Once again, Polycab India Ltd came out with another astonishing set of numbers. In the current COVID scenario, the operating revenue for the company degrew by just 6.5% despite the high base performance of last year while the profitability improved significantly. I will discuss more about the current quarter result in the blog ‘ Polycab India Ltd- Q2FY21 Analysis ‘. I already have covered about the company & Q1FY21 result updates in one of my earlier blogs: Polycab India Ltd- Analysis.
Polycab India Ltd- Company Profile
Polycab India Ltd is the largest wire & cable(W&C) company in India with a 12% market share of the total market and 18% market share in the organized space. The company ventured into FMEG segment in FY14 to move towards higher margin & B2C side of the business. The idea was to use the same distribution channel to cross sell FMEG(Fast Moving Electrical Goods) products as well as identify a new engine of growth. There is a lot of synergies between the two businesses.
As of Q2FY21, the company derives around 11% revenue from FMEG products, 80% from Wires & Cables, 5% from Copper rods & rest from EPC business.
Polycab India Ltd- Q2FY21 Analysis
While the first quarter(Q1FY21) was a washout with a 50% decline in sales on account of 2 months of lockdown. I was amazed by the recovery amidst the ongoing pandemic and intermittent lockdowns across the country in Q2FY21. And that is true for many other publicly listed companies I track.
While the B2B segment of the business continued to struggle(still down 30% YoY), the good performance was led by B2C & Export business. The B2C business consist of both FMEG(Fast Moving Electrical Goods) products such as Fans, Lighting, Switches, etc. and Wires sold in the retail market. FMEG segment grew by 25% YoY while B2C wire business grew in double digits.
The management has always kept its stance clear that they want to venture more towards B2C business focusing on premiumization and distribution. About 80% of company’s sales are via distribution. And every quarter the number of distributors, retail touch points are growing on a QoQ basis.
Other than distribution, equally important is to have a share of mind space of retail customer for any B2c business. For that it requires aggressive advertisement campaign. Last year the total add expense was ₹100cr(1.1% of total Sales). This is still much lower than their Havells’ ₹300-400 marketing spend every year, though the company has planned for much higher ad expense than the previous, majorly in IPL.
Key highlights of the concall - PolycabIndiaLtd Q2FY21
Polycab India Ltd- Q2FY21 Analysis
Domestic demand is improving
In terms of the Dangote order, the company is left with ₹150 cr(Total order size=1,000 cr) to be executed in Q3FY21. Also, have got an additional order of $10Mn(~75cr) from the same group.
Witnessing strong trend in export market. Focus on distribution led export business rather than order based export business. Excluding Dangote, the export business grew 5 times YoY. Last year export sales was 153 cr(Q2FY20) compared to ₹225cr in Q2FY21.
Optical Fiber Cable(OFC) business was sluggish.
For the company. Tier II,III & below towns are seeing double digit growth.
Putting all its effort in moving towards B2C side of the business. This requires lot of advertisement spend. Spending heavily in this year’s IPL. Of the total advertisement spend in IPL, about 20% has been considered in this quarter, rest 80% will be expensed in the next quarter.
Will be launching IOT enabled products in the next one month. Also, launching various entry level products such as multiplug etc to expand its presence. The company has introduced 40 new products in the last 6 months(that is during the pandemic).
In terms of cost optimization the company has taken various steps such and given names to such projects like Project Udaan which is with consulting major BCG, Project Sankalp. These have already started to show improvement in margins.
Also, the company is increasing channel financing for both its W&C and FMEG business. As of Q2FY21, roughly around 65% of W&C distribution is via channel financing and 15% of FMEG distribution is via channel financing. Channel financing reduces the receivable days but increases the finance cost.
Polycab India Ltd- Q2FY21 Financial Analysis (Values in Cr)
Fig 1. Polycab India Ltd- Quarterly Segment Analysis (Right to Left)
Fig 2 Polycab India Ltd- Quarterly Result Analysis((Left to Right)
As you would have noticed the significant jump in the margins for FMEG segment growing from 3.3% to 8% YoY(Fig.1). According to the management, this has been due to product price increase and working capital improvements. Although the more than doubling of margin looks quite good but it would be very difficult to maintain such margin at the current scale of the business. It is likely to be higher than 3.3% but lower than 8%.
Similar is the case for Wires & Cables business. The EBIT margin improved from 11.4% to 13.9% YoY.
These two have led to improvement in overall profitability margins.
The quarter also saw very good improvement in Operating cash flow from ₹238cr in Q2FY20 to 775 cr in Q2FY21 due to significant drop in Trade receivables.
Polycab India Ltd- Q2FY21 Analysis
The Q2FY21 number should be considered while keeping in mind the high base of FY20. Polycab’s excellent performance was a outlier in the previous financial year.
Copper which is the key raw material for the company is the single largest cost for the company. Copper prices are on a rapid uptrend due to the massive Chinese buying. Although, the management has asserted that they pass any increase or decrease in copper prices within a month. Need to watch this closely. I think given the improving demand situation, the company will be able to pass on the cost with ease.
B2B or the institutional business of wires and cables continue to be sluggish but it is improving every quarter. The festive months is likely to see the robust growth in FMEG product sales.
Based on my understanding of the company & tracking for quite sometime, Polycab is definitely a stock/company to hold for the long term.
Further reading: