When I first looked at Polycab India Ltd, I was amazed at the growth of the company given that the end user industries i.e. real estate, power & infrastructure is in a very bad shape. Amidst such slowdown, the revenue CAGR is 14% in the last 5 years while the profitability has almost doubled from 3.4% in 2015 to 6.3% in 2019. Polycab India Ltd is into the manufacturing and sales of wires & cables which constitute 90% of company’s revenue. The remaining 10% comes from Fast Moving Electrical Goods(FMEG) which includes Fans, Lightings, Switches, etc. I will try to explain in the blog ‘ Polycab India Ltd- Analysis’.
Polycab India Ltd- Analysis
Industry
Wire and Cable industry(W&C) was valued at ₹52,500 cr in 2018 and is expected to cross 1,00,000 cr by 2023 growing at the rate of 15%. W&C finds application in power, real estate, infrastructure, IT parks, O&G industries. Most of these sectors are dependent on the economy which is under persistent slowdown coupled with tough liquidity scenario for past few years. But since things are so bad, it can only get better from here. Wires & cables industry grows at about 1.5-2X of GDP growth.
W&C industry in India includes power cables, building wires, instrumentation and control cables, telecom cables (excluding OFC), elastomeric cables and other flexible and special application cables used in various industrial sectors.
Wires: Single flexible strand. Uncovered. They are used to bear mechanical loads, electricity & telecommunication signals.
Cables: Two or more wires running side by side & bonded/ twisted/ braided together to form a single assembly. Used in electrical conduction.
Good video to understand the difference between the wire and cable: Link
India used to be a net importer of wire & cable but in last few year Indian manufacturers have improved product quality, processes and enhanced capacities, turning into net exporter.
Wires and Cables sales are generally higher in the second half of financial year because of organizations pushing hard to achieve their annual targets towards the end of the year.
FMEG(Fast Moving Electrical Goods) consists of Fans, electric fans, LED lighting and luminaires, switches and other forms of electrical appliances. The competition in the FMEG segment is more fierce and hence branding is the differentiator.
FMEG when put together all the products is about 65,000cr market and expected to grow at a rate of 7-8%.
Polycab India Ltd- Analysis
About the company- Polycab India Ltd
Polycab India Ltd was incorporated in the year 1996. But the promoters history in the business dates back to 1964 by current promoter group’s family. The company is the largest wire & cable company in India with a 12% market share of the total market and 18% market share in the organized space. The promoters family have started from scratch and taken to the current heights.
The salary of the promoters are quite reasonable with the total remuneration paid to the executive directors+ promoters standing close to ₹18 cr which is less than 2.5% of total sales. The promoters have skin in the skin with 68.6% stake(No share is pledged).
The current CEO Ramakrishnan Ramamurthi has been associated with the company since 2012. He was earlier with Bajaj Electricals for more than 12 years. Just before the IPO he was assigned the CEO designation from ‘Vice Chairman, JMD & Group CEO ‘ March 2012 to May 2018. Seems a bit strange to let go of directorship(executive director) to be just an employee(CEO). Linkedin Profile .HE RESIGNED IN JUNE 2020, MOST LIKELY THAT WOULD BE IN PROCESS AT THE TIME OF HE GIVING UP ON DIRECTORSHIP.
THE CEO POSITION IS STILL UNFILLED.
The company came out with its IPO in April 2019 which got oversubscribed by 52 times.
The company has 24 manufacturing facilities(including the 2 Joint Ventures(JV)) located at Daman in Daman and Diu, Halol in Gujarat, Nashik in Maharashtra and Roorkee in Uttarakhand.
The company is domestically focused with only 5% revenue company from exports. Of the 24 manufacturing facilities 4 are dedicated for FMEG products. For a few FMEG products that contribute smaller percentages to the revenue, the manufacturing is outsourced.
The company’s strategy is to have their own manufacturing plant as well as to be backward integrated as they want to have utmost control over quality and protect the know-how. The company manufactures copper wire rod, aluminum and aluminum rods; several grades of PVC, rubber, XLPE compounds; GI wires and strips(raw materials)
The company has a wide distribution network of 3300 distributors and dealers and 29 warehouses 100,000 retail outlets in India as of March 2018. Company derives a total of 35% of revenue from the B2C segment and remaining 65% from the B2B which mainly includes institutional sales. In terms of diversification, no customer contribute more than 5% of total sales.
POLYCAB INDIA LTD WANTS TO TRANSITION ITSELF AS A B2C PLAYER FROM THE CURRENT B2B POWERHOUSE. They want to increase the B2C revenue share to 50% from the current 35%.
