Street impressed by Polycab’s margin expansion

Polycab India, the wires and cables major, did see its March quarter (Q4) revenues getting affected by the lockdown. Its revenue fell was lower than peers which, along with a good operating performance, meant that its net profit continued to grow. This helped the stock, which had halved from February highs and was languishing since then, rebound 13 per cent in three trading sessions after the results.

Revenues declined 14 per cent year-on-year (YOY) as the company lost end of year sales to the tune of about ~600 crore. However, a superior sales mix, led by exports, fastmoving electrical goods (FMEG), optical fibre cables, etc, coupled with better realisations and cost controls, drove up operating profit margin to 13.8 per cent, significantly better than the 10 per cent reported in the year-ago quarter. Adjusted profit (excluding exceptional items), thus, grew 51.8 per cent YOY, partly helped by lower taxes.

The superior sales mix complemented by the FMEG segment continues to drive Polycab’s prospects.

The cables segment, which contributes 85 per cent, saw sales decline 11 per cent in Q4, which, however, was much lower than the 24 per cent fall reported by competitor Havells. For the full year (FY20), too, sales grew 9 per cent; Havells had seen its cable sales decline 7 per cent YOY. The cable industry, too, has seen a sales decline in Q4, point out analysts. Part of this outperformance can be attributed to exports, contribution of which to consolidated sales grew to 12.3 per cent in FY20, from 3.1 per cent in FY19. Although it was driven by a large export order — about 2/3rd of exports in FY20, which may not be there in the current year — Polycab has set up its front-end in the US, eyeing developed markets, and expects to benefit from developed world’s declining dependence on China.

In the near term, the impact of lockdown will reflect on Polycab’s June quarter sales. Analysts believe the September quarter will be better, with further improvement expected in the second half of FY20.

On margins, too, while some impact of high fixed costs may be there in Q1, the company is confident of maintaining the 11-13 per cent trajectory for FY20. Analysts at Edelweiss, thus, have revised up their FY21 and FY22 earnings estimates by 4 and 5 per cent, respectively, given strong margin beat in Q4. However, Kotak Institutional Equities, which is more cautious, has cut its FY21 earnings estimates by 5 per cent, and upped the same for FY22 by 8 per cent.

A few such as Tarang Bhanushali at YES Securities believe the company is transforming into a diversified electrical equipment player, but trades at just 15x FY22 earnings compared to 3540x Havells. In other words, indicating room for re-rating.