Stock To Buy: Brokerage Recommends 'Buy' This Mid Cap Consumer Durable Stock For 24% Upside

Stock Outlook

Polycab India Limited stock closed today at Rs 2,229.70 apiece after gaining 1.32% from the previous close of Rs 2,199 apiece. Today it was opened at Rs 2,200 apiece. The share price of the company hit the 52-week low level at Rs 1,762 apiece on July 20, 2021, and the 52-week high level at Rs 2,820 apiece on April 22, 2022, respectively. Currently, the stock is trading at Rs 467.7 above its 52 week low level and Rs 590.3 below its 52 week high level.  Its ROE is 16.39% and its TTM PE ratio is 31.64%.

It is a mid-cap consumer durable stock with a market capitalization of Rs 33,357 crore. In terms of return & performance, it has given good returns and performed well in long term. Its share price moved up 3.94% in the last 1 week, and 5.36% in the last 1 month, respectively. In 1 year, the stock moved up 12.01%. It has given multibagger returns on 3 years of investments. On 3 years, it gave 263% returns.

 

Sombre start to FY23

Polycab had a sombre start to FY23. Its Q1 FY23 revenue dipped 31% q/q to Rs27.4bn, though y/y, it rose 48% due to the lower base. Despite a 280bp improvement in the gross margin, the EBITDA margin was 60bps lower q/q, as staff costs rose 5% q/q even as other manufacturing expenses were 12% lower than the quarter prior. With a 24% tax rate, net income dropped 32% q/q.

Near-term outlook uncertain amid falling commodity prices

Copper and aluminium are key input raw materials for Polycab. Volume offtake in Jun'22 slowed amid volatility in commodity prices. Channel partners tend to optimise inventory to avoid being loaded with high-cost stocks amid falling commodity prices. Based on that, management expects the pace of revenue booking to be dull in Q2 FY23. It expects volume growth, a key monitorable, to be steady in H2 FY23.

Guides to consistent capex of Rs3bn-4bn

Polycab has guided to Rs3bn4bn capex a year for next few years, as it aspires to book Rs 200bn revenue by FY26. In Q1 FY23 it incurred Rs1bn capex.

Valuations

According to the brokerage, "To factor in the near-term uncertainty, we lower our FY23e EBITDA and net income of Polycab by ~15%. Considering its vigorous go-to-market strategies and premiumisation initiatives under project Leap as it aspires to book Rs200bn revenue by FY26, we maintain our Buy rating."

The brokerage added, "Post-Q1 FY23, our FY23e revenue is largely intact. We lower EBITDA and net income ~15% each to factor in softer demand from a medium-term perspective and expected recovery in H2 FY23. We now model revenue/net income clocking 14%/26% CAGRs over FY22- FY24, resulting in the (post-tax) RoIC increasing from 18% to 22%. We maintain a Buy rating as we roll over to FY24, and derive a Rs 2,755 target price (31x FY24e EPS of Rs 88.9). At the CMP of Rs 2,200, the stock trades at 30x/25x FY23e/FY24e EPS of Rs 73.5/88.9."