Polycab India Stock Research Report

Capex led strong revenue growth momentum to continue

Takeaways: (1) Polycab reported robust broad-based revenue growth YoY led by favourable demand tailwinds. All segments reported strong double digit revenue growth YoY. (2) EBITDA margin at 11.5% (-295bps YoY) was at two-year low. We reckon high volatility in commodity prices and inferior product mix weighed on margins. Revival in contribution of high margin domestic wires and cables led by reduction in low margin EPC business may lead to EBITDA margin expansion in FY26. (3) FMEG segment reported strong revenue growth at the cost of margins. We reckon the trend may continue in near term as the company aims to expand its market share. (4) Capex intensity has remained high. Polycab is on track to spend INR 10-11bn in FY25, highlighted by INR 5.8bn on capex until Sep’24.

We believe the strong revenue growth trajectory may continue in FY25E led by favourable demand tailwinds. Maintain HOLD.

Q2FY25 result review

Polycab reported 30.4%/3.7%/3.3 revenue/EBITDA/PAT growth YoY, respectively. Gross/EBITDA margin contracted 355bps/295bps YoY. Margin contraction was largely due to (1) change in product mix and (2) intensified competition. Other income grew 115.6%/30.4% YoY/QoQ, respectively. EPC segment registered stellar revenue growth (+190.4% YoY) led by strong orderbook execution. APAT remained flat (+3.3% YoY) as strong revenue growth benefits were offset by higher depreciation/finance cost, up 19.5%/69.1% YoY.

Segment-wise performance

All segments registered strong double digit revenue growth YoY. Cables and wires reported 24.1% revenue growth YoY; FMEG reported revenue growth of 20.5% YoY. Others (EPC) segment posted 190.4% revenue growth YoY. EBIT margin for wires and cables contracted 231bps while expanded 65bps for others segment YoY. FMEG segment incurred losses at EBIT level.

Capex remains on track

Polycab had earmarked INR 10-11bn in FY25 for capacity expansion. It has spent INR 5.8bn as of Sep’24 (INR 2.8bn in Q1FY25). Expansion of production capacities augurs well to cater to favourable demand tailwinds.

Strong growth momentum in EPC segment has continued

Others (EPC) segment is witnessing strong traction as the segment recorded revenue growth of 190.4% YoY. While the segment is witnessing strong revenue growth since Jun’21, we note, the pace of growth has accelerated since Mar’24. We reckon robust orderbook execution amidst favourable business environment has led to high growth.

FMEG – focus on revenue growth than profitability

Polycab’s FMEG segment has reported strong double digit revenue growth in the past three quarters. Growth is largely attributable to (1) distribution expansion, and (2) restructuring of product portfolio. However, we note the company has consistently incurred losses at EBIT level since embarking its FMEG business. Losses are attributable to higher (1) ad-spends and (2) fixed cost. We reckon the trend of aggressive topline growth at the cost of margins may continue in near term as the company aims to expand its market share in the FMEG industry.

EBITDA margin impacted by product mix change

Polycab’s Q2FY25 EBITDA margin at 11.5% was below the two-year average of 13.3%. We reckon it dipped 295bps YoY due to (1) high volatility in commodity prices, (2) inferior product mix. We believe higher contribution of low margin EPC business and decline in contribution of high margin domestic W&C business have primarily led to contraction of EBITDA margin.

Maintain HOLD

We model Polycab to report revenue/PAT CAGR of 18.5%/19.4% over FY24–27E and RoCE of 20% in FY27E. Maintain HOLD with DCF-based revised TP of INR 6,790 (earlier: INR 6,400; implied P/E of 39x FY26E EPS).