Verdict: Appears insulated on cheaper valuation over peers

IPO Snapshot:

Polycab India is entering the primary market on Friday 5^th April 2019, to raise Rs. 1,345 crore via an IPO – Rs. 400 crore via fresh issue of equity shares of Rs.10 each and an offer for sale (OFS) of up to 1.76 crore shares by promoters (53% of OFS), IFC (40% of OFS) and senior management (7% of OFS), in the price band of Rs.  533 to Rs. 538 per share. Rs. 53 per share discount is offered to employees having a reservation of 1.75 lakh shares (no retail discount). Issue represents 16.83% of the post issue paid-up share capital (at upper end) and Rs. 946 crore OFS portion makes up 70% of the total IPO size. Issue is closing on Tuesday 9^th April with listing likely on 18^th April.

Company Background:

Polycab is India’s largest wire and cable manufacturer, with 18%/12% share of the organized/total domestic market, valued at Rs. 52,500 crore in FY18. Company has a wide product range of cables and wires, accounting for 50% and 42% of its Rs. 6,900 crore topline respectively. It has pan-India distribution network of 2,800+ dealers catering to over 1 lakh retail outlets. 5 years ago, company diversified into fast moving electric goods (FMEG), extending brand ‘Polycab’ to fans, LED lighting, switches, switchgear, conduits, solar products, water heaters, pumps, which together account for ~9% of revenues now. Undertaking EPC for power distribution and rural electrification since 2009, this vertical is no longer a focus area for the company.

With an aggregate manufacturing capacity of 33 lakh km cables and wires across 20 plants, operating at 70-75% utilization levels, company has established backward integration facilities for most key inputs, with largest raw material copper also having in-house linkages now, with 50:50 JV with Trafigura for copper wire rods getting operational soon. In addition, 4 plants manufacture FMEG across Gujarat, Maharashtra, Uttarakhand and Daman.  

Objects of Issue and Shareholding:

Rs. 400 crore of fresh issue proceeds will be used to meet:

1. Working capital needs of Rs. 240 crore
2. Debt repayment of Rs 80 crore of total Rs. 540 crore
3. Balance - general corporate purposes.

Promoters Jaisinghani family, who currently own 78.94% stake, will hold 68.7% post IPO, while IFC will off-load 5% from its 9 year old 15% holding in the company, to own 9.5% post issue. 2 top management team mates will also participate in the OFS.

Financials: 

For FY14-18, company’s revenue/EBITDA/PAT have posted strong growth of 15%/27%/43% CAGR to Rs. 6,924 crore/Rs. 803 crore/Rs. 371 crore respectively, due to new product launches, deepening distribution reach in B2C and focus on profitable growth. This strong show continued into 9MFY19, when revenue soared to Rs. 5,500 crore with EBITDA at Rs. 743 crore (EBITDA margin expanded 13.4% against 11.5% in FY18) and PAT at Rs. 358 crore (net margin 6.5% against 5.4% in FY18). Thus, 9MFY19 EPS of Rs. 25.31 was a tad short of FY18’s EPS of Rs. 26.2.

On an equity base of Rs. 141 crore, net worth stood at Rs. 2,716 crore (31-12-18). Net debt stands at 532 crore, resulting in net debt-equity ratio of 0.2:1, which will contract to 0.15:1 post IPO. While outstanding debtor days has declined from 85 days (31-3-14) to 52 days (31-12-18), inventory management has not been as skillful. Even though sales run-rate has doubled since FY14-to-now, outstanding inventory days has risen disproportionately from 54 sale days (31-3-14) to 113 days (31-12-18), as new verticals add up inventory (both raw material and finished goods) at each leg of the distribution cycle, as also higher carrying volumes in-anticipation of increasing sales in the March quarter, which is seasonally the strongest (accounting for ~30% of annual sales). As of 31-3-18, company’s inventory was about 71 days, in line with peers’ 60-75 days, which partly addresses the high inventory concern.

Valuation:

At Rs. 538, company’s market capitalization will be Rs.8,000 crore with EV of Rs. 8,450 crore, discounting FY19E earnings by PE and EV/EBITDA multiples of 16x and 8x respectively, while on FY20E basis, these multiples stand at 14x and 7x respectively. 

Since ~90% of Polycab’s topline is generated from cables and wires, it is prudent to compare multiples with listed cable/wire manufacturers as against those dominant in household appliances/electronic components. RHP includes comparison with the likes of Crompton Greaves Consumer and Bajaj Electricals which is inaccurate as both these companies do not have cables/wires in their portfolio. Instead, comparison table has skipped to include Finolex Cables, which garners 90%+ of its Rs.2,200 crore revenue from cables/wires.

Below is a suitable peer comparison:

* Financials for 9MFY19, ^Excluding treasury income

(Companies like Orient Electric, Apar Industries and KEC International have low overlap of product portfolio (10-35%) with Polycab, and hence not an included above)

Havells, with 2/3^rd portfolio overlapping with Polycab, is a cash rich company having strong presence in household appliance and ACs with focus on premium products (affirmed by superior margins) enjoys extremely premium valuations. Likewise, only 40-50% portfolio of V Guard overlaps with Polycab, while balance 50% is comprised of high-margin electronics and kitchen appliances, which again supports its premium multiples. Finolex Cables, the no. 2 player in the domestic B2C wires market, along with a host of FMEG like switches, CFL and LED lamps, fans, low voltage MCBs, water heaters, is a cash rich business with ~Rs.1,000 crore of liquid investments, earns the highest EBITDA and PAT margins in the above table and is ruling at PE over 20x and EV/EBITDA of 11x, making Polycab’s valuations attractive. Likewise, cables major KEI Industries (80% revenue from cables & wires, 20% from EPC projects) is also ruling at valuation multiples 10-15% higher than Polycab, despite KEI’s lower margin profile, making the IPO pricing of Polycab attractive.

Conclusion:

Market leadership, strong brand, promoter-cum-professional management, improving financials and attractive pricing make this issue of Polycab India a subscribe, as it is capable to give decent returns if held for 12 months, as the sector is now catching up on PE expansion, seen across stocks especially market leader Havells’ PE of 58x.

Grey Market Premium (GMP) of Polycab India: Grey Market Premium of Polycab India is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.