Cables & Wires set for a good FY24, Consumer durables outlook may improve only in H2 FY24
The business momentum within cables & wires is visible for everyone to see. Expectations of double digit volume growth, price stability in copper price after a volatile FY23 and now excellent traction in the international market too. Players are embarking on significant capex to capture the EHV and High Tension opportunity that is set to benefit from power distribution modernization and renewable energy capex. Newer opportunities in categories like Ebeam cables, elastomeric cables and railway cables are shaping up well on the back of railway modernization & significant solar & wind energy private capex. The trend of captive power plants is picking up at a serious pace, cables are indirect beneficiaries of this trend. If in any doubt do read the Q4 investor call transcript of Sanghvi Movers, Triveni Turbine & TD Power Systems.
Today we have a wide enough coverage and a decent enough understanding of the industry value chain to be able to connect the dots. Sectors like power are multi year trends once they pick up, one cannot put up capacity quickly without planning out downstream activities well in advance. In the face of such business momentum and strong demand outlook, cables & wires makers are rerating candidates, otherwise one cannot explain why Polycab and KEI now trade at 40+ TTM PE and 35+ Fwd PE.
On the other hand the consumer durables & appliances segments are seeing muted demand on the back of inflation and high competition. All large players there have hiked A&P spends in FY23 to preserve market share and to position themselves for the cyclical uptick that may materialize in the latter half of FY24. Businesses like V-Guard and TTK Prestige have started offering comfort in their valuation, we should always give special attention to managements that are executing well on category expansion and have demonstrated the ability to manage margins well. We continue to track developments there keenly.
Polycab has seen an excellent Q4, prospects for their export business have opened up significantly. The US market appears to be very vibrant and presents a good opportunity to ride the infra modernization & replacement theme. Apar Industries is another beneficiary of this theme. When many businesses speak the same language, a trend is to be taken seriously. A revival in the consumer durables category will offer a good kicker to Polycab since their FMEG revenue is > 1,200 Cr and operates at breakeven at an EBIT level right now.
The possibilities are very promising here but the valuation is very pricey, barring stories like V-Guard & TTK Prestige which are starting to trade at a discount to their 5 years averages now. In our book, Polycab and KEI continue to be a HOLD, we aren’t too thrilled about allocating more capital there even if momentum is strong. We want to play the cycle well, trail the trend higher and take proactive exits when needed. Cables & wires segment is a wonderful proxy for all the Infra & housing activity happening in the country, but beyond a threshold price there is no point in allocating more capital.
We have a good enough pipeline of stocks where growth prospects are good and the valuations more reasonable. We will go where we can get the most bang for our buck, consensus should work in our favour after we have built a position. Building a position after there is consensus introduces needless valuation risk into the portfolio
Do read the commentary for each of the businesses, this is how conviction is built to be able to HOLD when prices optically look stretched.