Polycab India rides a strong demand wave

Q2 was expected to be a good quarter, and it did not disappoint. Consolidated pre-tax earnings rose by 55% year-on-year to ₹557 crore and revenue stood at 27% to ₹4,218 crore. Polycab enjoys a market leadership position with 22-24% market share in the organized wires and cables (W&C) space. It is viewed as a beneficiary of the government’s thrust on infrastructure and momentum in private sector capex.

In Q2, contribution from W&C stood at 88% of gross revenue. Strong volume growth drove up revenue by 29% to ₹3,805 crore. The company cited government capex and strong real estate demand as key drivers of growth momentum.W&C saw earnings before interest and tax (Ebit) margin expand by 285 basis points to 14.6%.

However, the performance of the fast-moving electrical goods (FMEG) segment— which includes switches, fans and lights – was weak, reporting a loss of ₹6 crore at the Ebit level. Near-term outlook appears bleak. “While we foresee FMEG to remain subdued in FY24e, margins could improve from FY25e, with benefits from distribution revamp and economies of scale,” said a report by Jefferies India.

Still, in view of the company’s consistent execution over past 4-5 quarters, Jefferies has raised the target price-to-earnings multiple of the stock to 38x, from 33x earlier. Jefferies foresees FY23-26 estimated earnings per share growth, at 28% compounded annually, to outpace the 19% mark seen over FY20-23.

But whether W&C growth sustains ahead needs tracking as valuations are not exactly cheap. The stock trades at 40 times estimated earnings for FY25. “There is no sign of a demand slowdown yet, though the upcoming elections do pose some risk,” according to Kotak Institutional Equities. However, it finds current valuations “too rich for what is still predominantly a cables-driven story.”

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Updated: 22 Oct 2023, 06:32 PM IST