POLYCABNSEQ1 FY2023July 20, 2022

Polycab India Limited

9,026words

93turns

16analyst exchanges

2executives

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Management on call

Inder Jaisinghani

CHAIRMAN AND MANAGING DIRECTOR

Gandharv Tongia

CHIEF FINANCIAL OFFICER - POLYCAB INDIA LIMITED

Key numbers — 40 extracted

48%

rnoon, everyone. We have started the fiscal year 2023 on solid footing, with top line growth of ~ 48% fuelled by strong performance across B2B and B2C categories, which underlines our strategy to be

levels not seen by the recent generations. For advanced countries, against an inflation target of 2%, and emerging market economies, against an average target of about 3-5%, two-thirds are witnessin

st an inflation target of 2%, and emerging market economies, against an average target of about 3-5%, two-thirds are witnessing inflation above 7%. The sharply tightening financial conditions due to

ket economies, against an average target of about 3-5%, two-thirds are witnessing inflation above 7%. The sharply tightening financial conditions due to the ongoing monetary policy normalization on

rs,

he Indian economy is making resilient progress in Q1FY23 in spite of the drag from global spillovers, elevated inflation and some slackening of external demand as geopolitical developments take their

Rs 4.5 lakh crore

ellow, greens are making their appearance. For example, GST collections for Q1 FY23 stood at over Rs 4.5 lakh crore, up 37% year-on-year, while other indicators such as services PMI, IIP, Core sector all showed

37%

their appearance. For example, GST collections for Q1 FY23 stood at over Rs 4.5 lakh crore, up 37% year-on-year, while other indicators such as services PMI, IIP, Core sector all showed meaningful

420 bps

y 48% YoY. EBITDA more than doubled in the first quarter, while EBITDA margins improved by almost 420 bps year-on-year to 11.3% led by better operating leverage and calibrated price hikes. During the qua

11.3%

han doubled in the first quarter, while EBITDA margins improved by almost 420 bps year-on-year to 11.3% led by better operating leverage and calibrated price hikes. During the quarter, we launched seve

Rs 84

rs amongst others. Moving on, other expenses were broadly inline. Overall finance cost stood at Rs 84 Mn and other income at Rs 443 Mn. A detailed break-up of our other income and finance costs have b

Rs 443

n, other expenses were broadly inline. Overall finance cost stood at Rs 84 Mn and other income at Rs 443 Mn. A detailed break-up of our other income and finance costs have been provided on slide 12 of ou

Rs 2.23

een provided on slide 12 of our earning presentation. PAT almost tripled on year-on-year basis to Rs 2.23 Bn. On segmental result, the current quarter is yet another example of how the diversity of our

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Guidance — 20 items

Gandharv Tongia

opening

“For advanced countries, against an inflation target of 2%, and emerging market economies, against an average target of about 3-5%, two-thirds are witnessing inflation above 7%.”

Gandharv Tongia

opening

“Our focus on achieving double-digit contribution target over the medium term for this business remains intact.”

Gandharv Tongia

opening

“We expect this to normalize in one or two quarters.”

Gandharv Tongia

opening

“Now, let us talk about our key project, “Project Leap”.”

Gandharv Tongia

opening

“Lastly emphasize on Governance, where we have bottom-up and granular target setting approach deployed with linkages to scorecards across levels of business & functional teams.”

Atul Tiwari

“So we have seen very sharp commodity price crash over past 45 days or so, so have you passed all of that in your end product pricing and how it should impact your margins over next two to three quarters so that is one question, first question and the second one is now that there is a widespread expectation that prices of the Cables and Wire product will be reduced are you seeing reduced demand from channel and how long that is likely to continue?”

Gandharv Tongia

“So to answer your question, we expect to maintain a margin of 11% to 13%.”

Gandharv Tongia

“Expectation broadly is that we should have some stability in commodity prices in a month or so and after that I would not expect a significant correction in the inventory levels of our dealers and distributors.”

