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Polycab India: A Rising Giant
Polycab is a manufacturer of wires & cables as well as Fast Moving Electrical Goods (FMEG) which include products like fans, lights etc. The company sells its products under the brand name “Polycab”. It is the largest player in the domestic wires & cables industry and has also made its name in the FMEG industry by scaling the segment rapidly since it entered the industry in FY14.
A diversified product portfolio along with a wide distribution reach has enabled Polycab to grab the largest share of wires & cables market in India. It should be able to ride on the recovery in various sectors of the economy along with government supported capex. Buzz around private capex cycle along with various government reforms bode well for the company. Investments in marketing and branding has enabled Polycab to grab mindshare of consumers which means a sustained real estate cycle should also benefit the company.
Wires & Cables Industry
The wires & cables industry is the largest part of the electrical equipment industry accounting for 40-45% of the industry. It has a market size of ~50,000 crores and has demonstrated double digit growth over the last decade. The growth is on account of factors such as the electrification of rural villages and households, investments in transmission and distribution systems for modernization and increasing efficiencies, increased demand from renewable power generation, particularly solar and wind energy, infrastructure development initiatives taken by the Indian government such as Smart Cities Mission, and mass transit systems, and improved life-style and consumer spending.
The industry rides on the growth and capex in a variety of sectors and thus, at times, it has demonstrated some cyclical tendencies however, the resilience of the top organized players in the industry has allowed them to withstand the cyclical swings.
Difference between Wires & Cables
Though used interchangeably, wires & cables differ from each other. A wire is a single conductor strand or a group of conductor strands, sheathed in a jacket of insulation. Wires are generally used to carry electricity and telecommunications signals. A cable is, generally, two or more wires running together or bonded, twisted or braided together. They are mostly insulated to offer better protection than just wires and are widely used in power transmission.
The demand for wires & cables is derived from three major sources. These are investments in public infrastructure, private sector capex and residential real estate investment. With ever rising electricity demand due to influx of a large number of electronic devices into our lives, investments in power transmission and distribution infrastructure are necessary. As the per capita electricity consumption of India catches up with our counterparts, transmission & distribution infra will have to catch up to it, acting as a stable demand driver of wires & cables. Increasing focus on renewable sources of energy also bodes well for the industry as both solar and wind energy require substantially larger investments in cables (3-4x more requirements) than energy produced from thermal power plants.
The government schemes like National Infrastructure Pipeline (NIP) and PLI schemes will help sustain demand for wires & cables. NIP, announced in 2019, proposed an outlay of 102 lakh crore to execute over 7,000 projects, over a five-year period while the PLI scheme is aimed at achieving large-scale manufacturing base in India. There is also a fair bit of discussion around revival of private sector capex which has been subdued for a considerable period. This revival will further boost demand for the wires & cables industry.
On the residential front, housing affordability has improved drastically and borrowing rates have touched all-time lows. The real estate developers are witnessing strong demand across premium offerings while the government’s affordable housing schemes are promoting home ownerships among the modest earning classes. A cyclical upswing in the real estate sector should boost demand for wires & cables.
All the above factors indicate a strong market for wires & cables manufacturers in near to midterm.
Shift from Unorganized to Organized
The value in the industry is moving from unorganized sector comprising smaller regional players towards the organized sector comprising pan-India branded market players. The share of unorganized players has reduced from 39% in FY14 to 34% in FY19 and is expected to tread to ~25% by FY23/FY24. The industry sees frequent entry and exit of unorganized players, especially in the wires segment, owing to low tech nature of the product and less capital requirements. The organized players, however, have prudently focused on improving their product quality and have made investments in marketing and branding to grab value away from the unorganized players. In categories like High Voltage and Extra High Voltage power cables, where the manufacturing process is technology and capital intensive with strict regulation relating to the quality of products and an established relationship between B2B customers and incumbents, there are very few unorganized players.
Polycab Dominating the Market with a Diversified Product Portfolio
Polycab is the largest player in the Indian wires & cables industry with an overall market share of 12%. Within the organized wires & cables industry, Polycab has a market share of 18-20%. The company was started as a small trading firm and has, over time, built a formidable portfolio of wires & cables offerings that are used in a variety of industries. Polycab has the most extensive range of wires and cables in India, with 11,000 SKUs with a voltage range of 0.20KV-220KV and global certifications. The various types of wires & cables manufactured by the company include:
Power cables – These are used for power transmission and distribution. The company manufactures a range of cables with high to low voltage and different sheathings such as PVC, XLPE, flame retardant and low smoke.
Control cables - They send signals to control the functioning of an equipment and allow distribution of data or signals that have low voltage.
Instrumentation cables – They find a wide variety of applications for process instrumentation for measurement, supervision and control of the process in oil & gas, power generation and distribution, auto, chemical and mining industries.
Solar Cables - These are used as inter-connection cables for connecting different photovoltaic modules in air or conduit. Solar cables must withstand extreme weather conditions, be flame and fire retardant and operate at consistent high temperatures.
