In this briefing:
- Dabur IN
- January Chip Revenues Down 15.6% Year-On-Year
- Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown
1. Dabur IN
This insight is jointly prepared by Nitin Mangal and Pranav Bhavsar.
Either Dabur India Ltd (DABUR IN) should change the crystal ball or those responsible for gazing at it. Going by its trajectory of strategies in the recent past, the narrative that emerges is that of confusion. Confusion has been a constant about whom Dabur perceived its competitors, its perception of the market while the disruptors reigned and what is and what should be its core strengths.
In this insight, we find Dabur heading to hibernation in summers. We believe this confused state of mind at Dabur will lead to lower than expected growth rates and an impact on margins. Our arguments are based on in-depth analysis of over 3 years of conference calls, past 5 year financial statements, competitors balance sheets and primary research covering different parts of the country. Our base case FY 21 EPS is 21% lower than consensus estimates and a potential aggressive case EPS is 26% lower than consensus. We argue for a 35x forward multiple giving us a target price of INR 322 for the base case and an aggressive case target price of INR 305 indicating a potential 26% & 30% downside from the latest close price of INR 437.
How the Insight is Structured
The Insight begins with a background on Dabur’s Catch 22 Situation followed by a Brief Overviewof Dabur. We highlight the story so far and where we think is the disconnect. We discuss key takeaways from our field findings (primary research) and lay out our assumptions on how we think management will respond. We present where and how we differ from consensus and what does it mean for the stock price. We conclude the Insight by highlighting where we could be wrong along with key financials and an appendix about our primary research.
2. January Chip Revenues Down 15.6% Year-On-Year
The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues. Monthly revenues are down 15.6% from January of 2018. While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.
3. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown
- Polycab India (POLY IN) is the largest wires and cables manufacturer in India almost 2x the size of its next largest competitor. It is also present in electrical consumer durables and EPC projects.
- Company’s 14% revenue Cagr over FY14-18 was aided by government’s increased capex in rural and railway electrification.
- Despite large B2B exposure, company managed to defend gross margins over FY15-18 by passing on input cost variations to its customers. Operating margins have also been steady on the back of improving margins in the key wires and cables segment.
- High B2B nature of business results in 90+days of working capital cycle. Business is capex heavy (annual run rate Rs2.4bn over FY15-18). Company has the lowest asset turnover among its listed peers. It also generates the lowest amount of free cashflows among its peers.
- Investing most of the operating cash in the business would have been great if company was generating healthy ROE. But company’s ROE is in the sub 15% range and it would fall further after the planned Rs5bn primary issue.
- The asset-heavy and low ROE model makes Polycab more dependent on earnings growth to drive stock performance. This, in turn, makes it more vulnerable to any slowdown in government capex in electrification compared to peers.
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