Clients: ACC, Adani Wilmar, Ambuja Cement, Blue star, Bosch, GTPL Hathway,Gujarat Energy Transmission Corporation, Jindal United Steel, JSW Steel, Kalpataru Power Transmission, Konkan Railway Corporation, Larsen & Toubro, Reliance Industries, Reliance Jio Infocomm, Siemens, Tata steel etc.
Polycab India Ltd- Analysis
Polycab India Ltd: Subsidiaries & Joint Ventures
The company has 3 subsidiaries and 2 joint ventures:
Subsidiaries:
1. Dowells Cable Accessories Private Limited: Setup in 2015 in which the Company holds 51% stake.
2. Tirupati Reels Private Limited: Setup in 2015 in which Polycab India Ltd holds 55% stake.
3. Polycab Wires Italy SRL: Was Setup in 2012 and is wholly (100%) owned.
Joint Ventures:
1. Ryker Base Private Limited: Formed as a Joint venture(50:50) with Trafigura Pte. Ltd. in 2016 to manufacture Copper rods, a key raw material used to manufacture wires and cables. In March 2020, the company acquired the remaining 50% stake from its JV partner and now it is a wholly owned subsidiary of the company.
2. Techno Electromech Private Limited: 50: 50 JV with Techno, a manufacturer of LEB lights.
Polycab India Ltd had a larger number of subsidiaries but before the IPO they were merged to create a simpler structure. In terms of related party transactions, I could not find anything that looks suspicious.
Segment wise sales contribution of Polycab
Polycab India Ltd- Analysis
PRODUCTS
Wires and Cables (W&C)
Polycab India Ltd is the largest wires & cables company in India. It is the market, cost and price leader. Largest portfolio of W&C. Wires growth is 2X as that of cable. Wires have 300 bps better margins than cable.
In terms of size, the company is equivalent to the next three largest player combined. Wires contribute 45% of the sales and Cables contributes 55% of the total wire and cable sales which is 90% of the total sales as of Q3FY20. EBITDA margin for this segment stands at around 11-12%.
Largely dependent on to government initiatives in power and infrastructure growth.
In August 2017, co. launched Green Wire, an energy efficient wire. The product is compliant with the EU’s RoHS (Restrictions of Hazardous Substances) standards of European Union (EU), 2006.
Capacity utilization of wires & cables facilities stands at 70-75%.
Fast Moving Electical Goods(FMEG)
This segment was launched in 2014. Co is pushing its FMEG products through its existing distribution channel. FMEG is a natural extension of the current business of the company bringing in lot of efficiency in terms of usage of similar raw materials, utilizing the existing distribution channels and eventually GIVING THE BRAND POLYCAB VISIBILITY which is not there as of now , given their B2B nature of the business. Of the total FMEG sales, fans contribute about 40% followed by Lights and Switches & Switchgears (another 40% combined together).
Despite the real estate slowdown, the switchgear segment has grown in value with an increasing demand for modular switches with higher price points(5X margin than normal switches).
The company wants to focus on manufacturing value-added FMEG that enjoy higher profit margins such as premium fans, a wider range of table, pedestal and wall fans, smart fans and lighting products in the professional luminaire segment and penetrate segments of the FMEG market that are fast growing such as energy-effect LED sources and growing exports of ceiling fans, ensuring their presence in each rung of the value chain.
Given the early stages of FMEG business, there are a lot of costs going into the operations and smaller scale leads to thinner spread over sales compared to W&C segment, hence the EBIT remains at around 2.5% for 9 month FY20. The company aims to improve this by 1% every year and that will lift the overall profitability of the company. For 9m FY20, the FMEG revenue has already clocked ₹650cr.
Capacity utilization of FMEG facilities stands at 60-80%.
For Havells, EBIT of Consumer durable hovers around 25-26%, Lighting is around 30%, Switchgears is around 40%. Given the Havells strong brand they would be charging a premium over other brands. Now, Even if the EBIT margins of Polycab reaches 20-30% lower than that of Havells, it would be add immensely to the profitability of Polycab. It stands at 2.5% currently.Link
EPC(Engineering Procurement Construction)
In 2009, the company diversified into the engineering, procurement and construction (“EPC”) business, which includes the design, engineering, supply, execution and commissioning of power distribution and rural electrification projects. The company takes up projects that involves the usage of their end products.
EPC in general is a low margin segment where the projects are decided on bidding(mostly)/negotiation and is marred with higher working capital and not so regular receivables(quite frequent in case of govt projects coupled with non-payments). Although, it is a small portion of the company’s business, the management time and again assured that any new project will be taken very carefully considering the margins and other aspects.
