Polycab is wired for growth, but risks of a shock persist

The wires and cables business, which contributed 87% of consolidated gross total segment revenues in FY24, was the star of the show in Q4, clocking 19% year-on-year growth.
The wires and cables business, which contributed 87% of consolidated gross total segment revenues in FY24, was the star of the show in Q4, clocking 19% year-on-year growth.

Summary

  • Despite the company's strong prospects, investors should keenly monitor margins in the core business, the turnaround in the fast-moving electrical goods business, and any tax liabilities that may accrue in the coming year.

Polycab India Ltd’s shares are up 11% in the past two trading sessions, having hit a new 52-week high of 6,468.90 on Monday. The reason is simple. Investors are upbeat about the strong March quarter (Q4FY24), which saw the company gain market share and grow its volumes.

The wires and cables business, which contributed 87% of consolidated gross total segment revenues in FY24, was the star of the show in Q4, clocking 19% year-on-year growth. This was due to a resurgent domestic market, which saw government and private investments, and a real-estate boom. Polycab’s strategic initiatives solidified its market share to 25-26% of the domestic organised market.

The upshot of this was that the earnings before interest and tax (Ebit) margin in the wires and cables business was higher than anticipated at 15.1% in Q4, thanks to better operating efficiency and product mix, and reduced marketing expenses. Management guided for a sustainable Ebit margin of 12-13% in the long term.

On the other hand, one-time charges hurt the profitability of Polycab's fast moving electrical goods (FMEG) business, which contributed 7% of revenue, and Ebit loss mounted in Q4. Going forward, the management aims to improve FMEG profitability through increased volumes and a focus on higher-margin products such as switches and switchgear.

Also read: FMEG Industry: Wire and cable stocks offer a huge opportunity; should you invest?

Overall, though, Polycab is brimming with optimism. Anticipating strong demand for cables, the company has increased its annual capex from 600-700 crore to 1,000-1,100 crore for the next two to three years. The company has targeted 20,000 crore in total revenue by FY26 but could well achieve this sooner, having already crossed 18,000 crore in FY24.

Tax troubles

Investors have taken note. Over the past year the stock has gained as much as 90%, leaving behind fears of regulatory overhang. Reports in January that the Income Tax Department had searched several premises of the company the previous month hurt the stock, but it has recovered smartly since then. Polycab’s management has said the tax department has asked it for certain details and that it is in the process of compiling them.

“In the absence of any communication from the tax authorities, the markets have clearly assumed that Polycab does not face any material risk on the regulatory front," said a report by Kotak Institutional Equities. “While this assumption may indeed be proven right, the governance factor remains an overhang in our minds," it added.

Also read: Polycab share price tanks on reports of over 200-crore tax evasion, companies denies allegations

Despite the strong prospects, investors should keenly monitor the margins in the core business, the turnaround in the FMEG business, and any tax liabilities that may accrue in the coming year.

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