UBS Research has initiated coverage on Polycab India Ltd and KEI Industries, two prominent players in the cables and wires (C&W) segment, with a strong 'Buy' rating. The brokerage firm has identified these companies as key beneficiaries of the ongoing electrification drive in India, underpinned by robust growth prospects, favorable supply-demand dynamics, and increasing export potential.

1. Robust Growth Prospect

UBS Research anticipates that the C&W segment will experience growth at twice the GDP rate between FY24 and FY30. The segment, currently valued at $8 billion and accounting for 40% of the electrification market in FY24, is expected to grow to $20 billion by FY30. This growth will be driven by increased capacities, strong domestic demand supported by capital expenditures in transmission and distribution, and a positive real estate cycle.

UBS forecasts that the top five companies in the segment will see their market share increase significantly, and that the global supply chain will shift, boosting export revenue from $2 billion in FY24 to $5 billion by FY30. These estimates translate to a 17% compound annual growth rate (CAGR) for the sector.

The brokerage expects the companies under its coverage to achieve revenue and EBITDA CAGRs of 20% to 25% during FY24-28E, driven by robust demand, operating leverage, growing market share, and strong export penetration.

2. Cable & Wires Top in Electrification Attractiveness Framework

UBS has ranked the C&W segment the highest in its electrification attractiveness framework, which assesses industry competitiveness based on factors such as return generation, export potential, revenue growth, and consolidation. The brokerage views the C&W sector as a critical component of the electrification value chain, offering attractive investment opportunities.

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3. Favorable Supply-Demand Dynamics

UBS Research believes that favorable supply-demand dynamics will benefit industry leaders like Polycab and KEI. The report notes that while capacity constraints have limited top-line growth for some large incumbents, these companies are now accelerating investments. UBS's coverage companies are expected to see their FY24 capex increase by 50% year-on-year, aligning new C&W capabilities with underlying demand, which should drive profit growth.

4. Earnings Growth to Support Valuations

According to UBS, the C&W segment has undergone a re-rating due to rising top-line and margins, with valuations now in line with the broader market. UBS believes that the 16% and 24% earnings CAGR projected for Polycab and KEI, respectively, between FY24-27, suggests that the market has underappreciated the potential ramp-up of exports and possible mergers and acquisitions by incumbents.

UBS has set a target price of ₹6,150 for KEI Industries, indicating a 31% upside from current levels, and a target price of ₹12,135 for Polycab India, suggesting a 78% upside. The brokerage firm is confident that compounding earnings will support the relatively high valuations of these stocks.

Additional Coverage in the Consumer Durables Sector

In addition to Polycab and KEI, UBS has also initiated coverage with 'Buy' ratings on other companies in the Consumer Durables sector, including Havells India and Voltas Ltd. However, companies like Finolex Cables, Crompton Greaves Consumer Electricals, Bajaj Electricals, Symphony, and Whirlpool of India Ltd remain unrated under UBS’s coverage.

Conclusion

UBS Research's positive outlook on Polycab India and KEI Industries is rooted in the anticipated growth of the C&W segment, which is expected to benefit from increased electrification efforts and favorable market dynamics. With significant upside potential in their stock prices, these companies are well-positioned to capitalize on the ongoing electrification drive in India, making them attractive investments in the Consumer Durables sector. As the market evolves, investors should closely monitor the developments in this space, particularly in light of UBS’s bullish stance.

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