one of the fastest growing FMEG players, aiding its transformation from a B2B company to a B2C company. PIL is a market leader in the domestic wires & cables (W&C) segment with an over 12% marketshare (an 18% organized marketshare). In a forward extension to its W&C business, Polycab is also present in the EPC business, bidding for projects with ~40-60% cabling requirements.

SCRIP SPURT

In the wake of rapid strides made by the company so far and better prospects ahead, the share price of Polycab has more than trebled to Rs 2,700 during the last one year or so. We expect a further spurt in the coming years and will not be surprised if the price reaches even the Rs 5,000 level during the next five years if the same pace of growth is sustained going ahead.