Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Polycab India Ltd (PIL) to ‘CRISIL AAA/Stable from ‘CRISIL AA+/Positive’ and reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facilities of the company.

 

The upgrade factors in sustenance of PIL’s strong business risk profile which is expected to further improve, led by improving scale of operations, market leadership position and established brand in the cables and wires industry, diversified end user segments catered to and strong operating efficiency supported by integrated nature of operations. The ratings also factor in the company’s healthy financial risk profile, marked by strong capital structure and robust debt protection metrics. These strengths are partially offset by exposure to intense competition and exposure to volatility in raw material prices.

 

Operating income has increased at a healthy compound annual growth rate (CAGR) of 18% over the five fiscals through 2024 driven by consistent capacity additions to meet growing domestic demand, extensive distribution network and higher advertisement spends. Driven by strong revenue growth and brand recall, market share in the organised cables and wires industry has grown to 25-26% in fiscal 2024 (from 18-19% in fiscal 2019).

 

Revenue grew 28% to Rs 18,039 crore in fiscal 2024 (as compared to Rs 14,108 crore in fiscal 2023), while the operating margin remained healthy at 13.9% (as compared to 13.1% in fiscal 2023). Double digit revenue growth momentum is expected to continue over the medium term, driven by robust demand and timely ramp up of capacities.

 

Although the cables and wires segment contribute ~87% to the overall revenue of PIL, the end user  segment remains diversified as the company has a varied product portfolio catering to multiple industries such as railways, ports, power generation and distribution, manufacturing, building infrastructure, auto, mining etc . This helps the company tide over slowdown in any end user industry.  Revenue diversification is also supported by gradual scale up in the fast moving electrical goods (FMEG) segment, which has increased at a healthy five-year CAGR of 15% over fiscals 2019-2024. Additionally, PIL has transitioned from being a pure business-to-business player to a business-to-consumer (B2C) player (retail wires and FMEG), with the B2C business contributing 30-31% to overall revenue in fiscal 2024.

 

The financial risk profile continues to be healthy, marked by strong capital structure and robust debt protection metrics. Overall gearing was comfortable at 0.24 time as on March 31, 2024 (against 0.21 time a year ago) and interest coverage ratio at 22.21 times (35.4 times). Gearing and debt protection metrics are expected to remain comfortable over medium term as well, in the absence of any major, debt-funded capital expenditure (capex). Yearly capex of ~Rs 1,000 crore planned for the next three fiscals will be entirely funded by cash accrual.

 

In December 2023, IT raid was conducted on across various plants of PIL. Till date, PIL has not received any notice for tax demand from the IT department. CRISIL Ratings will continue to closely monitor the developments in this regard and any adverse regulatory action will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of PIL, its subsidiaries and joint venture, as these entities, collectively referred to as PIL, have strong business and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Market leadership position in wires and cables in India: PIL is a market leader in the Indian wires and cables industry, with 25-26% share of the organised market, supported by its strong dealer-distributor network of over 3,800 entities. The company has significant market share in west and south India, which contributed over 60% to its revenue in fiscal 2024.

 

PIL also has healthy revenue diversity as it caters to various end-user industries such as railways, manufacturing, ports, power generation and distribution, building infrastructure, auto, mining etc. Revenue diversification is also supported by gradual improvement in the FMEG segment, which commenced in fiscal 2014, witnessed robust growth over the past few years and now contributes around 7% of revenue. Going forward, revenue may continue to increase, driven by strong domestic demand, growing product mix across different price points and distribution network expansion.

 

PIL also has an EPC division which started as a forward integration initiative. It currently contributes to 3.5-4.5% of the overall revenues.

 

• Integrated operations: The integrated nature of operations results in high-quality output and operating efficiency. PIL has done significant backward integration, including facilities to manufacture aluminum rods and polyvinyl chloride. Further, the acquisition of Silvan Innovation Labs Pvt Ltd in fiscal 2023 helped develop new products to address evolving consumer needs and provide innovative solutions.

 

• Healthy financial risk profile: The financial risk profile should remain supported by the increasing cash accrual, strong liquidity and absence of any major, debt-funded capex. Networth is estimated at a sizeable Rs 8,223 crore as on March 31, 2024 (against Rs 6,648 crore a year ago) with gearing (including letter of credit acceptances) at 0.24 time and total outside liabilities to tangible networth ratio at 0.47 time. Interest cover and net cash accruals to adjusted debt (NCAAD) ratio continue to remain healthy at 22.2 times and 0.87 times respectively in fiscal 2024 as compared to 35.4 times and 0.93 times in previous year. The financial risk profile is expected to remain healthy over the medium term backed by increasing cash accruals, strong liquidity, and absence of any major debt funded capex plan.

