21 Jul , 2022 By : Kanchan Joshi
The fall in the price of copper and aluminium has weighed on the shares of Polycab India Ltd. The stock is down 22% from its 52-week high of Rs2,820 apiece seen on 22 April. These metals are used in cables and wires. On the London Metal Exchange, the price of copper and aluminium has declined by nearly 29% and 27%, respectively, from the average prices in April.
“Generally, the increase or decrease in one-month average price of copper and aluminium is passed on to consumers without much delay in the cable and wire sector. If the recent free fall in the prices of these commodities continues, it is likely to have considerable impact on Polycab’s realisation in Q2," said Harshit Kapadia, analyst at Elara Securities (India). The wires and cables segment contributed 86.3% of Polycab’s consolidated total income in the June quarter (Q1FY23).
Also, dealers and distributors tend to reduce inventory in the hope of a further fall in prices. Moreover, the monsoon season would also lead to slower construction activity. In view of this, Polycab expects the second half of FY23 to be better than the first. Demand is expected to pick up pace from Q3FY23.
Demand was soft in June as commodities prices had fallen. Even so, a lower base helped as last year’s Q1 was impacted by the second covid wave. The upshot was that Polycab’s operating revenue saw a 48% year-on-year (y-o-y) growth to about Rs2,737 crore. Volumes in select categories were above pre-pandemic levels, the company said. About two-third of the revenue growth was volume-led and the rest was because of pricing actions, it said.
Ebitda margin improved by more than 410 basis points y-o-y to 11.4% helped by price hikes and better operating leverage. Polycab expects Ebitda margin to remain in the 11-13% range.
The Ebit margin in the wires and cables segment in recent quarters is around 10%-12%. However, there is room for improvement in the fast-moving electrical goods (FMEG) segment, which reported Ebit margin of 2% in Q1.
By FY26, the company aims to increase annualized Ebitda margin in FMEG to 12% through levers such as operating leverage, new product development, premiumization, and cost optimization. However, given the presence of strong competitors in this segment, achieving this target would be a tall ask.
Stability in commodity prices would be critical for the Polycab stock. Further, increased infrastructure spends by government and private entities bode well as the growth is expected be volume-led.
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