The equity markets have been in a good mood lately and that is leading to a sudden increase in initial public offerings (IPOs). The latest to join the bandwagon is wire and cable maker Polycab India Ltd’s IPO, which opens for subscription on Friday.
It is one of the largest companies in the organized cables and wires industry, in which it operates with a market share of 18%. The company’s financial performance has been alright. Over fiscal years 2016-2018, compound annual growth rate for revenue was 14%. Ebitda (earnings before interest, depreciation and amortization) margin for FY18 was 10.9%. Analysts are gung-ho about Polycab India’s brand strength and wide distribution network. The company is also focusing on new products. In 2014, it diversified into the fast-moving electrical goods (FMEG) space. Given these factors, the issue could generate a reasonable amount of interest, according to some analysts.
However, despite its larger size, Polycab India’s valuations are at a slight discount to peers KEI Industries Ltd and Finolex Cables Ltd. Based on FY18 earnings per share, Polycab India is available at 20.5 price-to-earnings ratio at the upper end of the price band of ₹533-538 per share. The same measure for KEI Industries and Finolex Cables stands at 22.6 times and 21.3 times, respectively.
It would have made more sense to look at FY19 earnings. However, annualizing Polycab India’s performance for the nine-month period ended December (9M FY19) doesn’t make sense, given the seasonality factor. Besides, margins jumped sharply, which according to one analyst may not sustain. Against that backdrop, this year’s numbers may not give a fair picture, as it has to be seen whether the high margins will persist. Polycab India’s Ebitda has increased by as much as 76% over the same period last year to ₹694 crore, while the Ebitda margin has expanded by 421 basis points to 12.6%. Its peers haven’t seen such robust growth. A basis point is one-hundredth of a percentage point.
Ebitda margin expansion for 9M FY19 was driven by gross margin expansion of 550 basis points probably because of better product mix and lower raw material costs, according to Harshit Kapadia, an analyst at Elara Securities (India) Pvt. Ltd. In a report on 4 April, Kapadia highlights in the risks section that the Ebitda margins in Q4 FY18 and 9M FY19 were exceptionally high at 16% and 13%, respectively. “This may not be sustainable," he said.
Even so, given that valuations are at a discount to peers and considering the added lure of the FMEG segment, investors may well get wired into this opportunity.