Polycab IPO: Attractive play on wires and cables growth story

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Given its leadership in cables and wires, diversified portfolio and distribution network, Polycab India is expected to post robust growth rates going ahead. The company has been outperforming the cables and wires sector with a growth of about 14 per cent over the last three years. The sector is expected to see higher growth rates which will help maintain the revenue trajectory. It had a market share of 18 per cent in the organized and 12 per cent in the total Indian wires and cables industry during FY18. Also its wires and cable revenues of Rs 6,240 crore during FY18 was 2.2-2.3 times reported by Havells and Finolex Cables. What helps the company stay ahead of its rivals and is a growth driver is its vast distribution network, its brand image and diversified portfolio. The growing share of organized players in the cable and wires industry after the implementation of the goods and service tax too is a trigger.

While 80 per cent of its revenues comes from its large portfolio of cable and wires, the new business segments too are starting to contribute to overall growth. Polycab entered the manufacturing and selling of FMEG (8 per cent of 9MFY19 revenue) such as electric fans, LED lighting and luminaries, switches & switchgears, solar products during 2014. Utilising its vast distribution network the company has been growing the business and improving its B2C (retail) focus.

Its growing direct retail sales focus and contributions from the FMEG business has helped it to improve its margins from 10 per cent earlier to 11.7 per cent in FY18 and further to 13.5 per cent in nine months FY19 (9MFY19). Its manufacturing facilities with high degree of backward integration also helps control costs besides keeping quality levels under control.

The company’s debt equity ratio stands at 0.23 times and is expected to reduce given that some of the proceeds from the public issue will used to retire debt.

At the upper price band, Polycab is valued at a price to earnings of 21.6 times its FY2018 earnings which is almost at par with peers such as KEI Industries and Finolex cables. Though company’s return ratios too are good they are lower than these peers, say analysts.

The average industry valuation of comparable listed peers stands at 44.6 times. However these include peers such as Havells too which are highly diversified and have larger consumer durables and other products and hence can sustain much higher valuations. Polycab  currently is dependent more on wires and cables segment. However looking at company’s growth history, current financials and growth prospects analysts feel valuations are reasonable and recommend the issue to investors. Given the brand position, financials and business prospects, analysts at Centrum Broking suggest investors can subscribe to the issue. Analysts at ICICI Securities believe that valuations are attractive, given its leadership position in the wire & cable industry, low debt/equity (Rs 0.3 times) and attractive return ratios. 

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