Why Polycab India Is Jefferies' Top Small And Mid Cap Pick
Jefferies estimates a 17% sales CAGR and a 26% PAT CAGR over FY23-26 for the company.
Polycab India Ltd. remained a 'buy' for Jefferies after the company reported strong volume growth in cables and wires, including margin expansion in the June quarter.
The brokerage also revised the target price on the stock to Rs 4,835, implying an upside of 17% from the previous day's closing price.
Jefferies estimates a 17% sales CAGR and a 26% PAT CAGR over FY23–26 for the company. This will be based on volume growth led by construction, capex, infrastructure, and improving traction in the fast-moving electric goods sector. The brokerage also raised its FY24–26 EPS estimates by 6–7%.
Major Growth Driver
Polycab reported 42% year-on-year revenue growth and 81% year-on-year profit-after-tax growth this quarter.
The cables and wires segment is the company's key growth driver, as it accounts for 90% of Polycab's sales mix, Jefferies said. The segment will drive sales and profit growth in the near term, it said. Sales in the first quarter were up by +46% year-on-year, with higher growth from cables compared to wires. Although revenue growth was widespread, the North contributed 31% of the sales mix.
The company also recorded 88% export growth, which accounted for 9% of the quarter's sales, and the company's international coverage has now expanded to over 72 countries.
India's Capex Cycle
Jefferies sees two growth legs to India's capex cycle—private and public.
On the private side, average industry capacity utilisation, now at 73%, may necessitate new capacity additions in a variety of sectors. On the public side, the 2023 budgetary allocation has been directionally good for capex and infrastructure, according to the brokerage.
Product linked incentive based capex and emerging opportunities in the space of solar and data centres will be the next leg of growth, Jefferies said.
It views Polycab as a strong player in India's capex and housing markets.
Weak B2C Demand in FMEG
The fast-moving electric goods segment accounts for 10% of Polycab's revenues. Weak B2C demand drags sales and margins in this segment, said Jefferies.
Sales grew 3% year-on-year in the segment during the first quarter, and profitability was impacted by higher fixed costs and ad spends.
However, with the completion of the distribution revamp by the company in FY23 and softening commodity prices, the brokerage expects an improvement in profitability in FY24.
