Polycab's Q1 results show deep impact of lockdown

Valuation discount to peers and recovery in certain pockets bode well

The nationwide lockdown took a heavy toll on wires and cables major Polycab India results in the June quarter (Q1) of financial year 2020-21 (FY21) after the first 45 days of the quarter saw no major sales.

Sales in the quarter declined 50 per cent year-onyear (YOY). Adverse operating leverage meant that Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin declined 571 basis points (bp) to 5.8 per cent and profit before tax at ~391 crore plunged by 80 per cent YOY.

Sales of the wires and cables segment, which contributes 80 per cent to top line and where Polycab is a leader, fell 51 per cent. Domestic distribution channel sales were half of last year, while institutional business was impacted severely due to delays in order finalisation, said the company.

However, much of this was already factored in by the Street, which is why the stock is down only 3.5 per cent after the results.

While demand is recovering, the stock has rebounded 30 per cent from May lows. Within domestic distribution channel sales, housing wires saw good traction, posting double-digit growth in June. Though that might have been because of pent up demand and pre-stocking due to price hikes, July too is showing improvement, say analysts. Institutional sales, however, remain suppressed and are likely to see traction only from second half of FY21.

Polycab is also seeing traction in export markets. The company has set up its frontend in the US and Australia simultaneously, and is targeting regular order flows. Exports doubled in Q1 to ~100 crore helped by this.

In the fast moving electrical goods (FMEG) segment, while Q1 sales declined by 43 per cent, it rebounded to near normal levels in June. Though the fans segment was impacted as April and May are key stocking periods, lighting and agro pumps are seeing good traction.

Tarang Bhanushali at YES Securities says earnings revival will be led by exports and FMEG.

Analysts say the slowdown in infrastructure growth and uncertainty in real estate will lead to moderation in growth for cables and wires. Within this, specialised cables, such as those used for internet, will continue providing support.

Overall, the gradual resumption of economic activity and infrastructure projects suggest that broadbased recovery is pushed to H2FY21. Analysts at Anand Rathi expect a weak FY21 and returns ratios going back to healthy levels in FY22.

While remaining positive, analysts say, demand recovery remains key to further upside in the stock, which is trading at reasonable valuation of 16.5x FY21 estimated earnings and lower than 3540x valuation of peers.