 

Weaknesses:

• Exposure to high competition: The wires and electrical cables industry comprises numerous unorganised as well as organised players. While the company has gained market share over the past few years owing to new product launches and its go-to market strategy, intense competition may continue to constrain scalability, pricing power and profitability.

 

• Exposure to volatility in raw material prices: PIL’s main raw material includes copper and aluminium which has seen lot of volatility in the past. These raw materials form ~75-80% of overall RM cost and any sharp variations can impact the company’s operating performance. However, the company has strong risk mitigation strategies including hedging of commodities. Further, strong pricing power wherein prices are reset on a monthly basis and majority of RM price changes are passed on to the customer, mitigates the risk to an extent.

Liquidity: Superior

Liquidity is backed by unencumbered cash equivalent and liquid investments of Rs 2,234 crore and unutilised fund-based bank lines of Rs 450 crore as on March 31, 2024. Available liquidity and expected cash accrual of over Rs 2,000 crore per annum (as per CRISIL’s assumption) will comfortably meet yearly debt obligation of Rs 3-4 crores, incremental working capital requirement and capex of ~Rs 1,000 crore per annum planned for the next three years.

Outlook: Stable

PIL will continue to benefit from its market leadership position in the wires and cables segment, growing FMEG business, established distribution network and backward integrated operations.

Rating sensitivity factors

Downward factors

• Weaker-than-expected operating performance, leading to lower revenue and moderation in the business risk profile
• Operating margin declining to less than 10%, resulting in lower-than-expected cash accrual
• Any large, debt-funded acquisition or capex

 

ESG profile

The environment, social and governance (ESG) profile of PIL supports its already strong credit risk profile. The sector can have moderate environmental and social impact, driven by its plastic waste generation, intensive water usage and direct impact of products on the health and wellbeing of customers.

 

Key ESG highlights

• PIL has scaled up its renewable energy initiatives with the goal of reducing our carbon footprint. By augmenting their solar panel installations, investing further in wind energy, and exploring new hydropower opportunities, PIL has increased its renewable energy consumption to 1.26 lac GJ in fiscal 2024 from 1.24 GJ in the previous year.
• PIL has reduced water withdrawal volumes to 2.64 lac kilo litres in fiscal 2024 from 7.62 lac kilo litres in the previous year by investing in advanced water saving technologies at its plants, introducing sophisticated filtration and purification processes to ensure the reuse of water and improving irrigation efficiency.
• The company aims to improve gender diversity across functions; Zero cases of discrimination were reported in FY24.
• It is focussed on ensuring safety and security of employees. There were no fatalities in fiscal 2024 and the lost time injury frequency rate ratio stood at 0.08
• The governance structure is characterised by effectiveness in board functioning to enhance shareholder wealth presence of investor grievance redressal mechanism and extensive disclosures

 

ESG is gaining importance among investors and lenders. The commitment of PIL to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

About the Company

Incorporated in 1996, PIL operates in the electrical industry and is a market leader in the Indian wires and cables industry, as well as a fast-growing FMEG player. The company also operates in the engineering, procurement and construction business and executes limited projects. It has 28 manufacturing facilities located across Gujarat, Uttarakhand, Maharashtra and Daman.

 

Revenue from operations stood at Rs 4,698 crore and profit after tax (PAT) at Rs 401.6 crore for the three months ended June 30, 2024, against Rs 3,889 crore and Rs 403 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not Applicable

Name of entity	Extent of consolidation	Rationale of consolidation
Dowells Cable Accessories Pvt Ltd	Full	Subsidiary
Tirupati Reels Pvt Ltd	Full	Subsidiary
Steel Matrix Pvt Ltd	Full	Subsidiary
Polycab USA LLC	Full	Subsidiary
Polycab Australia Pty Ltd	Full	Subsidiary
Polycab Electricals & Electronics Pvt Ltd	Full	Subsidiary
Uniglobus Electricals & Electronics Pvt Ltd	Full	Subsidiary
Polycab Support Force Pvt Ltd	Full	Subsidiary
Techno Electromech Pvt Ltd	Proportionate consolidation	Operational and financial linkages