Workers coil copper wire rod following manufacture. Photographer: Andrey Rudakov/Bloomberg

Polycab India’s IPO: Here’s All You Need To Know

India’s largest manufacturer of electric wires and cables plans to raise nearly Rs 1,345 crore from its three-day initial public offering, which opens today.

Polycab India Ltd. is offering nearly 2.5 crore equity shares at a price band of Rs 533-538. Some of its promoters, including the World Bank’s lending arm International Finance Corporation, will sell stake in the IPO. It will be a combination of offer-for-sale and fresh issue.

The company will use the funds raised via fresh issue for debt repayment and working capital requirements.

Polycab India’s IPO: Here’s All You Need To Know

The company is valued at close to Rs 8,000 crore at the upper end of the price band. Its promoter holding will fall to 68.7 percent from 78.9 percent after listing.

Business

Polycab has a market share of close to 12 percent in the Indian electric wire and cable market, according to its red herring prospectus. It also manufactures electrical goods, including fans, LED lighting, switches and switchgears and solar products.

The company entered the electrical goods segment in 2014, which contributed less than 10 percent to its revenue in FY18. Polycab also exports its products to over 40 countries, but that contributes to only 3.4 percent of its total revenue.

Polycab has 24 manufacturing facilities in Gujarat, Maharashtra, Uttarakhand and in Daman and Diu. Four of these are for making electrical products. It’s setting up a plant with the commodity trader Trafigura at Halol in Gujarat to make copper wire rods. The plant—which was expected to commence production by the end of financial year 2018-19—aims to strengthen the backward integration of Polycab’s manufacturing by meeting a part of its demand for copper.

Revenue of the Indian cable and wire industry grew at an annualised rate of 11.1 percent in the last five years, according to the red herring prospectus. This is expected to rise to 14.4 percent due to increased consumer spending and the government’s initiatives in power and infrastructure.

The company has a pan-India distribution network of over 2,800 authorised dealers that cover nearly 1,00,000 retail outlets and 30 warehouses. It has discontinued its relationships with small dealers in the last three years.

Financial Highlights

The company’s net worth as of Dec. 31, 2018, was Rs 2,723 crore, translating to a book value of Rs 183 per share after the issue of new shares.

Polycab’s revenue grew at an annualised rate of 11.1 percent in the four years through March 2018. The company’s net profit grew 42.7 percent in the same period. For the first nine months of financial year 2018-19, the company reported a revenue and net profit of Rs 5,507 crore and Rs 358 crore, respectively.

Earnings before interest, tax and depreciation and amortisation grew at an annualised rate of 25.4 percent, while Ebitda margin averaged 9.2 percent in the four years through March 2018. For the first nine months of financial year 2018-19, the company reported an Ebitda and Ebitda margin of Rs 694 crore and 12.6 percent, respectively.

Fluctuations in prices of its primary raw materials—copper, aluminium, polyvinyl chloride compounds and steel—could impact Polycab’s margins.

Polycab had a debt of close to Rs 620 crore as of Dec. 31, which would reduce to Rs 540 crore once the company uses part of the IPO proceeds to repay debt. The firm’s total debt-to-equity ratio is as low as 0.2 times, despite incurring a capital expenditure of over Rs 900 crore and distributing dividends at least in the last four years.

Peers And Valuations

Finolex Cables Ltd., KEI Industries Ltd. and Havells India Ltd. are Polycab’s nearest peers. Finolex Cables generates over 96 percent of its revenue from cables and wires. The corresponding figures for KEI Industries and Havells India are 75 percent and 32 percent, respectively. Havells India generates nearly half of its revenue making electrical goods.

Polycab’s growth has been better than its peers in the four years through March 2018. For Havells India, we have considered the revenue and EBIT of its cables and electrical goods unit.

Polycab had a debt of around Rs 728 crore and leverage of 0.3 times as of FY18, which would fall to Rs 540 crore and 0.2 times, respectively, after listing.

Polycab’s return ratios have expanded in FY18 compared to the last year. Yet, it fails to match up with its peers on this count, according to data compiled by BloombergQuint.

Valuations

Polycab’s earnings per share on an annualised basis for financial year 2018-19, after the issue of new shares, would be close to Rs 32 and at the upper-end of the price band, price-to-earnings ratio stands at 16.7 times, according to BloombergQuint’s calculations.

“A strong brand portfolio and distribution network could bode well for Polycab’s product launches and expansion of FMEG business,” said Centrum Wealth. The government initiatives and better prospects in electrical goods may be added triggers for potential business growth, the brokerage said. “We suggest investors can subscribe to the issue.”

Given the strong industry growth trends, leadership position, healthy financials and comfortable valuations, we are positive on the IPO, Motilal Oswal said in a note. “Hence, we recommend 'Subscribe’.”