Gandharv Tongia

“I think your second question was around the topline target of Rs 20,000 crore by fiscal 2026 so when we were working on this topline target as part of initial thought in the Project Leap around a year back we considered last five years movement in copper and aluminium LME as well as in USD-INR exchange rate and of course we factored in some management estimate.”

Naval Seth

“One last question on the commodity prices you stated that H2 will be better than H1, but do you think that last year volumes were impacted because of significant increase in commodity prices, and have you started to see some green shoots where demand coming back or some demand, which might have got postponed last year will come back this year?”

Risks & concerns — 11 flagged

Global economy is going through an extremely uncertain period amidst the simultaneous interplay of various headwinds – a lingering war and enduring COVID; the sharp volatility in energy and other commodity prices; strains in global supply chains; and worsening food security.

— Gandharv Tongia

Several indicators suggest that the Indian economy is making resilient progress in Q1FY23 in spite of the drag from global spillovers, elevated inflation and some slackening of external demand as geopolitical developments take their toll on world trade.

— Gandharv Tongia

It is expected that the consumer demand in the urban market remains resilient, while a pickup in monsoon will support the rural markets which have been showing consumption stress.

— Gandharv Tongia

However, switches saw a decline due to supply challenges.

— Gandharv Tongia

As a matter of fact June was slightly softer and it appears that there would be some impact of the softer commodity prices even in the second quarter, but broadly from third quarter onwards we should see some uptick in demand and second half of the year should be significantly better than the first half of the year.

— Gandharv Tongia

The expectation is that the commodity prices will get stabilized in a month or so and after that we should not have any significant challenge as far as demand is concerned.

— Gandharv Tongia

We can produce as well as we can consume and that is where I do not see any challenge in terms of demand over mid to long term.

— Gandharv Tongia

We realized that 24 work streams which we have identified as part of Project Leap, If we want to successfully implement those 24 work streams we need probably more experience and more leaders at the top management level and you know this business and company already, we do not have any capital risk, we are sitting on cash in our balance sheet we are only leader, the only risk we have if we were to critically challenge is execution risk.

— Gandharv Tongia

If you can just highlight the revenue deferment because of decline in the commodity prices for cable & wire business and impact on the fan business because of GTM and whether that GTM is through, or it will further have impact on the remaining quarters?

— Gopal Nawandhar

If you can just highlight the gap between the increase in the commodity prices for FMEG portfolio and the kind of price increases we have taken and are you seeing any kind of price correction post this decline in the commodities in the last one-and-a-half months?

— Gopal Nawandhar

When you are talking about the slowdown it slowed down because of the base effect, when the business is small the CAGR would be slightly higher, when the business is larger or sizeable the CAGR will go down so to that extent I would disagree, but at the same time if your question is on the aspiration whether it can be better we are an aggressive company as far as growth is concerned and we believe that we can always do better than what we have achieved.

— Gandharv Tongia

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Q&A — 16 exchanges

Hi Sir. Thanks a lot for the opportunity and congrats on good set of numbers. Just a couple of questions on Cables & Wire business. So we have seen very sharp commodity price crash over past 45 days or so, so have you passed all of that in your end product pricing and how it should impact your margins over next two to three quarters so that is one question, first question and the second one is now that there is a widespread expectation that prices of the Cables and Wire product will be reduced are you seeing reduced demand from channel and how long that is likely to continue?

Gandharv Tongia

Thanks Atul. Thanks a lot for your kind words. I think your first question was around margins and whether we have passed on all the benefits to the end consumer or customer. So you know this business Atul, historically we have maintained EBITDA margins of 11% to 13% in Cable & Wire and we believe in the quarters and years to come we should be able to maintain the same range in the current quarter also it was 11%. Almost 87% of our business comes from dealers & distributors and where we revise our prices at least on monthly basis and when we revise these prices we consider two factors predomina

Thank you for the opportunity. I have two-three questions Gandharv. First as you stated volumes have seen growth over pre-pandemic levels, also can you give out any number on that, that is first question. Second on Project Leap because when we gave our Project Leap guidance of Rs 20,000 crore revenue by 2026, copper prices were kind of 20-22% higher than the current levels, So if copper prices or the other commodities are going to stay where they are right now so will there be any change in timeline or number on this Rs 20,000 Cr, and third question is on the unorganized players where last yea

