Future International Business Will Benefit From Diversification And High-Margin Focus

Key Takeaways

• Strong revenue growth anticipated due to increased market demand and operational readiness, with plans to hit revenue targets ahead of schedule.
  
• Enhanced geographical diversification and focus on higher-margin segments expected to improve international business performance and EBITDA margins.
  
• Heightened competition, increased costs, and market dynamics are compressing margins across segments, potentially reducing overall profitability and earnings.

Catalysts

Manufactures and sells wires and cables under the POLYCAB brand in India and internationally.

• The company plans to achieve ₹200 billion in revenue a year ahead of its original FY '26 timeline, indicating strong future revenue growth driven by increased market demand and operational readiness.
  
• The Indian economy's positive outlook, including projected GDP growth and expected interest rate cuts, along with government infrastructure spending, suggests a conducive environment for revenue growth in domestic markets.
  
• Investments in expanding the product range and increasing penetration in emerging markets have started bearing fruit, particularly in the wires segment, potentially driving future revenue growth.
  
• The international business is expected to show improvement, with efforts to increase exports to various countries, which should positively impact revenue and margins due to enhanced geographical diversification.
  
• Despite current margin pressures, second-half margins are expected to improve, supported by structural trends and higher-margin segments within Wires & Cables business anticipated to perform better, positively influencing EBITDA margins.

Polycab India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Polycab India's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 9.1% in 3 years time.
• Analysts expect earnings to reach ₹28.0 billion (and earnings per share of ₹187.39) by about December 2027, up from ₹17.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹32.3 billion in earnings, and the most bearish expecting ₹24.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 59.2x on those 2027 earnings, down from 62.0x today. This future PE is greater than the current PE for the IN Electrical industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.19%, as per the Simply Wall St company report.

Polycab India Future Earnings Per Share Growth

Risks

• The decline in EBITDA margins due to increased advertising and promotional spending, employee expenses, and heightened competition, particularly in the wires segment, could affect net margins.
  
• Higher competitive intensity and price volatility in the copper market are compressing margins in the wires segment, which may lead to reduced earnings.
  
• Lower contribution from the higher-margin international business, alongside increased freight costs, could negatively impact revenue from exports.
  
• A higher contribution from lower-margin businesses such as the EPC segment may lead to reduced overall profitability.
  
• Potential margin contractions in the FMEG segment due to elevated organizational expenses and subdued international orders might hinder future margin growth, impacting overall earnings.

Valuation

• The analysts have a consensus price target of ₹7457.07 for Polycab India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹9000.0, and the most bearish reporting a price target of just ₹4750.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹305.6 billion, earnings will come to ₹28.0 billion, and it would be trading on a PE ratio of 59.2x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹7401.25, the analyst's price target of ₹7457.07 is 0.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.