Polycab impresses in FY23, but may need extra spark going ahead

The segment recorded a substantial rise of 286 basis points in its Ebit (earnings before interest and tax) margin, reaching 14.5% year-on-year. One basis point is one hundredth of a percentage point.

Despite the positive results, the company’s earnings growth could be tempered in FY24 due to higher advertising and promotion (A&P) expenses. “In a media appearance post-results, management guided a sharp increase in A&P spending to 2-3 times the levels of FY23,” said analysts at Kotak Institutional Equities in a report on 15 May.

This comes as the company relaunches its brand and pushes to accelerate growth in its B2C business comprising fast-moving electrical goods (FMEG) and wires, the broking firm added. Last year, A&P expenses stood at Rs124 crore and formed less than 1% of operating revenue.

To be sure, the FMEG segment is facing a weak demand environment. In Q4, revenue in this vertical dropped by 19.5% year-on-year to ₹305 crore. For the full year FY23, revenue in the FMEG segment was flattishr due to distribution channel adjustments, inflation, and increased A&P expenditure. It helps that the FMEG segment formed only about 9% of revenue in FY23.

On the other hand, there is optimism for the cables & wires segment, which is seeing solid demand. Government initiatives and private capital expenditure revival are likely to support this trend. Polycab’s overall Ebitda margin for FY23 rose by 276 basis points year-on-year, thanks to price increases, a favourable mix, and declining input costs.

“Polycab tends to benefit in periods of commodity price deflation; however, the cables & wires business inherently remains competitive and cyclical, so retaining these margin benefits could be challenging,” said Kotak analysts.

That said, the stock has run up sharply in the recent past. So far in CY23, Polycab’s shares have risen as much as 32%. “Cables & Wires / Industrial stocks have re-rated in the past few months, on capex revival and volume traction,” said analysts from Jefferies India in a report on 15 May. This also means that a good portion of the optimism is being factored into the share price, which may cap meaningful upsides at least in the near-term.