Polycab India can jump 87%, says Jefferies; Here are the reasons

Global brokerage house Jefferies is bullish on cables stock Polycab India. It has a buy rating on the stock and a target price of ₹3,300, indicating a potential upside of 35 percent in the base case scenario.

However, the brokerage sees an 87 percent potential upside in its bull case scenario for the stock and a 38 percent potential downside in its bear case scenario. In the bull case, Jefferies has a target price of ₹4,500 while in the bear case, the target price is ₹1,500.

“Our conviction is underpinned by robust prospects (revival in capex, infra, housing), it's market leadership (21 percent organized share), a ramp-up in B2C FMEG (37 percent sales CAGR in 5 years) and benefits accruing from strategic initiatives. Business seems de-risked, with top 10 customers at 22 percent of the sales mix,” explained the brokerage.

Over FY22-25E, the brokerage expects Polycab's cables & wires (81 percent of FY21 sales) business to sustain strong over 15 percent CAGR, driven by higher volumes led by housing and expected revival in capex/infra. Polycab is the market leader (21 percent organized market share) and Jefferies sees it outpacing industry growth (11-12 percent CAGR), led by diverse applications, expanding distribution and share gains from unorganized.

It added that FMEG (Appliances) is a margin-accretive, B2C category and Polycab's focus on in-house manufacturing and deeper penetration could drive an 18 percent sales CAGR over FY22-25. It also expects FY22-25E PAT to clock over 30 percent CAGR.

Polycab is working on three projects which could support the PAT growth, noted the brokerage - 1) 'Leap' - vision for ₹20,000 crore sales by FY26E via thrust on FMEG & exports, 2) 'Udaan'- envisages savings worth 80 bps via innovation and alternate sourcing of raw materials, 3) 'Shikhar'- which targets to reach 300 cities in 3 years with over 50 percent retailers and drive 3x sales via channel expansion and IT enablement.

"Copper volatility is generally a pass-through in the cables and wires industry. In the earlier copper up-cycle in FY17-18, Polycab's operating margins expanded by +140 bps over FY16-FY18. However, the 9MFY22 operating margin was hit by rising discretionary costs (ad-spends) and cost pressures in FMEG (likely lag in price hikes). While we expect FY22-23E operating margin to stay at 10-11 percent, the margin could normalize to 12-13 percent in FY24-25, led by better op-leverage (housing, capex) and FMEG/B2C expansion," explained the brokerage.

However, subdued traction in FMEG, the slowdown in capex /infra spends, delay in benefits from strategic initiatives, and excess volatility in raw materials (mainly copper) are key risks it added.

A bull case scenario is possible, according to Jefferies if these 2 things happen: 1) her spend on capex, housing and infra development in India and 2) Faster ramp-up in FMEG, resulting in better margins.

Conversely, the bear case scenario may kick in, if there is: 1) Subdued traction in capex, housing and infra development in India, 2) Lower offtake in FMEG, and 3) Excess volatility in commodities impacting margins.

“Our target PE at 35x on Mar’24e is at a discount to our coverage appliance stocks' average, even as Polycab is likely to deliver superior earnings CAGR at over 30 percent. The company currently trades at a 25-40 percent P/E discount to Havells and Whirlpool,” it said.

The stock has risen 29 percent in the last 1 year as against an 8 percent rise in Nifty50. Meanwhile, among its peers, Whirlpool has lost 11 percent and Havells has added 10 percent in this period. However, in 2022 YTD, it has been almost flat, down just 2.2 percent but has risen nearly 10 percent since July.

The company reported a 201.91 percent YoY jump in its net profit at ₹222.54 crore during the first quarter of FY23 as against ₹73.71 crore in the year-ago period. Its revenue from operations of company during the quarter under review rose 47.5 percent to ₹2,736.6 crore compared to ₹1,855.2 crore in the corresponding quarter of the previous fiscal.

"We have started the fiscal year 2023 on solid footing, fuelled by strong performance across B2B (Business to Business) and B2C (Business to Consumers) categories. Furthermore, we recorded the highest first quarter top-line in the history of the company, which underlines our strategy to be agile, focus on robust execution and consistently deliver the best quality of products to our customers," Polycab India chairman and managing director Inder T Jaisinghani said post earnings. Profitability was supported by better operating leverage and various strategic initiatives implemented over the past few quarters, he added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.