The company manufacture and sells diverse range of wires and cables and some of the key products in the wires and cables segment are power cables, control cables, instrumentation cables, solar cables, building wires, flexible cables, flexible/single multi core cables, communication cables and others including welding cables, submersible flat and round cables, rubber cables, overhead conductors, railway signalling cables, specialty cables and green wires. The company's products are used in various industries including mining, oil and gas, shipping, power, renewable, infrastructure, construction, automotive, telecommunication and agriculture etc apart from household and institutional segments. Its customers include institutional clients such as L&T Construction and government clients such as Konkan Railway Corporation.

In FY 2014, the company diversified into FMEG segment and today it manufactures and sell FMEG such as electric fans, Led lighting and luminaries, switches and switchgears, solar products and conduits and accessories. The FMEG segment has grown at a CAGR of 57.96% from FY 2016 to FY 2018 and by 41.4% for the nine months ended December 2018 on a YoY basis.

Around 89% and 87% of the total sales for FY 2018 and nine months ended December 2018 came from wires and cables segment, 7% and 8% of the total sales for FY 2018 and nine months ended December 2018 came from the FMEG segment and rest 3% and 4% of total sales for FY 2018 and nine months ended December 2018 came from Engineering procurement and construction services (EPC). The EPC division provides electrical turnkey solutions comprising project management, onsite execution and resource management through specialized erectors and financial management. Within 89% of total sales from wires and cables for FY 2018, sale from wires is around 42% and sales from cables stands around 58% of total sales.

The company has 24 manufacturing facilities, including two joint ventures with Techno Electromech Pvt Ltd. And Trafigura Pte Ltd, located across the states of Gujarat, Maharashtra and Uttarakhand and the union territory of Daman and Diu. The 50:50 joint venture with Trafigura, to set up a manufacturing facility at Waghodia, Gujarat, to produce copper wire rods, has started commencement of operations from April 19 with capacity of 2.25 lakh tonnes of copper wire rods.

Its pan India supply chain comprises a network of authorized dealers, distributors and retailers. The distribution network in India comprised over 2,800 authorized dealers and distributors and 30 warehouses as on nine months ended December 2018. The company supplies products to authorized dealers and distributors. They, in turn, supply them to over 100,000 retail outlets in India.

Exports account for around 3.4% of total revenue for the company as on December 2018 and the company exports to more than 40 countries in the world with majority in US, EU and Gulf region.

The Offer and the Objects

The offer comprises offer for sale by the existing shareholders of 175.82 lakh shares, which, at the lower price band of Rs 533 per share, works out to Rs 937.12 crore and, at the higher price band of Rs 538 per share, works out to Rs 945.91 crore.

The offer also comprises of fresh issue of Rs 400 crore, which at lower price of Rs 533 per share, works out to 75.05 lakh shares and at higher price of Rs 538 per share works out to 74.35 lakh shares.

The minimum bid lot is 27 equity shares and in multiples of 27 equity shares.

The objects of the issue to fund the working capital requirements of the company for Rs 240 crore and Rs 80 crore towards repayment of certain borrowings availed by the company and rest for general corporate purpose apart from providing the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

The offer for sale comprises of promoter Inder Jaisinghani (20.89 lakh shares), Ajay Jaisinghani (20.71 lakh shares), Ramesh Jaisinghani (20.71 lakh shares), Girdhari Jaisinghani (20.79 lakh shares), Bharat Jaisinghani (5.29 lakh shares), Nikhil Jaisinghani (5.29 lakh shares) and public shareholders, namely, International Finance Corporation (IFC) (70.6 lakh shares), Anil Hariani ( 5.13 lakh shares) and Ramakrishnan Ramamurth ( 6.37 lakh shares).

Post issue, the promoters and group will hold 68.7% in the company.

Strengths

According to Crisil, the Indian cables and wire industry recorded 11% CAGR in five years from FY 2013 to FY 2018 and is expected to expand at a CAGR of around 15% Rs 103300 crore by FY 2023.

The most extensive portfolio of wires and cables to cater to the needs of institutional and retail customers in different industries has recorded a CAGR of 14.3% from FY 2016 to FY 2018 in terms of operating revenues. The company is one of the faster growing manufacturers in the organized wires and cables industry, as per Crisil.

Increasing disposable income, changing trends in home improvements, higher investments in infrastructure and construction, more industrial investments and better awareness about energy efficient products and technologies will drive demand for company's products.

There is a strong track record. During FY 2016-18, consolidated net sales and Pat have recorded CAGR of 14.3% and 41.7%, respectively, both ahead of the industry and peers.

It has incurred capex of around Rs 1100 crore in the past five years for building capabitliies, scale and new product line and range. Currently, it is operating at around 70% of the installed capacity. As the capex cycle twits, incremental cash-flows will improve.

