Can Polycab become the next multibagger stock? | Polycab fundamental Analysis

As an investor in the stock market, everyone is looking for multi-bagger stocks. 

Now, if you ask anyone about good stocks, you would hear names like TCS, Infosys, HDFC Bank, HUL, etc. These are great companies. There is no doubt about it. 

But the question is - They have already given multi-bagger returns in the past. So can they continue to give such returns in the future? 

That’s where company size plays an important role. For example, TCS has a market cap of Rs 10 lakh crore. Now, can it become 10 times in the next 5-10 years? No! It is next to impossible.

While, as an investor, you can always invest in such great companies for good returns but can’t expect multibagger returns as they are already huge companies.

That’s where I am in hunt for companies that have the potential to become the next TCS or next HUL.

In this hunt, I am doing a lot of research to identify potential future multi baggers. And one company that I have investigated is - Polycab.

Now If I ask you - How many of you know this company Polycab? I guess many of you have never heard about this company before. So let’s explore this company and see if Polycab has the potential to become the next multibagger.

Company and its product portfolio

• Polycab is India’s largest manufacturer of cables and wires with a market share of 18% in the organized segment.
• It is also a fast-growing player in the fast-moving electrical goods (FMEG) industry.
• While incorporated in 1996, the foundation of Polycab was laid in 1964 with the setting up of a humble electrical store under the name Sind Electric Stores.
• Polycab has 25 manufacturing facilities in India and a strong network of 3,500+ distributors all over India.
• Polycab's products are sold in more than 1.25 lakh retail outlets all over India.
• As of today, Polycab has a market cap of Rs 15,000 Cr. So it is a mid-cap company.

Business Segment:

1. Wires and cables: Polycab has a diverse customer base across a wide range of industries, including health-care, oil and gas, renewable energy, IT digitalization, infrastructure, metal, defense, mass transit system, electric vehicles, and real estate.
2. Fast-moving electrical goods: Leveraging their brand recall, distribution strength, pioneering R&D capabilities, and marketing initiatives, Polycab has been strengthening its FMEG business. In fact, Polycab’s FMEG revenue has been steadily growing year-on-year registering a CAGR of about 47% during the past five years. This would be one of the key segments to drive growth for Polycab in the future.

Overall, looking at the company and its diverse product portfolio, I would rate it 10/10.

Competitive Strength and Weakness

• R&D Competence: Polycab products are top class. This is the result of their superior research and development capabilities. Further, keeping pace with the emerging industry trends and consumer preferences, Polycab intends to invest more in the development of energy-efficient and other specialized products.
• Strong Brand Presence: Led by its powerful legacy, extensive distribution reach, wide customer base, unique product mix, and reputation for always delivering the best quality, Polycab is a brand to reckon with in the electricals industry.
• Wide Network: Polycab has a robust network of 3,500+ dealers and distributors and 1,25,000+ retailers supplying the products across India. In recent years, they have widened their distribution network to achieve an even stronger retail reach.
• Experienced management: Polycab is in the business of wires and cables for around 50 years now!

If we talk about the competitors cables and wires, Polycab has competition from KEI Industries, V-guard and Finolex cable.In FMEG segment, Havells India is currently leading with a 14 percent market share. Polycab has around 8% market share.

Overall, looking at the competitive strength and weakness, I would rate it 9/10.

Future growth prospects

Indian government has a lot of focus on infrastructure building and the digital revolution. 

So think this way - When you construct bridges, dams, buildings, and houses, what do you need? When you build smart cities, what do you need? One of the most important requirements is the cables and wires to transfer electricity. Polycab is the leader in wires and cables with 18% market share. 

Then you also need a fan, switches, lights, switchgear, geyser, cooler, etc. Polycab has been expanding its presence in FMEG space and currently holds a market cap of 8% which is expected to increase in the future driving more growth for Polycab.

India’s structural drivers like rapid urbanisation, rising incomes, evolving aspirations, digital inclusion and increasing consumer awareness about safer and energy-efficient products will drive India’s consumption growth story in the electrical segment.You also need to look at how the market is evolving. 

Today, consumers focus a lot on quality and hence they prefer branded products. This change is rapidly shifting the demand from unorganized players to organized players. And Polycab would benefit a lot from this.

Another disruption in Indian economy is in the digital space. India is slowly transforming into a digital economy and this transformation has just started. Now you need to build the infrastructure for that and we generally think about the telecom sector that would gain from it. But one of the critical requirements in building the digital infrastructure is wires and cables. 

You need to lay optical cable fibers for data transfer which require cables and wires. That’s where I think there is a huge huge growth opportunity for company like Polycab. Overall, looking at the future growth prospects, I would rate Polycab 10/10.

Financials

1) Growth Ratio: 

In the last 5 years, Polycab revenues have grown at a CAGR of 13% and its profits have grown at a CAGR of 36% which is phenomenal! Hence, on the growth ratio, I would rate Polycab 10/10.

2) Profitability Ratio: 

Over the past 7 years, operating profit margin, ROE and ROCE are continuously increasing. The major reason for improvement in operating profit margin and improving ROE and ROCE for Polycab is its foray into the FMEG segment. Since it is a B2C segment where the consumers buy directly, they pay upfront. This has resulted in better cash flows and better working capital for Polycab which has improved its profitability. Overall, on the profitability ratio, I would rate Polycab 10/10.

3) Leverage Ratio:

Considering the latest debt to equity as 0.04 which is negligible, I would rate it 10/10. 

4) Management Efficiency Ratio:

Overall, looking at the improving debtors day and inventory turnover and increasing reserves, I would rate it 9/10.

Shareholding Pattern:

High shareholding by promoters shows their confidence in the firm.

Valuations:Stock is currently trading at a PE of 20 which is way below the competitors valuations. For example, Havells India has a PE of 67. If you look at the PEG ratio which is calculated as PE divided by earnings per share growth, it is 0.57. Any company with PEG lower than 1 is considered undervalued. So Polycab at current levels is highly undervalued stock. Overall, at valuations, I would rate it 10/10.

Hence, looking at the company and its product portfolio, its competitive strengths, future growth prospects and strong financials, I think Polycab is one share that has all the qualities of a multibagger stock and worth considering as a part of your portfolio.

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Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.