Polycab - Next Asian Paints?

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Polycab has its root in Mumbai's Lohar Chawl, dating back to 1964 when it used to be just an electrical Shop. Thakurdas Jaisinghani who moved to India from Pakistan started Sind Electric Stores, but he died within 4 years and his sons had to take the responsibility to run the Shop.

His eldest son, Girdhari (whole-time director at present), 16 back then had to stop his studies and take care of the Shop, Inder, 14 back then did the same. Inder is the current chairman and director of the company. Other two brothers Ramesh and Ajay did the same.


The brothers set up their first manufacturing plant in Halol, Gujarat to make wires and cables. They got the company registered in 1996. In 1998 they set up a new manufacturing plant in Daman to expand the capability to optical fiber cables, switchboard cables, power cable, etc..
The company was having organic growth till 2009, in 2009 they received an investment of 401.8 crores from International Finance Corporation ( Subsidiary of World Bank). The same year company expanded in Engineering, Procurement, and Construction(EPC) business with the goal of bidding for projects involving wires and cables so that they can use their products. They did projects such as electrification, BharatNet, etc.. under EPC
The company till now was majorly B2B, manufacturing based on tenders and family-controlled, the next generation decided to step in and convinced them to run it professionally. In March 2012, R Ramakrishnan was appointed as group CEO and MD. R Ramakrishnan had previously worked for Asian paints for 18 years and 12 years with Bajaj Electricals. The company also started focusing on branding and B2C business. Although the B2B business has better margins there is no customer stickiness and inventory & payment are longer. B2C business although a low margin but brand has customer stickiness and premium can be commanded later.
The company forayed into the Fast Moving Electrical Goods(FMEG) business with switches and switchgear and kept on adding more products such as fans, LEDs, etc.. FMEG and Wires & Cables had common raw materials such as copper, aluminum so this was a horizontal expansion for the company. FMEG has been growing well and is a B2C business.
Copper is one of the major materials contributing up to 55% of raw material cost, so the company did a joint venture with Trafigura(Singapore listed commodity trading company) to set up a copper rod production plant in Waghodia facility, Gujarat. This backward integration helped them have control over the cost and quality of raw material. Reliance is the only other company that makes copper rod in India.

 The company came with an IPO in 2019 and received a positive response. Trafigura wanted to exit India and the company acquired the remaining 50% stake in Ryker (Waghodia Facility) making it a subsidiary of Polycab.



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What is the current situation of the company?

At present Polycab is India’s largest manufacturer and seller of an extensive range of cables and wires, and a fast-growing player in the fast-moving electrical goods (FMEG) industry, along with an established export presence. 

The company is in the following Business verticals

  • Wires and Cables
  • FMEG
  • EPC

Raw Materials

Aluminum rods, Copper rods, and various grades of PVC, Rubber, XLPE compounds, GI wire and strip

Wires and Cables

They have 12% of the overall market share in the wires and cables segment and 18% of the organized market share and is the market leader in India.
They manufacture power cables, control cables, optical fiber cable, instrumentation cable, solar cable, and other cables, in wires, they make building wires, flexible wires, Flame retarded wires, low smoke flame retarded wires, etc..
 They serve a variety of end industries such as power, IT park, oil & gas, infrastructure, metal, cement, real estate, telecom, railway, agriculture, etc..

FMEG

FMEG business has grown over 47% CAGR in the last 5 years and they are eating up the market share of existing players. Backward integration for raw material gives them an edge and have been working on the brand as well through advertisement, experience center, etc about which we will talk about in a later section. The company is eyeing huge growth in this segment as it is B2C and their goal is to be a B2C player.

EPC

This business is vertical integration for wires and cables wherein they bid for projects which require majorly wires and cables such as electrification program(they did rural electrification under government scheme), fiber connection to gram panchayat (Bharat Net), etc..

Manufacturing Presence

It has 25 manufacturing facilities across 7 locations and 30 warehouses across 20 states and Union Territories. 