Building Wires – These are ideal for indoor- and outdoor-applications and building electrification in various industries, household appliances such as power-supply for refrigerators and air conditioners.
Other cables manufactured by the company include Telecom cables, Optical Fiber cables, Flexible Cables etc.
Strong Manufacturing Capabilities
Polycab has 23 manufacturing facilities located across India with 52 warehouses. It undertakes the manufacturing of most of its products in-house. The installed capacity across wires & cables/fans/switchgears currently stands at 4.1 mn KMs/3.7 mn units/9 mn units respectively. The company had entered into a JV with Trafigura in 2016 to set up a manufacturing facility to manufacture copper rods as a backward integration exercise. During FY21, Polycab increased its stake in the JV to 100%, making it a wholly owned subsidiary. However, in Q3FY22, Polycab divested its entire stake in the subsidiary for an enterprise value of 323 crores. The company could not fully utilize the entire capacity of the subsidiary and metal trading would have diverted the company’s focus from its core offerings.
Marketing and Advertisements
In order to enhance the company’s brand positioning as a B2C player, Polycab has consistently invested in brand building and advertisements. The spends on advertisements and promotions have increased from 0.4% of sales in FY14 to 1.2% of sales in FY21. In absolute terms, the advertisement and promotion expenses have grown 7x between FY14 and FY21. Its association with IPL since 2016 has greatly enhanced its brand image.
Exports Emerging as a Key Destination
The global wires & cables market is estimated to be $145 billion. India has traditionally been a net importer of wires & cables however, things changed in FY16 with India becoming a net exporter of wires & cables. The dependence on imports was due to limited technical capabilities of Indian manufacturers. This was solved by the domestic players entering into technical collaboration with foreign partners and investments in R&D to improve product quality.
Polycab has an export presence in 55+ countries. Its export aspirations received a shot in the arm in 2019 with a 1000+ crore order form Dangote, Nigeria for the supply of cables. While the order led to a sudden jump of exports contribution in total revenues, Polycab has drafted a strategy to take the share of exports to over 10% and maintain the share at that level. It has established subsidiaries in countries like the USA and Australia and has identified 10-12 markets where it will follow a distribution led model to increase market penetration.
Strategic EPC Business
Polycab has presence in the EPC business related to design, engineering, supply, execution and commissioning of high voltage and extra high voltage cabling power distribution projects ranging between 33kV and 220kV and rural electrification projects. The EPC segment of the company is an opportunistic one and Polycab only undertakes projects where cables supply requirement is ~60% of the total scope of work. During FY21, the Company worked as a Project Implementing Agency (PIA) with its consortium-partner in BharatNet’s Phase-II project for Package-3 in Bihar and Package-B in Gujarat.
FMEGs are consumer electrical goods sold through various channels such as retail trade outlets and e-commerce platforms. These include products such as fans, lights, luminaires, switches, switchgears, pumps, conduits, fittings and so on. Over the years, this industry has evolved rapidly with increasing participation of organized players and emphasis on branding. Structural drivers like changes in demography, consumer behavior, technology and rising disposable incomes have catapulted the growth of the organized FMEG sector in India. Meanwhile, the unorganized market, which makes up 10-50% across various product categories, has been on a steady decline.
Polycab entered the FMEG segment in FY14 with the launch of switches and switchgear products. Over the years it has entered newer product categories in the FMEG segment. It currently offers:
Fans: The market for fans is about 9900 crores in India with fairly well penetration. While demand for fans grows at a steady pace, there is a shift towards premium and energy efficient fans and organized players are aligning their portfolio accordingly.
Polycab offers a range of fans portfolio, including ceiling fans, table fans, wall-mounted fans, pedestal fans, exhaust fans and Air Circulators. In the past 18 months, Polycab has launched 100+ SKUs of fans. The focus has turned towards premiumization with calibrated pricing actions. It has launched a super-premium "Hohm" product range, which are IoT-enabled and aligned towards the preference of the younger generation.
Lightings: Lighting and Luminaires industry is about 22,700 crores in size. The industry has seen fair bit of disruption in the recent past with rapid adoption of LEDs at the cost of traditional bulbs and CFLs. This has been aided by government’s UJALA scheme and rising awareness towards energy efficient products. LED chip prices have also dropped drastically, aiding the adoption.
Polycab offers bulbs, 36W battens, frameless panels, chip on board (COB), strip lights, streetlights, flood lights amongst others. The premiumization drive through Hohm is also underway in this segment too.
Switches & Switchgears: The domestic switch & switchgear industry has a market size of 25,000 crores with switches accounting for 20% of the total market. Polycab offers MCBs, Isolators, RCCBs, distribution boards and a range of sockets and modular switches that are available for varied range of wattages, voltages and amperage and with different breaking capacities. These sockets and switches are sold under the brand “LEVANA”. Increasing popularity of modular switches bodes well for Polycab.
Other products under FMEG include water heaters, pumps, conduit and accessories, and solar products.
Rapid Scale up of FMEG Business
Polycab has scaled up the FMEG segment rapidly and the contribution of FMEG sales in total revenues has increased from 4% in FY16 to 12% as of FY21 with revenues crossing 1000 crore mark in FY21. The CAGR in last five years has been 37%. The profitability has also improved with segmental EBIT margin improving to 5.5% in FY21 from 1.8% in FY18.
