Polycab India Shares Gain On HSBC Global's 'Buy' Rating
HSBC Global Research said it was bullish on India's cable and wire industry as it is "large, resilient and growing".
Shares of Polycab India Ltd. gained the most in nine months after HSBC Global Research initiated coverage on the cable and wire maker with a 'buy'.
The company is well-placed to make a recovery and gain from trends such as renewable energy, digitalisation, and increasing electrical mobility, the research house said in its Oct. 7 report. HSBC Global was bullish on India's cable and wire industry as it is "large, resilient and growing".
"Our analysis of government, corporate and household demand makes us optimistic about the prospects of a cyclical recovery for the industry," the report said. It sees the industry benefiting from mega trends such as growth in renewable energy, higher adoption of reliable underground cabling as opposed to overhead transmission, digitalisation, and increasing electrical mobility.
The two market leaders—Polycab and KEI Industries Ltd.—will grow their market share as smaller, informal firms account for 30-35% of sector value and even the organised part of the industry is fragmented, the research house said.
"Both companies are well-placed to profit from the volatile commodity price environment and can use their distribution reach, strong balance sheets and brands to expand their product offerings in adjacent categories and enhance their growth rates," it said.
HSBC Global termed Polycab as the market, cost and price leader and the largest exporter in India’s cable and wire market. Its expansive distribution reach with more than 1.65 lakh retailers, make the company a potentially meaningful player in categories such as fast-moving electric goods.
The company, according to the report, has an "experienced and stable management team", which has a good record of executing corporate strategy. "The investment in advertising and promotion, creating a new premium brand 'Hohm', the acquisition of Silvan Innovation Labs as well as investment in creating exclusive brand outlets (Polycab Galleria and Polycab Arena) underline the company’s long-term consumer-based strategy."
HSBC Global lauded the company's strong product portfolio, order fulfilment capabilities and its medium-term outlook for the future. It mentioned the multi-year transformation Project Leap, which aims for a revenue of Rs 2,000 crore by FY26. The company, the report said, can achieve most of the targets, including the revenue aim.
It set a target price of Rs 3,200 apiece for Polycab, implying a potential upside of 30.7%. Coverage was initiated on KEI Industries as well.
Shares of Polycab India gained as much as 7.86% to Rs 2,609.9 apiece around noon on Friday. Of the 26 analysts tracking the company, 21 maintained a 'buy' and five suggested a 'hold', according to Bloomberg data. The 12-month consensus price target implies a downside of 13.6%. Trading volume of the stock was 3.5 times the 30-day average for this time of the day.
Despite the rally in both stocks so far this year, the research house said the current valuations "underappreciate the robust cash-backed growth outlook and sharp improvement in return on invested capital that we expect". A potential share price catalyst could be the company's upcoming quarterly earnings.
It listed a few key downside risks to its target price for Polycab:
Slower and protracted recovery in demand.
Slower-than-expected ramp-up of FMEG business.
Lower-than-expected margin improvement in FMEG business.