Polycab India Ltd- Analysis
Polycab India Ltd- Raw Materials
The company’s raw material consist of Copper(55%), Aluminum(20%), Stainless steel(5%) & PVC(15%). A significant portion of raw material purchases by the company is in foreign currency. Prices of Copper & Aluminum is decided on the basis of prices prevailing on the London Metal Exchange. Prices of PVC is derived from prices of crude oil. So rupee depreciation is bad news for the company. But the co usually passes on the increase in cost to the customer. Drop in prices is usually better enabling the company to increase their margin.
Here the importance of target customer comes into play. If the customer is B2B, it is very difficult to change prices if there is raw material prices increase while for B2C, it can be done quite easily, given the positioning of your brand & non-negotiating power of retail customers.
Given the size of the company, Polycab enjoy economies of scale and are able to negotiate for better prices while ordering raw materials in large quantities. This enables cost savings.
KEI & Finolex derive a large portion of their revenue from EPC segment.
Polycab India Ltd- Financial Analysis
Polycab India Ltd- Financial Analysis
The increase in Gross margin seems to be the ability of the company to charge a premium on the back of advertisement campaigns for brand building allowing Polycab to increase prices as well as introduction of new & better products.
The company have been working to reduce the cash conversion cycle. In order to reduce the receivable days(DSO), the company has increased use of channel financing. Through channel financing, vendors can get into arrangements with banks through Polycab. Polycab will receive payment directly from banks. Banks will lend to the vendors the amount, will bear the credit risk. 65% of the channel sales via distributors now is covered through channel financing.
The company has reduced its total debt from ₹820 cr in 2017 to 192 cr in 2019 via better cash flow generation and IPO proceeds. Interest for the just completed FY20 has gone down substantially, thus increasing the profitability. Also, they are quickly paying off interest bearing payable to bring down the finance cost.
Free Cash Flow(FCF) improvement during the year(FY19) was on account of due to a large advance received for an export order(₹400cr) and increased LC(letter of credit) acceptances in trade payables.
Barring 2019, cash flow from operation is quite similar to profit after tax. That is a positive sign implying whatever profit the company is making is able to convert into cash.
If you look at the Cash of the company, there has been sudden jump in the cash position of the company to ₹ cr. There are 2 factors to it:
1. IPO proceeds
2. Received advance of ₹400cr for a order of ₹1000cr from African MNC Dangote
One of the reason for the current growth amid the slowdown was a large order from an African MNC Dangote. Of the ₹ 2507 cr revenue earned by the company in Q3FY20, ₹319cr came from Dangote order. Even if we dedect that the growth in revenue was at 10% compared to revenue degrowth of its peers.
Polycab India Ltd- Growth drivers
Growth will be driven by:
FMEG segment growth
New product launches in FMEG segment
Increase in distribution network- Number of distributors have increased to 3450 & retailers to 1,25,000 by Q3Fy20. This number is expected to increase every quarter. The management in an interview has mentioned their internal target of reaching 250,000 retailers in the next 3-4 years.
Small share of export revenue offers lot of opportunities of growth
Polycab India Ltd- My Analysis
The management’s focus on quality control and higher economies of scale in terms of raw materials leads them to have large manufacturing facilities and that makes the business being asset heavy. Because of which lower return ratios but higher profitability. Most of the competitors outsource manufacturing leading to higher return ratios, faster scalability but lower profitability and maybe some quality issue.
I think both school of thoughts are right in their way. It all boils down to execution.
Polycab management are very keen to be able to differentiate their products even marginally in an otherwise commodity kind of w&c industry. Very little differentiation in wires and cables products.
The company is spending on marketing and advertisement to create branding for all its products and in particular FMEG ones.
Reason for continued growth:
In terms of outdoing the industrial sluggishness, the company claims to have offered differentiated, enhanced product mix. Since they manufacture in-house most of their products allows them to provide guarantees of quality, service and short-notice supply that only a very few competitors can match. It in a way implies market share capture from competitors. Growth was aided through acquisitions of quality clientele and better realization. Also, increased distribution network is another factor supporting the growth especially from eastern India. THE RECENT W&C GROWTH IS DRIVEN PRIMARILY BY INSTITUTIONAL SEGMENT.
Company is trying to move from order book to distribution based model i.e. B2B to B2C. In order to do so company has increased its ad spending and doing a lot of below the line marketing. Electricians are incentivized to sell their wires products by directly crediting ₹10 per packet sold to the electrician’s account via ‘Polycab Bandhan Star’ app. The larger number of packets they sell, the more these electricians can make. The reach now includes more than 1,00,000 electricians and 50,000 retailers.
The attrition rate of the company is quite low varying between 1-2% implying something positive associated while working for the company.
They have increased their ad spends to ₹116 cr in 2019 compared to 58 cr in 2017. For 9 month FY20, the spend has already been 90 crores. Most important part of brand building. Also, experience centers showcasing Polycab’s product are being set up in electrical hubs of large cities to increase awareness of brand Polycab. Polycab’s IPL advertisement which began in 2016 is also a big brand booster.
