Time to cherry-pick companies that use metals as their raw materials?
Recession, Recession, Recession!
Fear sells faster than any blockbuster product, indeed.
Some experts are now predicting a full-blown global recession triggered by rising inflation and rising interest rates.
As a result, copper and aluminium prices have declined more than 20% and 30% respectively over the last 3-4 months. Now should you worry about a potential recession or get excited about some manufacturing companies that extensively use these base metals?
Well, frankly, we don’t have any definite answer to this. However, some manufacturing companies that may benefit from India’s structural growth story are worth tracking hereon.
Today, we decided to talk about one such company, Polycab India.
Polycab India’s story in brief…
Polycab India is a leading manufacturer of wires and cables in India. Although Wires and Cables business is the mainstay of Polycab, it has been rapidly growing its presence in the Fast-Moving Electric Goods (FMEG) space. FMEG is an intensely competitive space, but Polycab has been working on aggressive expansion plans.
Over the years, the company has brought down its dependence on B2B (Business-to-Business) segment. From nearly 70% until five years ago, the contribution of B2B segment to the company’s top line has come down to 58%-60%.
The company aspires to claim the number one position, across all product categories. At least that’s the vision.
At present, 4,600 distributors and 2.5 lakh retail outlets sell Polycab products. The company has also developed an alternate sales channel by partnering with leading e-commerce platforms such as Amazon, Flipkart and JioMart amongst others.
What are the macro triggers for Polycab’s business?
Growth trends in infrastructure, housing and manufacturing sectors largely decide how strong the demand trends are for Polycab. At the current stage of development, India is likely to witness a substantial growth in infrastructure and housing.
Moreover, the company is eyeing some niche opportunities in sunrise sectors such as Electric Vehicles (EV), defence, data centres and digital connectivity amongst others.
Why you may want to track Polycab now?
Raw material costs accounted for 74.1% of Polycab’s revenue in FY21 which shot up to 77.6% in FY22.
Copper and aluminium are the key raw materials for the company. Now it remains interesting to see if cooling base metal prices offer tailwinds to Polycab.
How has the stock of Polycab done recently and in the past?
Despite a 19% correction over the last 2 months, Polycab is up 12% from its June 2021 levels. Moreover, the stock has generated 4X returns for those who invested in the Initial Public Offering (IPO) of Polycab India in April 2019. The offer price was Rs 538/share, mind you.
And what about valuations?
At the time of IPO, Polycab commanded a Price-to-Earnings (P/E) multiple of 20. Now the valuation multiple has swollen to 36 times.
Oh, does that mean the company is overvalued even after recent correction?
There are always more facets to a story than what we think initially.
In that context, Polycab is no different.
At the time of IPO, the company had an 18% market share in the organized market of wires and cables. This has now increased to 24%. The company’s net profit has jumped from Rs 500 crore in FY19 to Rs 917 crore in FY22.
What are the crucial triggers you should watch out for?
The Project Leap—Polycab’s transformation programme—has set out a clear cut objective of achieving Rs 20,000 crore of revenue by FY26. In other words, the company is targeting a top-line growth of 14% on compounded annualized basis, here onwards.
On the margin front, the company aspires to clock a 12% EBITDA margin on FMEG portfolio and wants to maintain EBITDA margins of 11%-13% in the Wires and Cables business.
However, more than the top-line growth which is vastly affected by a rise/fall in the commodity prices, you should keenly track the bottom line and margin performance of the company.
4 pillars of Project Leap
- Perfecting the organizational structure and filling up capability gaps across business functions
- Revisiting business model and making it more customer centric
- Achieving go-to-market excellence
- Optimizing product portfolio
Growing its presence in the smaller towns, increasing the contribution of premium products and offering products across price-points remain some near and medium term objectives of the company.
What’s been the progress so far?
Polycab is planning to incur an annual capex of Rs 300-400 crore for the next few years. The company has earmarked 2/3rd of the capex amount for Wires & Cables business and 1/3rd for FMEG business.
Moreover, Polycab is willing to take an inorganic route, if required, and acquire suitable companies having superior technological preparedness and robust regional distribution networks.
By adopting data-driven production and planning strategies, Polycab has managed to reduce its time-to-market, optimize costs and thereby gain a market share. It’s working on the end-to-end digitalization of the entire distribution system.
Polycab has launched a new sub-brand Etira for the economy segment. Its progress will be crucial to watch out for.
Moreover, the company recently merged heavy duty and light duty cable divisions to unlock cross-selling opportunities and achieve better economies of scale.
Such initiatives take time to fructify.
Will Polycab deliver as per its own guidance? Do let us know what you think!
Do you wish to get an alert every time we publish a story?
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