PolyCab India IPO…..Subscribe or Ignore?

Background

On 5th April 2019 – Polycab India will try to raise money through an IPO route. The shares offered in the primary market are a combination of OFS and fresh issue[1][2].

The OFS will allow promoters among which is International Finance Corporation(the lending arm of World Bank) to exit the company.

The Fresh Issue will be utilized for the following purpose:

Scheduled repayment of all/portion of debt availed by the company
To fund incremental working capital requirements of the company
General corporate purposes

Business Focus

Polycab India is engaged in the business of manufacturing and selling wires and cables and Fast Moving Electrical Goods (“FMEG”) under the “POLYCAB” brand[1].

In 2009, the company had diversified into the engineering, procurement and construction business, which includes the design, engineering, supply, execution, and commissioning of power distribution and rural electrification projects[1][3].

According to CRISIL Research, it is one of the largest manufacturers of wires and cables in India, in terms of revenue from the segment and provides an extensive range under them. For FY’18, it’s market share was 18% in the organized wires & cables industry. It commands around ~12% of the total wires and cables business in India which is estimated around ₹525 billion( based on manufacturers realization)

Fig 2. Polycab Wire & Cables[5]

This is set to expand at a CAGR of ~15% in value terms to reach an approximate amount of ₹1,033 billion by FY’23.

Apart from this segment, Polycab also manufactures and sells other products in the FMEG space like electric fans, LED lighting and luminaires, switches and switchgears, solar products, conduits, and accessories.

Fig 3. Other products manufactured by Polycab[5][6][7]

Contribution from various verticals to the revenues[1][2]

Financials

During FY’16-18, the company’s total income rose at a CAGR(Compounded Annual Growth Rate) of 14.31%. EBITDA & Profit After Tax(PAT) grew during the same period to 23.82% & 41.71%[1][3][4].

Polycab had a debt of around Rs 728 crore and leverage(debt/equity) of 0.3 times as of FY’18, which would fall to Rs 540 crore & 0.2 times post listing. This good despite indulging in the capital expenditure(or capex) cycle for expansion

Industry Peer Comparison

The table consists of all the listed peers of Polycab which are pretty much catering to the same end user[1][2][3][4].

Owing to the product portfolio, the appropriate peers would be KEI & Havells India. Polycab falls short with regards to the ROE.

In numerical terms, Polycab falls in the same bracket as Finolex which makes >90% of its revenues from cables & wires.

Advantages

Polycab like its listed peers comes with some inherent advantages which investors can leverage prior to making a decision[1][2][4]

Expansion into new products (eg. green products)
Enhancement of market share by targeting growth segments like mining, renewables, etc.
A ramp-up in FMEG business
Focus on backward integration (Ryker Plant – for copper wire rods) by tying up with Commodity Trader and
Good brand identity

Challenges

Capital intensive business
Fluctuation in raw materials affects the bottom line
Heavy dependency on cables & wires to generate revenue
Revenue from the overseas market is relatively small

Is it Worth it??

As the IPO consists of a fresh issue which is essential to meet the business needs, the company seems to be focused on diversifying into new avenues. Increased allocation towards developing in-house products can assist Polycab in carving out a niche for itself.

Government policies like rural electrification and repair of older electrical networks would play an important role in revenue generation in the years ahead.

To summarize, the IPO seems like a good bet for investors with a medium to long term horizon. The IPO saw a 71% subscription on Day-1[8].

Please do not subscribe to it with the intent of listing gain.

If you want to share your opinion kindly do so in the comments section or email me at u2d2tech@gmail.com.

References

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Nathanial Ton says:

August 18, 2020 at 8:00 am

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