Polycab has a wide distribution network across India. As of Dec 2021, it had 4100+ authorized dealers and distributors supplying to 1,65,000+ retail outlets. 52% of the total distributors cater FMEG products, 28% wires & cables while the rest 20% are common across both the categories. These distributors are well connected with the company’s 52 warehouses and depots spread across 20 states.
The distributors are also fairly well distributed across different regions of India with slight tilt towards South India. North/South/East/West distributor mix stood at 27%/30%/21%/22%. Between FY16 and FY19, there was a slight reduction in the number of distributors as Polycab decided to concentrate on larger distributors.
As the consolidation in distributor base is over, Polycab can look to strengthen the reach even more as there is still scope for increasing the network when compared to peers such as Havells which has a distributor network of 11,000+ and Bajaj Electricals which touches 2,20,000+ retail points.
The company has over the years taken up various organizational projects with key end goals. Project Josh was a strategic initiative of the company to increase market share in the FMEG segment in a targeted and organized manner and, Project Bandhan, which provided the company a platform to provide sales incentives to retailers and electricians and built brand loyalty.
Polycab is currently running three major strategic projects running simultaneously targeting different aspects of business.
Project Shikhar is a 360-degree program with three main pillars i.e., Channel expansion, The Polycab “Experts Program” and IT enablement. The company aims to implement it in 300 identified high potential cities across India to drive 3x sales in these geographies.
Project Udaan aims to build a lean and sustainable cost structure as well as institutionalize new ways of working. The company is analyzing various dimensions of product life cycle for e.g., strategic procurement, manufacturing process, supply chain, design optimization and value engineering to weed out organization wide inefficiencies. It has already identified savings worth 80bps.
Project Leap is the company’s strategic project aimed at achieving a turnover of 20,000 crores by FY26 with market share improvements across categories. It aims at sustaining the share of exports in total sales at >10% while scaling up the operating margins in the FMEG segment to>12%. It is also aiming to increase the share of online sales to ~10% by FY26.
Raw Material Costs Indicate Pain in Short-Term
The key raw materials for Polycab are Copper, Aluminium and PVC. Commodities have been on fire of late. While some short-term pain can be expected, the hit on margins should be relatively short-lived owing to the pricing mechanism followed by the company which allows it pass on the RM price hikes quickly. However, a sustained period of price hikes can impact volumes.
The company’s metal procurement contracts come with embedded derivatives, which provides it an opportunity to finalize the purchase price at a future date. This provides Polycab with the flexibility to price the raw materials subsequent to the procurement date and linking it to the realizations through revision in price list. Prices are generally revised on monthly rest after considering two variables; one is changes in metal prices of copper and aluminum and the other is change in the foreign exchange rate of USDINR.
A point to note here is that since Polycab is materially a wires & cables company, both revenue and EBIT wise, it has to pass both the rising as well as falling trends of raw material prices. Thus, even a too deflationary raw material environment is not very benefecial for the firm as it will have have to mark down its prices.
Consumer Durables Bet Next?
While the current focus of Polycab is on improving the profitability in the FMEG segment, a full consumer durables bet in the future is not unlikely. The recent hiring trends also indicate a potential move towards that in the future. Excerpt form Q3FY22 concall,
“Mr. Vivek Sharma has joined us from Panasonic. He was the MD of Panasonic and after super annuation he has joined us as Deputy Managing Director. Tapas has joined us from Havells and he is heading our fans business. Similarly, there are other team members who have joined from other large companies like Crompton and other large B2C players.”
Sales have grown at a CAGR of 12% between FY14 and FY21 while EBITDA has grown at a CAGR of 21% during the same period. PAT has clocked in a CAGR of 39% during the same period. EBITDA margin has consistently improved from 7.5% in FY14 to 13.1% in FY21. The sustainable range for EBITDA margin in the wires & cables segment is 11-13%, as highlighted by the management.
PAT to CFO conversion has been healthy with average CFO/PAT figure over last 7 years being 150%. Fixed assets turnover improved from 5.3x in FY14 to 6.2x in FY20 and dropped to 4.8x in FY21. Inventory turnover dropped from a high of 6.4x in FY14 to touch a low of 3.6x in FY17 and stood at 4.5x in FY21. Polycab has been able to control its receivables days with increasing channel financing and receivables days has consistently improved from 87 days in FY14 to 58 days in FY21.
There is still significant scope of improvement in receivable days as currently 70% of the company’s distributors in wires & cables are covered under channel financing while the same in FMEG segment is around 40% which gives scope of further improvement in receivable days as the channel financing coverage will improve over time.
Debt/Equity has reduced from 0.2x in FY14 to 0.03x in FY21. Polycab generates healthy cash flows so debt is expected to be benign unless there is some sizable acquisition. It has a net cash position of 670 crores.
ROE/ROCE have improved consistently from 6%/12% in FY14 to 19%/20% in FY21.