Technology integration including complete sales force automation is helping the company much more insights from the sales team as well as better control.
If the company have been able to do such a tremendous job with so much headwinds faced with its end consumers by taking multiple incentives. So when the tide turns for the good, they will be the best placed to take advantage of the positive environment.
Polycab India Ltd- Analysis PRIMARY RESEARCH(Updated on 06.04.2020)
When you listen to management, they will almost always say positive about the company. It is always advisable to take the view on the ground to validate what they are saying. Spoken to a large distributor+retailer based out of Patna: Havells is the king there. Everyone comes with a single mind to purchase Havells wire only. Havells is followed by Anchor, Polycab and then Finolex(in order). Havells is priced at a premium followed by Polycab, Anchor and Finolex. Outside Patna, KEI is very popular. There is hardly much difference in product quality. All brands have warehouses and depend on the stock to replenish any sudden demand and there are delays in delivery by almost all brands every now and then. In terms of B2C(FMEG), Havells dominates. A couple of Bangalore based Electrician: Electrician 1: Number 1 brand preference is Anchor, followed by Finolex and Polycab. Havells stands 4th. Havells is the most expensive followed by Polycab, Anchor and Finolex at more or less similar levels. Electrician 2: Anchor is #1 in Bangalore followed by Finolex and Polycab. Same point on pricing as that of Electrician 1. BOTH OF THEM SAID THE SAME THAT POLYCAB DOMINATES MAHARASHTRA AND GUJARAT. One of them mentioned in terms of industrial product, Polycab is the preferred choice(He worked in Mumbai for 7 years). Cost is the reason why Havells lag in Bangalore/Karnataka. My hometown(Purnea,Bihar) based electrician: Polycab dominates there followed by Finolex, Havells and Anchor. There are rumors over there that Havells don’t use pure copper in wire and it is mixed with iron to save cost. That is why these electrician do not advise anyone to buy Havells.
Conclusion: EACH BRAND IS STRONG IN CERTAIN GEOGRAPHICAL REGIONS. THE SAME PRODUCT HAS DIFFERENT KIND OF PERCEPTION IN DIFFERENT REGIONS. MAKING INROADS IN NEW GEOGRAPHIES WHICH ARE ALREADY CAPTURED BY SOME OTHER BRAND IS DIFFICULT AND TIME CONSUMING. Need to be innovative in order to make inroads. The top 4 brands mentioned by everyone are Havells, Polycab, Anchor and Finolex(no particular order here). When these companies supply product to dealers, distributors or retailers, they usually collect a partial or full advance before supplying the products.
Polycab India Ltd- Key risks
Since the company imports a large percentage of its raw material , there exists risk of forex loss due to rupee depreciation. Along with that if the slowdown in the Indian economy persists for much longer, it is going to have some adverse impact on the company.
Also, the turmoil in the telecom sector due to the demand of huge sums because of retrospective revenue calculation dues might cause the telecom players to keep any expansion plan on hold.
Came across a 10 year old article on tax norm violation by the company. Link
Financial Comparison between Havells India Ltd(B2C) and Polycab India Ltd(B2B)
Usually B2C companies get better valuation due to brand power, ability to increase price,better free cash flow, higher return ratios etc
For example both Havells India Ltd and Polycab India ltd have similar revenue and profitability but the valuation of Havells is more than 3 times that of Polycab.
But this is as of today, if we look 2-3 years down the line, things seems to get better for Polycab as they increase the FMEG(B2C) as well as higher proportion of B2C wires sales revenue by creating brand awareness via marketing and TV ads.
The company is transitioning itself to a large B2C player from B2B company. But most of the times in life or business, things do not go as per plan, so its better to track the quarterly numbers of the company.
Update 24.09.2020 (Q1FY21)
The company derives 80% of business via dealers & distributors implying it wants to stay away from taking projects since there is a lot of competition in terms of tenders as well as longer receivable days.
In terms of catering to govt projects, the Polycab’s exposure is just 2% of revenue which is very good considering the very long delays in receiving payments from the govt. But its end clients as well as distributors cater to govt projects. In a way, receivable & margin risks are passed on to the clients & distributors to a large extent, some amount of risk would remain as the Polycab’s performance will depend on how its clients are doing.
Coming to cable exports, the company is looking at Africa where World Bank is doing a lot of projects and there is no import duty. That is something that the company is looking to get into.
Also, they wants to grow from the small base in US & Australia and in general in export markets. The company has already received some order approvals from Metro companies in Australia.
Even during Q1FY21, the company had a good traction in retail wires & FMEG business. But cable business was at standstill due to long lockdown and labor shortages.
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A good article on Polycab : Link