Money in bank for Polycab shareholders! Share price rockets as much as 10 pct; Anand Rathi has this message for investors

Anand Rathi believes Polycab India’s faster recovery led to strong earnings upgrade. It has retained a Buy rating on Polycab share price with a target price of as much as Rs 1228 from just Rs 945. Strategic moves (inventory reduction, channel financing) will aid in long term sustainable growth. Polycab’s EBITDA grew 15% YoY; the 14.8% margin (up 266 bps YoY) was due to premiumisation, a better mix and cost-savings.

They think faster traction in the high margin B2C segments (wires / FMEG) and exports, premiumisation and cost saving measures led to Polycab’s strong Q2 performance. Healthy net cash position (Rs 6.3 bn) was another positive for Polycab India. On the faster recovery, Anand Rathi now expects 8%/13% CAGRs in Revenue / PAT over FY20-22 with a 14%+ EBITDA margin. Strategic moves (inventory reduction, channel financing) will aid in long term sustainable growth. Profitable growth in FMEG will support a re-rating.

All-round performance in Q2

Better Q2 revenue (down only 6% YoY) was due to strong recovery in B2C businesses. EBITDA grew 15% YoY; the 14.8% margin (up 266 bps YoY) was due to premiumisation, a better mix and cost-savings. Ad-spend has been restored; it will be higher in Q3 (IPL). Other income includes Rs 225 mn forex gain. Net cash position further rose to Rs 6.3 bn.

Wires / FMEG / exports strongly bounce back

Wires posted double-digit growth, coming mainly from T1 and below towns. FMEG grew 25% YoY with a healthy margin which is sustainable due to premiumisation. Exports were up 47% YoY to Rs 2.3 bn, including Rs 440 mn sales to Dangote.  Domestic cables business was down 30-40% YoY, recovered slower and is likely to be normal in Q3.

Strategic moves to aid long-term sustainable growth

Focus on working capital management (inventory reduction, channel financing) and optimising costs are a few strategic moves to keep Polycab on the sustainable growth path in the long run. Rs 2 bn capex in building capacities and technology upgrading, even in a tough FY21, is a testimonial to this.

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Strong earnings upgrade owing to faster recovery

Over FY15-20, revenue/PAT registered 13% / 36% CAGRs. On the faster recovery, Anand Rathi expects 8%/13% CAGRs over FY20-22 with a 14%+ EBITDA margin, the RoE nearing 20% and FCF continuing. Long-term prospects are bright too.

Key risks: 

Volatile raw-material prices, slowdown in government spend on infra.