satco growth and momentum pms stock picks
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SATCO Growth and Momentum PMS Stock Picks
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Polycab India Ltd Investment Rationale
Entry Price Rs.1015
TP Rs.1294
Upside 27%
The Indian wire & cable industry is ~Rs.60,000 crs as of Financial Year 2019 and is expected to grow at a CAGR of 15% over the next 4 years. The major drivers are government spending on infrastructure (Rs.103 lakh crs estimated spend on National Infrastructure Pipeline over 5 years), railways and metros, and Housing for All 2022 (PMAY Scheme). Rapid urbanisation, and the resulting increased demand for real estate will create further need for urban and real estate power connectivity.The rationalisation of corporate tax rate, increased focus on tax collections, and requirement for higher voltage cables have resulted in growing consolidation of the industry in the hands of a few large players.Polycab India (PIL) is the largest player in the domestic W&C industry with a 12% market share, and a distribution network of 3,450 dealers and 112,500 retail outlets.PIL derives 85% of revenue from the wire and cable segment , 10% from fast moving electrical goods (FMEG-primarily fans, luminaries, and switchgears), and 5% from Others (primarily EPC).
Wire and cable segmentDemand from infrastructure and real estate will steadily drive demand for wire and cable products.PIL will leverage its strong brand recall and distribution network to increase the sales contribution from distributors from ~45% of the W&C segment to >50% over the next 2-3 years.Margins in the retail segment are higher, and the cash collection cycle is lower than the institutional business.Strong backward integration of copper cathodes ensures the company is protected from volatility in commodity prices.
FMEG segmentRevenues have grown from Rs.217 crs to Rs.643 crs between FY16-FY19; up more than 3 times.The company is currently 1% of the ~Rs.65,000 cr domestic FMEG market; with its focus on brand building, extensive retail distribution network, and new product ranges, this segment can grow exponentially over the next few years, contributing to improving margin profile.PIL will leverage the common sourcing with the W&C segment to control production costs
FinancialsThe company has generated 940 crs cash in FY20 (up to Dec-19), and is virtually debt free.The working capital cycle has reduced from 75 days in FY16 to 53 days (TTM Dec-19).We value the business at 22x FY21 earnings and arrive at a value of Rs.1,294.
Outlook & Valuation
Prolonged slowdown in the real estate market and government led infra spending.Competitive intensity-pricing pressure would impact the margins and return profile of the business.Inability to scale up the FMEG business.
Risks