Distribution

B2C business is done through distributors, dealers, and retail outlets. They have 3650+ authorized dealers and distributors out of which 1800+ are exclusively for FMEG products. Their products are sold in over 137,000 retail outlets PAN India.

Important Initiatives 

Polycab Experience Centres

To build the brand for B2C the company has launched experience centers to showcase products.Currently in Mumbai, Pune, Trivandrum, and Visakhapatnam. The response has been positive and it will launch more such experience centers across the country.

Marketing and Advertising Initiatives

To increase brand awareness the company has done aggressive advertising through IPL, social media platforms, etc.. You would have seen their advertising featuring Paresh Rawal, Aayushman Khurana, R Madhavan with tag line Connection Zindagi Ka.

Bandhan Program

Through Bandhan Program, it is trying to create a relationship with electricians and retailers who have a major influence on their product sales to customers. The company rewards electricians and retailers for each product sold through reward points which can be redeemed to a bank account.

 Channel Financing

The company provides channel financing to distributors through banks which helps them get the 💰 money on time and the risk of default is borne by banks. Getting money in time also helps in working capital management. It is offering this to more and more distributors.

Automation

It is using sales force automation for the digitization of orders and inventory management to help increase productivity, efficiency. Data collection would help them in cross-selling.
  The company also offers distributor management systems that help them provide visibility on the distributor sales and replenishment of inventory with distributors.

New Launches

To further improve margin, the company is launching premium products. They have launched IoT based voice-enabled lights. Polycab is also building platforms and capabilities in the IoT space.
 Additionally, they launched accessories such as an extension board, DSP port, multi-plug holder.

Revenue Breakup

 
Wires and cables contribute 85% of revenue, FMEG contributes 9% and is growing aggressively, 6% is from EPC, and other businesses.
At present the majority of revenue comes from India, the company has a target of maintaining 10% revenue from abroad. Last year 12% revenue contribution was due to a huge order from an African MNC.  Their sales in America, Australia are growing well.
The majority of the profit still comes from wires and cables contributing to 91% of overall profits.
In raw materials, copper contributes almost 59.8% of the cost. Now that they have acquired the entire stake in the joint venture, they would control over raw material cost and quality.


Historical Performance

The company had better than industry growth in revenues over the last 5 years having a CAGR of 13%. EBITDA grew at a CAGR of 21% during the same period. EBIDTA margin also improved due to efficiency and control over raw material and the use of technology. Profit after tax grew at a CAGR of 37% during the same period.

It also reduced its debt significantly and at FY20 end debt to Equity stood at 0.04. IPO proceeds were mostly used for debt reduction.

Q2 Performance 

Although the top line declined 6% YOY, it improved significantly QOQ, even after the decrease in revenue EBITDA grew 16% YOY due to better margins. PAT increased 14% YOY and 88% QOQ.
 Even during a pandemic when peers struggle it had better performance.
One interesting thing to note is their receivables days is 52 whereas Payable days is 123, this gives them sufficient time to pay after receiving money from sales. This is mainly due to channel financing and B2C play and it is focusing well on it.


Valuations


At the time of writing this article, the company is trading at 881 Rs with a Market cap of 13,166cr.
 

Market Cap (Rs Cr.)

13,166.84

P/E

17.7

Industry P/E

14.41

Book Value (Rs)

258.43

Price/Book

3.42


At present, the company is commanding a PE of 17.7 which is better than industry peers but not expensive, and a price to book of 3.42 looks fair.

Final Verdict

The company is good and professionally managed, although the majority stakes are with the family. The backward integration has helped with the cost control of raw material. B2C focus is the right strategy and the use of CRM tools and data will give them an edge and help them better manage inventory and efficiency. Effective use of data will also help them in cross-selling and inventory management at the distributor end. Asian paints make the best use of data and this company is heading in that direction. The company is fast transitioning from B2B player to B2C. Their shares in wires and cables and FMEG is growing because of low prices and premium quality. Brand focus and premium product launches will further improve the margins. This should be accumulated at present valuations for long term investment ( 5 to 10 years). 

Disclaimer: This is for educational purposes only, please consult your financial adviser before buying or selling stocks.

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