Leverage and synergies exist in terms of cross-selling of FMEG products to the existing network and customers of wire and cables. As a business-to-business (B2B) manufacturer of wires and cables, Polycab has diversified into the FMEG business and transformed from a pure B2B company into a B2B and business-to-customer (B2C) company. As on December 2018, around 70% of wires sales, entire sales of the FMEG business and around 10% of cables sales were on a B2C basis.

The company has a strong brand and comprehensive product range and diversified product offering for various customer base across industries. The company has developed an environment-friendly wire, lead free and low halogen green wire, to meet the growing demand for green products. Specialized cables such as automotive cables, rubber (elastomeric) cables and electron-beam irradiated cables meet the demand from automobile, ship-building, mining and rolling stock sectors. Building wires meet the demand that comes from affordable housing scheme, growing nuclearization of families and investments in commercial and residential infrastructure.

Weaknesses

The industry is highly competitive and with a lot of scattered players. Every player is increasing its brand awareness and building scale.

Copper, aluminium, steel and polyvinyl chloride are major raw materials for the company, with copper accounting for around 56% of total raw material. Any significant increase in the prices of the raw materials in short term can affect the margins which have been increasing consistently.

Any change in import duty structure on wires and cables and on FMEG products can result in higher imports and, thus, pricing pressure on the industry, which can hurt the margins.

The company's inventory day's cycle was 153 days and 96 days in the nine months ended December 2018 and FY 2018. With increase in product offerings and reach, inventory days cycle and, thus, overall working capital requirement will remain high.

Valuation

For FY 2018, consolidated net sales were up 23% to Rs 6779.29 crore. The OPM stood at 10.9% compared with 8.7% for FY 2017, resulting in OP growth of 54% to Rs 740.83 crore. Other income stood at Rs 62.21 crore, down by 18%. Interest cost stood at Rs 93.68 crore, up by 42%, while depreciation stood at Rs 132.95 crore up by 4%. Thus, PBT stood at Rs 576.41 crore, up by 59% YoY. After providing total tax of Rs 205.60 crore up by 60% and share of profit of associates of Rs 0.11 crore in FY 18 and MI of Rs 0.55 crore, PAT for FY 2018 stood at Rs 370.37 crore, up by 59% YoY basis.

For the nine months ended December 2018, the company reported consolidated net sales of Rs 5506.70 crore up by 17% YoY with the OPM of 12.6% as compared to 8.4% for nine months ended December 2017, thus leading to a 76% increase in OP to Rs 694.04 crore. Other income stood at Rs 54.35 crore up by 24% YoY, Interest cost, at Rs 90.49 crore, was up by 65% YoY and depreciation, at Rs 107.14 crore, up by 8% YoY, resulting in PBT of Rs 550.76 crore, up by 94% YoY. After providing for total tax of Rs 187.93 crore, up by 82% YoY, and loss of share of associates of Rs 4.61 crore as compared to profit for share of associates for the nine months ended December 2017 of Rs 0.33 crore and MI of Rs 0.81 crore, up by 155% YoY, PAT for the nine months ended December 2018 stood at Rs 357.41 crore, up by 98% YoY. Profit cannot be annualised due to seasonality in business.

At the higher price band of Rs 538, the offer is made at around 21.6 times its FY 2018 consolidated EPS of Rs 24.9 on a post-issue equity share capital of Rs 148.60 crore of face value of Rs 10 each.

Kei Industries, Havells India and Finolex cables are listed comparable companies.

For FY 2018, net sales of Kei Industries stood at Rs 3458.8 crore and PAT stood at Rs 144.56 crore. This gives an EPS of Rs 18.5 for FY 2018. At the current market price of Rs 420, Kei trades at around 22.8 times its FY 2018 earnings.

For FY 2018, consolidated net sales of Havells India stood at Rs 8146 crore and PAT stood at Rs 673.84 crore. This gives an EPS of Rs 10.6 for FY 2018. At the current market price of Rs 765, Havells trades at 72.2 times its FY 2018 earnings.

For FY 2018, consolidated net sales of Finolex Cables stood at Rs 2815.12 crore and PAT stood at Rs 330.11 crore. This gives an EPS of Rs 21.6 for FY 2018. At the current market price of Rs 470, the company trades at 21.8 times its FY 2018 earnings.

Polycab has been able to grow ahead of the industry in the past due to its scale, network, brand that have been successfully built over the period. The company was able to reduce its institutional sales of wires and cables and increase its B2C sales, which are the main driver for the operating margins improvements. As the FMEG business further matures and more and more products are added in the category, the leverage on the existing distribution network and economies of scale provides a good scope for margin improvement in the FMEG business. The issue is offered at reasonable valuations and offers margin of safety for investors.

Polycab India: Issue highlights

 Polycab India: Consolidated Financials

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