Stock To Buy: Midcap Capital Goods Stock For Potential Gains Of 40%

Sharekhan has a buy call on the stock of capital goods player Polycab and there is a possibility of a 40% gains on the stock. Here are some of the reasons, why Sharekhan has a buy call on the stock of this midcap capital good player

Polycab: A leading player in cables and wires

Polycab is engaged in the business of manufacturing and selling wires and cables and fast moving electrical goods. Apart from wires and cables, the company also manufactures and sell FMEG products such as electric fans, LED lighting and luminaires, switches and switchgear, solar products and conduits & accessories.

Polycab India FY22 annual report reveals that the company gained market share in some product categories despite inflationary pressures and supply-side headwinds. Revenue in both Wires & Cables (W&C) and FMEG segment was a blend of higher realizations and a decent volume growth driven by strong distribution network (4,600+ dealers and distributors and 2,05,000 retail outlets), robust product portfolio (W&C - 11,000+ SKUs, FMEG - 6,000+ SKUs) and absorption of input cost in some of the product categories in order to capture market share.

Company to grow FMEG Segment

According to Sharekhan, in the long term, the company is focused on in-house manufacturing, distribution expansion to grow FMEG segment, while strengthen its leadership position in W&C through new products across varied price points. "Further, Polycab's healthy net cash position and net working capital cycle provide us further comfort. Domestic wires business achieved ~ 50% y-o-y growth in FY22 and contributed ~50% to the overall W&C segment. The W&C industry is witnessing a gradual shift from smaller regional unorganized players towards pan-India branded market players across categories. This could help larger players further gain market share," Sharekhan has said.

FMEG industry to see strong growth

According to the firm, the the Indian FMEG industry witnessed decent price driven growth in FY22 despite subdued volume growth. "The share of unorganised players continued to decline as consumers are moving towards branded and high-quality products. Polycab's FMEG segment sales grew by 21% y-o-y led by distribution expansion and healthy demand environment, particularly in water heaters, lights & luminaries and switchgears and contributed 10% to FY22 revenue. This resulted in market share gains across most categories. In FMEG, the company has exhaustive range of products that cater to both home and institutional needs. In FY22, the company launched ~30 different models of fans and appliances across categories i.e. premium, economy, BLDC, etc. and new models of lights and luminaries. Around 54% of Polycab's distribution network is utilised by the FMEG segment giving it ample scope for growth," the brokerage has noted.

Valuation and view

According to Sharekhan, Polycab is well-poised to benefit from government infrastructure investments, revival in housing demand, pick up in construction and increase in private capex spending. "The operating margins are expected to improve as the impact of price hikes and operating leverage is likely to offset the increased input costs in medium to long term. The focus on increasing exports and scaling up of FMEG business with new product launches would be other key growth triggers. Overall, we believe the company is on a healthy growth trajectory, owing to its leadership position and a strong product portfolio both in the W&C and FMEG segments and a strong distribution and in-house manufacturing capabilities. We retain a Buy on the stock with a price target of Rs. 3,000," the broking firm has said.