Polycab India IPO review (Apply)

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Review By Dilip Davda on April 2, 2019

• PIL enjoys a niche place among FMEG segment..
• The segment is expected to see over the two-fold business by 2023.
• PIL's financial performance has posted growth in top and bottom lines with higher margins. ..
• It is a safe bet for medium to long term investment considering reasonable pricing..

ABOUT COMPANY:
Polycab India Ltd. (PIL) is engaged in the business of manufacturing and selling wires and cables and fast moving electrical goods ('FMEG') under the 'POLYCAB' brand. According to CRISIL Research, PIL is the largest manufacturer in the wires and cables industry in India, in terms of revenue from the wires and cables segment and provide one of the most extensive ranges of wires and cables in India. For Fiscal 2018, 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 Rs. 53000 crores (approx) based on manufacturers realization (Source: CRISIL Research). Apart from wires and cables, it manufactures and sells FMEG such as electric fans, LED lighting and luminaires, switches and switchgear, solar products and conduits and accessories. According to CRISIL Research, the wires and cables industry in India, in value terms, has grown at a compound annual growth rate ('CAGR') of approximately 11% in the last five years. CRISIL Research expects the wires and cables industry in India to expand at a CAGR of approximately 15% in value terms to reach approximately Rs. 103000 crore by Fiscal 2023.PIL has also diversified into the engineering, procurement and construction ('EPC') business, which includes the design, engineering, supply, execution and commissioning of power distribution and rural electrification projects. The company is catering in B2B as well as in B2C segments.

PIL has 24 manufacturing facilities, including two joint ventures with Techno Electromech Pvt Ltd. ('Techno') and Trafigura Pte Ltd ('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. In 2016, it entered into a 50:50 joint venture with Trafigura, a commodity trading company, to set up a manufacturing facility in Waghodia, India to produce copper wire rods (the 'Ryker Plant'). PIL expects the Ryker Plant to commence commercial operations by the end of Fiscal 2019, with an estimated annual capacity of 225,000 MT of copper wire rods once it is fully operational.

Company's distribution network in India comprised over 2,800 authorized dealers and distributors and 30 warehouses and over 100000 retail outlets as at end for the nine months period ended December 31, 2018. It exports its products to over 40 countries.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its repayment of all or a portion of certain borrowings, working capital and general corpus fund needs, PIL is coming out with a maiden combo IPO of primary (approx Rs. 400 cr.) and secondary (17582000 equity shares) book building issue. The issue opens for subscription on 05.04.19 and will close on 09.04.19. The price band for the issue is fixed at Rs. 533 – Rs. 538 per share. Thus PIL mulls raising Rs. 1337.12 cr. to Rs. 1345.91 cr. (Based on lower and upper price bands). The company is likely to issue approx 7434944 fresh equity shares. PIL has reserved 175000 shares for eligible employees and from the balance net issue, a quota is reserved for QIBs 50%, for HNIs 15% and for Retail investors 35%. The company is offering a special discount of Rs. 53 per share to eligible employees only. Minimum application is to be made for 27 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. BRLMs to this issue are Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd., Citigroup Global Markets India Pvt. Ltd., Edelweiss Financial Services Ltd., IIFL Holdings Ltd. and Yes Securities India Ltd. while Karvy Fintech Pvt. Ltd. is the registrar to the issue.

Issue constitutes 17.72% (approx) of the post issue paid up equity capital of the company. Having issued initial equity at par, PIL raised further equity in the price range of Rs. 339.02 and Rs. 415.79 per share between July 2009 and December 2012 period. It has also issued bonus shares in the ratio of 1 for 1 (December 1999), 5 for 1 (March 2006), 1 for 1 (March 2007) and 1 for 1 (October 2014). The average cost of acquisition of shares by the promoters is Rs. 0.00, Rs. 0.01 and Rs. 0.11 per share and that of selling shareholder (IFC) Rs. 189.72 per share. Post issue PILs current paid up equity capital of Rs. 141.21 cr. will stand enhanced to Rs. 148.64 cr. (approx).

FINANCIAL PERFORMANCE:
On the financial performance front, for last three fiscals, PIL has (on a consolidated basis) posted turnover/net profits of Rs. 5747.35 cr. / Rs. 184.70 cr. (FY16), Rs. 6122.54 cr. / Rs. 232.96 cr. (FY17) and Rs. 6986.14 cr. / Rs. 370.92 cr. (FY18). For the first nine months ended on 31.12.18 of FY19, it has earned a net profit of Rs. 358.22 cr. on a turnover of Rs. 5561.05 cr. Thus the company has posted growth in top and bottom lines yielding fruits for capex made in the last five years for up gradation, expanding product portfolio and acquisitions.

PIL has posted CAGR of 14.3% in the last three fiscals. Its net profit margins have grown from 2.2% in FY14 to 5.4% in FY18 and further to 6.4% in 3Qs of FY19. Its current debt-equity ratio is around 0.23.

For the last three fiscals, PIL has (on a consolidated basis) posted an average EPS of Rs.20.79 and an average RoNW of 13.50%. The issue is priced at a P/BV of 2.80 on the basis of its NAV of Rs. 172.36 as on 31.12.18. If we annualize latest earnings and attribute it to fully diluted equity post issue, then asking price is at a P/E of around 16.75 against the industry average of 54. Thus issue appears reasonably priced.

COMPARISION WITH LISTED PEERS:
As per offer documents, it has shown Havells India, Bajaj Electricals, Crompton Greaves Consumer, KEI Ind and V-Guard as its listed peers that are currently trading at a P/Es of around 59,30, 39.6, 19.4 and 70.9 (As on 02.04.19). However, some of them are not strictly comparable.

MERCHANT BANKER'S TRACK RECORD:
On BRLM's front, the six merchant bankers associated with the offer have handled 64 issues in the past three financial years, out of which 21 issued closed below the issue price on listing date.

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