Gandharv Tongia

So I will go in the same order. I think your first question was around the volume growth and you are rightly observed that we have registered a fair amount of volume plus value growth. If I were to give you a broad color on the current quarter growth of 48% it is safe to assume that most of it almost two-third is coming from volume and balance is because of the pricing action, which we have taken. I think your second question was around the topline target of Rs 20,000 crore by fiscal 2026 so when we were working on this topline target as part of initial thought in the Project Leap around a yea

Hi Good afternoon. Thank you for the opportunity. My question was if you could help us understand the FMEG part. First in terms of the revenue mix if you could break it into key products and you did point out to a drop in switches if you could give some sense as to what exactly is the issue out there and how do you see it going forward?

Gandharv Tongia

Sure. So we have broadly five or six sub-product categories within FMEG. One is fan, second is light & luminaires, switches, switchgears, conduit pipe, bit of solar and bit of agro pumps. Fan contributes almost 30-35% to our topline of FMEG, and light & luminaires as well a number closer to the same range, and other businesses are slightly smaller. Fan got impacted in this quarter, as you remember in the previous quarter we had mentioned that we are doing the realignment exercise in fan business because we believe to achieve a significantly larger topline within fan business we need to revisit

Good noon Sir. Thank you for the opportunity. I think all the questions have already been answered. I would like to go on the demand front so currently how do you see the current demand panning out over the next one to two years considering that now we are witnessing interest rate rising and are we really seeing real estate gaining traction or is there certain pockets kind of driving the volume growth for us currently?

Gandharv Tongia

Your voice was cracking in between I think you are talking about the demand outlook is that correct? Yes. As I briefly mentioned in my opening remarks the June month got impacted because of significant softening of commodity prices. The expectation is that the commodity prices will get stabilized in a month or so and after that we should not have any significant challenge as far as demand is concerned. Ours is a business which is a distribution play almost 87% of our topline comes from dealers and distributors and whenever there is a significant softening of prices generally dealers and distri

Good afternoon team. Sir I just have one question with respect to your cable & wire division. When you are mentioning that you will be maintaining your EBITDA margin in the range of 11% to 13%, but I just want to understand during the deflationary scenario is that understanding correct that during this period your absolute gross profit I am just focusing on the contribution margins perspective that absolute gross profit in a deflationary scenario would be lower in that case?

Gandharv Tongia

Let me share with you my experience of this industry in the last 15 years or so. What I have observed in this industry is whenever there is a reduction in commodity prices generally the contribution margin and EBITDA margin would improve for cable & wire manufacturers and it is other way around whenever there is increase in commodity prices so I would expect something similar to happen if there is significant reduction in copper, aluminium prices. If that does not happen I would probably then expect a significant competitive intensity in the industry and significant market share gain, but gene

Thanks for the opportunity. Sir, the new brand Etira can you share more light basically where it is launched and which are the products that we have entered right now, what is the pricing difference versus Polycab brand and where it is exactly positioning I agree it is at low end of the market, but compared to unorganized products or the premium products like Polycab where it is basically positioned and is there any three to five year target that the company is working on?

Gandharv Tongia

Etira was launched as part of our rural as well as low-cost product offering. If we have initiated our work on penetration of rural market, we have a vertical called emerging India which is being headed by Deepak who joined us around a year back and he has significant experience on the rural market. Etira was launched in the fourth quarter of the fiscal 2022 and if I am not wrong, we have registered 100% growth on sequential basis of course numbers are small, the numbers are not significant, but the fact is the growth of 100% show that is very promising. As of now it has been launched only in

Thank you for the opportunity. Most of my questions have been answered. Just one question Sir, you mentioned that strengthening of the leadership team was one of the focus areas if you can talk little bit about how has that moved and what has been the key addition of late and especially on the FMEG side it could be really useful?

