Jefferies Prefers Polycab Over Havells Due To Three Factors

A better product and sales mix, no capacity constraints and cheaper valuations drove Jefferies India Pvt. to maintain a 'buy' rating for Polycab India Ltd. as against a 'hold' for Havells India Ltd.

However, Havells' distributor count is slightly higher than Polycab as the former enjoys a front-mover advantage in most business-to-consumer segments. Polycab has a better business-to-business mix, according to the brokerage. "While we acknowledge Havells as a strong franchise, retain hold on punchy valuations."

Jefferies has a price target of Rs 5,870 apiece for Polycab's stock, implying an upside potential of 19.5%. For Havells, the brokerage has a price target of Rs 1,400 per share, suggesting a downside of 9.09%.

The brokerage expects cables and wires to deliver double-digit annual growth for both the companies due to private capital expenditure and housing.

In terms of the product mix, while Polycab is the largest cable and wire maker, Havells is a holistic play with diversified products, Jefferies said. "Havells is an established premium player in electronic consumer durables. While Polycab forayed into this segment in 2016 but grown higher albeit at a low base," it said.

In terms of capacity, Polycab has an advantage over Havells, which faces capacity constraints. "Polycab has sufficient capacities and is operational at 70–75% utilisation," Jefferies said.

It said Havells is set to expand its cable facility by 25% at Tumkur, Karnataka. It is expected to be commissioned at the start of next financial year and utilisation can be ramped up over the next few quarters. Polycab is expected to spend Rs 6–7 billion on capex in the next fiscal.

Polycab enjoys a lower ad spend at 2% of sales, given its higher exposure in the cables and wire segment, whereas ad spend stands at 3–4% of sales for Havells, it said.

On the downside, the brokerage said capex and housing slowdown as a key risk for both the stocks.