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Polycab India's (Polycab) initial public offering (IPO) provides investors with a unique opportunity to be a part of India's largest wire and cable manufacturer. The total issue is pegged at Rs 1,345 crore, which consists of primary as well as secondary sale of shares, valued the company at nearly Rs 8,000 crore at the upper end of its price band of Rs 538 per share.
While cable and wires remains its core business (90 percent of revenues), the company also a small presence in the engineering, procurement & construction (EPC) space through which it provides electrical turnkey solutions to its clients. In 2014, the company forayed into the fast moving electrical goods (FMEG - fans, lighting and luminaire products, switchgears, switches and pumps) segment to leverage its existing brand as well as distribution channel.
The company was established as Sind Electric Stores in 1964 by Thakurdas Jaisinghani and is currently promoted by the second as well as third generation of the Jaisinghani family (promoter group) who together hold around 79 percent stake in the company.
After the IPO, stake of the promoter group will reduce to 69 percent. While the family holds majority stake, the company is professionally managed through key management personnel such as Ramakrishnan Ramamurthi (CEO), Gandharv Tongia (CFO) and Manoj Verma (COO).
What are the key positives?
Dominant position in the marketThe historic revenue growth of Polycab has been in-line with the industry and the same is expected to continue as the cables and wires market continues to expand on the back of government’s focus on power, infrastructure and housing. The company is also exploring export opportunities through strategic tie-ups in the international markets (US, Europe, Middle East and Africa).
Strong financials and healthy return ratiosDespite being an asset heavy business model with in-house manufacturing, the company has generated healthy return ratios through prudent working capital management. Its return on capital stood at nearly 20 percent in FY18 and 9M FY19.
Expanding retail presenceIn 2016, the company entered into an equal joint venture with Trafigura (multinational commodity trading company) to set-up a 225,000 million tonne copper wire rod manufacturing facility in Waghodia (Vadodara). This plant is expected to commence operations from Q1 FY20 and will reduce Polycab’s dependency on copper sourcing from external parties.
Diversified distribution networkWhat are the key business risks?
Raw material and currency fluctuationsFMEG is a very crowded market with a large number of players present in each product category. Certain products such as lighting have witnessed a steep price erosion due to technology obsolescence and fever pitch competition. Other products such as switchgears and pumps have a high degree of correlation with new construction activity and monsoon, respectively.
As the company is operating at nearly 70 percent capacity utilisation, the timing of the IPO raises questions about the need for tapping funds through capital markets. Valuations are at a minor discount to its core peers (KEI and Finolex Cables) and offers value to prospective shareholders.
Investors, be it short or long term, should look forward to subscribing to this IPO as its valuation should be at a premium to other listed players considering its market leadership position, sound fundamentals and healthy growth prospects.
Read: Future Supply Chain: A lucrative investment opportunity
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here