Gandharv Tongia

When we were thinking about Project Leap and this was almost 15 months back and we were in active discussions with our partner Boston Consulting Group. We realized that 24 work streams which we have identified as part of Project Leap, If we want to successfully implement those 24 work streams we need probably more experience and more leaders at the top management level and you know this business and company already, we do not have any capital risk, we are sitting on cash in our balance sheet we are only leader, the only risk we have if we were to critically challenge is execution risk. What do

Thanks for the opportunity. If you can just highlight the revenue deferment because of decline in the commodity prices for cable & wire business and impact on the fan business because of GTM and whether that GTM is through, or it will further have impact on the remaining quarters?

Gandharv Tongia

In our business Gopal generally speaking we would not necessarily witness a demand loss or loss of opportunity as mentioned we have deferment from one month to another month, one quarter to another quarter and this is a generalized statement. My expectation is that the second half of the year should be similarly better than the first half of the year and that is where I would not necessarily would like to quantify the impact on the first quarter, but I would like to give you this comfort that in the history of the company this was the best quarterly performance as far as the first quarter of t

Good afternoon and thank you so much for taking my questions. Just a couple, first one was on the gross margins which have improved quite a bit this quarter to about 25% just to check whether there is any one-off item in there that might have boosted these and should we expect these to come back down in coming quarters that was one, second if you could just give us some sense of your market share trends in both the segments over the past year or so if you have any data points with you and last one I just wanted to clarify when you mentioned this 87% of revenue coming from the distribution driv

Gandharv Tongia

I think your first question was on the gross margin and EBITDA margin. There is no one- off in the first quarter as I was mentioning to another participant, we have maintained EBITDA margin of 11% to 13% in cable and wire business and in the periods to come we should be able to maintain the same. As far as market share is concerned in cable and wire business of the organized market, we have almost 24% of market share. In FMEG, we are comparatively small it ranges between 1% to 1.5%. In terms of packing order, we would be anywhere between six player, ninth or tenth player so we are competitivel

Sorry I missed the initial comments. Just wanted to confirm was there any inventory loss in Q1?

Gandharv Tongia

Ankit, you know this business, you have been tracking our company since long, we have a very robust hedging framework in place and when you procure inventory it comes with embedded derivative and when we decide the selling price of our finished goods that is when we have the ability to decide the procurement price and that is where it becomes a pass through and that is a reason, generally speaking I would not expect any inventory loss to incur to the P&L of our company and to directly answer a question there is no inventory loss. Thank you so much.

Thanks a lot Sir. If we look at our growth in FMEG segment has significantly slowed down to our vis-à-vis the market compared to our growth in earlier years, what do you think that is hampering it and what are we doing to kind of address that situation?

Gandharv Tongia

I would partially agree with you. When you are talking about the slowdown it slowed down because of the base effect, when the business is small the CAGR would be slightly higher, when the business is larger or sizeable the CAGR will go down so to that extent I would disagree, but at the same time if your question is on the aspiration whether it can be better we are an aggressive company as far as growth is concerned and we believe that we can always do better than what we have achieved. Only one element which I would like to add here is slight realignment which we have done in the last couple

Thanks for taking my question. I just wanted to understand are we seeing any improvement in rural market demand uptick?

Gandharv Tongia

It is a mixed bag. There are two pockets where we have noticed there is slight uptick in demand, but in few pockets slight sluggishness, but our reading from the ground suggests that this onset of southwest monsoon should help in reviving and improving the rural market demand.

Thank you for the opportunity. Sir as we expect better H2 this year, but we had a healthy base in the previous year supported by the higher prices, in this deflationary environment how is we able to defend the strong base of last year in H2?

Gandharv Tongia

Deepak you know this business, you are investor in our company since long. As far as B2B business is concerned we are taking steps to deliver industry-leading growth and as far as B2C business is concerned as part of Project Leap we are targeting to get to a breakout growth and irrespective of softening of commodity prices we believe that we would be able to beat the industry growth in cable and wire business over mid to long term and in FMEG we should have a significant growth in competitive industry growth.

