Polycab India shares down 14% in 2024 so far. Target price Rs 5,255, says Nirmal Bang

After falling sharply earlier this year, Polycab India Ltd shares have recovered some of the lost ground. But they are still down 14 per cent for 2024 so far. Nirmal Bang Institutional Equities, which met with the company CFO an head of investor relations, said it has downgraded the Polycab stock to 'accumulate' following the recent catchup post its January 19 note.

That said, the brokerage said it remains structurally positive about the company’s long-term business prospects, as it awaits clarity on the recent turn of events. Polycab India recently denied reports of tax evasion by the company on stock exchanges and suggested it had not received any communication from the Income-tax department regarding the outcome of December 2023 search operations.

"We will revert to our original multiple once we see a revival in FMEG and derive adequate comfort on the recent events getting addressed to investors’ satisfaction," Nirmal Bang said. This brokerage suggested a target of Rs 5,255 on the Polycab India stock.

Nirmal Bang, which met CFO Gandharv Tongia and Head of Investor Relations Chirayu Upadhyaya said Polycab's focus is on enhancing market presence through increased A&P spends. Polycab is targeting 3-5 per cent of B2C topline annually, with anticipated margin implications, it said.

Nirmal Bang said Polycab registered 20 per cent YoY cable volume growth domestically in 3QFY24 as focused infra development led to cables outperforming wires. Internationally, Polycab has diversified exposure in terms of countries in Europe & the Middle East while majority of Cables exports are driven by the US.

"Currently, Polycab is transitioning from an institutional player to a distributor-led model in the US. It is also leasing a warehouse on the US east coast to supply Cables directly to distributors and customers. The management is currently focussed on enhancing its learning curve in understanding specific Cable SKUs and customer needs in new geographies," Nirmal Bang said.

For Wires, Polycab India’s demand remains robust, driven by real estate projects entering construction phase, Nirmal Bang said.

"Approximately 70 per cent of demand for Wires comes from Real Estate – this sector has been in an upcycle for 3 years with a total cycle length of 6-8 years, indicating 4-5 more years of growth remaining,' it said.

In the case of EHV, increasing electricity consumption in India is seen driving demand for higher voltage cables, boosting EHV demand. A significant portion of demand for EHV cables is met through imports due to limited domestic capacity, thus representing a big opportunity.

"Players are doubling their current capacities for EHV cables and the same are expected to be fully absorbed (including Polycab) due to strong demand forecast – especially driven by RE. Smart City initiatives and the expansion of RE generation in suburban areas are expected to drive demand for EHV cables as both entail replacing overhead cables with underground ones," it said.

Nirmal Bang noted that two large players presently cater to 55-60 per cent of demand for EHV cables. Gestation period to set up EHV cable manufacturing plant is 2-3 years.

"Polycab’s EHV cable plant will be commissioned by early-FY27. Currently, Polycab is in a JV with an experienced EHV cable manufacturer. Ebitda margin for EHV cables is typically in high teens – a better margin profile vis-a-vis other cables. This margin difference could be 300-400 bps from normal power cables," it said.

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