Mumbai-based wires and cables company Polycab is coming with its IPO today. The company has priced in public offer in the range of INR533-538 per share and employees will be eligible for a discount of NR53 per share. Investors can place bids for minimum 27 shares and in multiples thereafter. Through this Polycab IPO analysis, we try to find out if the offer is a worthwhile investment for investors.
Polycab IPO details
|Polycab IPO Subscription Dates||5 – 9 April 2019|
|Price Band||INR533-538 per share (Employee discount – INR53 per share)|
|Fresh issue||INR400 crore|
|Offer For Sale||17,582,000 shares (INR937.12 – 945.91 crore)|
|Polycab IPO size||INR1,337.12 – 1,345.91 crore|
|Minimum bid (lot size)||27 shares|
|Face Value||INR10 per share|
|Listing On||NSE, BSE|
Polycab IPO Analysis: Fresh + OFS
The upcoming IPO will be a mix of fresh shares as well as a sale by existing investors. The company plans to raise INR400 crore by issuing new shares. These funds are proposed to be used towards:
- Scheduled repayment of all or a portion of certain borrowings – INR80 crore
- Funding working capital requirements – INR240 crore
- General corporate purposes
- Issue expenses
In addition, existing shareholders plan to sell 17,582,000 shares through an offer for sale (OFS) amounting to as much as INR945.91 crore.
Selling shareholders include promoters Inder Jaisinghani, Ramesh Jaisinghani, Ajay Jaisinghani, and Girdhari Jaisinghani; as well as other shareholders Bharat Jaisinghani, Nikhil Jaisinghani, Anil Hariani, Ramakrishnan Ramamurthi, and International Finance Corporation (IFC).
The biggest chunk of shares will be offered by IFC which plans to sell as many as 7,060,292 shares out of the 21,176,446 shares it owns currently. IFC invested in the company in 2009 and its average cost of acquisition stands at INR189.72 per share.
Polycab IPO Analysis: Cables, Wires and FMEG
The company, promoted by Inder Jaisinghani, Ajay Jaisinghani, Ramesh Jaisinghani and Girdhari Jaisinghani, is among the largest manufacturers in the wires and cables industry in India. According to a research study by CRISIL, the company had a market share of approximately 18% of the organized wires and cables industry and approximately 12% of the total wires and cables industry in India, estimated at INR525 billion based on manufacturers realization in FY2018.
In 2014, the company diversified into the FMEG segment and its key FMEG are electric fans, LED lighting and luminaires, switches and switchgears, solar products and conduits and accessories.
Polycab has 24 manufacturing facilities, including two joint ventures with Techno Electromech and Trafigura, located across the states of Gujarat, Maharashtra and Uttarakhand and the union territory of Daman and Diu. Four of these 24 manufacturing facilities are for the production of FMEG, including a 50:50 joint venture with Techno, a Gujarat-based manufacturer of LED products.
Polycab IPO Analysis: Strong financial footing
Polycab has done a fantastic job on the front on expanding revenues in the last few years. In years of consistent growth, it is easy for management to accumulate debt on books in order to maintain high growth rates. However, Polycab has kept a tight control on debt levels and its debt to equity ratio (D/E ratio) has actually come down from 0.45 in FY2016 to 0.23 as on 31 December 2018.
It is not just the debt but other expenses also which have been controlled well by the company. As a result, EBITDA expanded from 10.01% to 13.37% in the same period. It is pretty much the same story with net earnings which have grown consistently in the last three years. In the latest nine months, its net margins have doubled to 6.4% from FY2016 levels.
Polycab India’s financial performance (in INR crore)
|Net margin (%)||3.2||3.8||5.3||6.4|
Polycab IPO Analysis: All is well but should you subscribe?
As seen so far, Polycab has executed its growth strategy beautifully so far and has several advantages to it. This includes being the largest wires and cables manufacturer in India, a strong manufacturing and distribution network including 24 plants, 2,873 authorized dealers and distributors and 30 warehouses.
The relatively recent move of diversifying into FMEG space is something which is panning out well so far with segment revenue growth outperforming the overall topline. This diversification also means better margins and valuations and has been successfully demonstrated by Havells India. Although it is too early to call it a success as FMEG accounts for just 7% of Polycab’s revenues and the business is highly competitive with Bajaj Electricals, Crompton Greaves Consumer Electricals, Finolex Cables, Havells India, and Orient Electric hogging the limelight, it is noteworthy that the move holds promise for premium valuations.
The biggest competitive edge Polycab has over its competitors is its backward integration capabilities. The company has made investments that enable it to produce key raw materials like copper wire rods, aluminium rods (for aluminium conductor), various grades of PVC, Rubber, XLPE compounds, GI wire and strip (for armouring). The benefits of this backward integration are obvious as it allows the company to maintain control of the supply chain, lower its costs of operations and sell products at competitive prices.
All said, Polycab operates in an industry which requires substantial working capital. A quick check on the company’s balance sheet revealed that its working capital requirements as of 31 December 2018 were nearly 21.7% of revenues. This is quite high and has the potential to offer negative surprises.
Valuation-wise, the company’s EPS for the nine months stood at INR25.31, offering annualized EPS of INR33.74. For P/E ratio, this works out to 15.94 on the higher side of the price band of INR533 – 538 per share. Going strictly by the performance in FY2018, the EPS of INR26.23 translates into PE ratio range of 20.33 – 20.52. While the extrapolated numbers for FY2019 may be too optimistic, the data points based on FY2018 performance are also attractive.
Among its listed peers, Bajaj Electricals, Crompton Greaves Consumer Electricals, Havells India, and V-Guard Industries Electric are trading at P/E ratio of 40 and above. However, all these names have substantial consumer-centric business and thus, comparison with cables and wires players like KEI Industries and Finolex Cables would be more appropriate. These players are available at P/E ratio of 23 and 21.
Overall, Polycab IPO analysis reveals that the company is on a strong footing with a strong brand, excellent and well-established operations, and a robust management team. At the same time, decent valuations offer comfort while also offering a potential upside from foray into B2C stream. It is noteworthy that the IPO shares are trading at a decent premium in the grey market, indicating a strong listing.
The continued presence of IFC as a shareholder may also be seen as a vote of confidence to the business. Feel free to check out our discussion page on Polycab India IPO to get a sense of sentiments on the ground.