Thanks for the opportunity. My first question would be on FMEG segment margin where you have reiterated that your ambition of 12% margin by FY2026 would it be possible to guide us what is going to drive this sharp margin improvement and price increases are going to drive substantial part of this margin, so that is my first question?

Gandharv Tongia

Sure. Do you want to give me your second and then I can take both at once? The second one is that you alluded to some change in the payment methodology during Q1 can you please elaborate that? These are my two questions. First question was on FMEG profitability. One is with larger size we will get operating leverage and that is where the EBIT and EBITDA margins should improve. Second is new product development and premiumization of our offerings as I mentioned a while back premium contribution to FMEG topline was around 4% in fiscal 2021 almost 8% in FY2022 and in the quarter gone by it was al

Good afternoon and thanks for the opportunity. Just one question I think is left with me now. On FMEG Gandharv we are looking at 60%-70% coming from lighting, and fans, the sector has a lot of large competitors incumbents going forward FMEG has to play a very large role in achieving the Project Leap targets the botheration is essentially coming from how does this, what does Polycab do different in terms of product offerings and getting to that growth number because growing this category now at Rs 1200 crore base at more than 20% is going to be tough, market share gains in this category is goin

Gandharv Tongia

It is a great question Rahul and believe me we have invested a lot of time in the Boardroom, in the Leap meeting and strategy meeting discussing deliberately we have a complete blueprint in place and the topic which you have touched upon these are the areas we are making considerable investment of time and making lot of effort whether the GTM and dealer distribution expansion adding more geographies into our network whether working on brand or architecture and so on and so forth, but let me give you a broader perspective to FMEG. When we started this business 50 years back we got into cable an

Thank you so much for joining us this afternoon. In case if you have any followup question please write to us at investor.relations@polycab.com and we would be pleased to attend your question. Thank you and have a great day.

Management

Speaking time

Gandharv Tongia

Moderator

Achal Lohade

Uttan Kumar

Naval Seth

Nikunj Gala

Aniruddha Joshi

Atul Tiwari

Gopal Nawandhar

Ankit Babel

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Opening remarks

Gandharv Tongia

Thank you operator and very good noon everyone. I hope you all are doing well. It is a pleasure to have you on the call. As operator mentioned my name is Gandharv Tongia and I am the CFO at Polycab India Limited. Thanks for joining us today to discuss our Q1 FY2023 earnings. During the call, we will be referring to the presentation, financial results and financial statements which are available on the stock exchanges as well as investor relations webpage of our website. It can also be downloaded through QR Code on slide number 8 of earnings presentation. From our management team, we have with us our Chairman and Managing Director, Mr. Inder T. Jaisinghani. Let me now hand it over to him for his opening comments.

Inder T. Jaisinghani

Good afternoon, everyone. We have started the fiscal year 2023 on solid footing, with top line growth of ~ 48% fuelled by strong performance across B2B and B2C categories, which underlines our strategy to be agile, focus on robust execution and consistently deliver the best quality of products to our customers. Profitability was supported by better operating leverage and various strategic initiatives implemented over the past few quarters. We will strive to continue the path of profitable and sustainable growth and contribute to the success of all our stakeholders. I now request Gandharv to take you through our earnings presentation.

Gandharv Tongia

Thank you Inder bhai. Revenue growth of 48% marks the beginning of FY23 on a promising note as most of our businesses are now performing above pre-pandemic levels. The numbers might look upbeat due to low base, but we are seeing sustainable improvement in our underlying businesses. More importantly, we are progressing well on our strategic agenda which will drive transformation over mid-to-long-term. The current quarter breaks the rhythm of back-to- back impacted Q1 results, turning it to be the best Q1 in the history of the company in terms of revenue and margins. Before I take you through the presentation, let me give you a flavour of macro environment. Overall macro environment has been a bit of mixed bag during the quarter. Global economy is going through an extremely uncertain period amidst the simultaneous interplay of various headwinds – a lingering war and enduring COVID; the sharp volatility in energy and other commodity prices; strains in global supply chains; and worsening f

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