POLYCABNSEQ2 FY2022October 25, 2021

Polycab India Limited

8,945words

104turns

13analyst exchanges

2executives

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Management on call

Inder T. Jaisinghani

CHAIRMAN &

Gandharv Tongia

CHIEF FINANCIAL

Key numbers — 40 extracted

rs,

We have noted relatively better levels of new CAPEX announcements in the past three quarters, more so from the private side. As these projects come under execution phase, we do expect it to pr

48%

tation with slide four. For the quarter ended 30 September 2021, our consolidated revenue grew by 48% year on year. On quarter on quarter basis, our consolidated revenue grew by 66% while if we were

66%

revenue grew by 48% year on year. On quarter on quarter basis, our consolidated revenue grew by 66% while if we were to compare it with pre pandemic Q2, we have realized a 40% growth. For us, it th

40%

dated revenue grew by 66% while if we were to compare it with pre pandemic Q2, we have realized a 40% growth. For us, it the highest Q2 numbers we have ever recorded and even higher than March total

ute focus on driving top line supported by distribution expansion initiatives. EBITDA declined by 3% year on year on a relatively stronger base. Margins though lower on year on year basis has improv

237 bps

on year on a relatively stronger base. Margins though lower on year on year basis has improved by 237 bps compared to last quarter with favorable operating leverage. A&P spends were broadly stable while

Rs.1 billion

quarter with favorable operating leverage. A&P spends were broadly stable while our staff cost at Rs.1 billion or 3.4% of sales were lower due to higher top line performance. Other expenses were lower on acco

3.4%

orable operating leverage. A&P spends were broadly stable while our staff cost at Rs.1 billion or 3.4% of sales were lower due to higher top line performance. Other expenses were lower on account of c

Rs.88 million

lower on account of cost savings and better absorption of fixed costs. Overall financial cost at Rs.88 million were lower versus Q1 while other income at Rs.264 million was largely stable. A detailed breakup

Rs.264 million

f fixed costs. Overall financial cost at Rs.88 million were lower versus Q1 while other income at Rs.264 million was largely stable. A detailed breakup of our other income and financial cost has been provided o

Rs.2.6 billion

nancial cost has been provided on slide 13 of our earnings presentation. Our profit before tax at Rs.2.6 billion and profit after tax at Rs.2 billion decreased by 7% and 9% year on year respectively. On slide

Rs.2 billion

13 of our earnings presentation. Our profit before tax at Rs.2.6 billion and profit after tax at Rs.2 billion decreased by 7% and 9% year on year respectively. On slide five, in the first six months ended

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Guidance — 20 items

Gandharv Tongia

opening

“As these projects come under execution phase, we do expect it to provide a fillip to cables and wires demand.”

Gandharv Tongia

opening

“We believe it is likely to create a very conducive environment for infra-activity over the medium term.”

Gandharv Tongia

opening

“We are trying to cut a fine balance between managing profitability and customer affordability, but overall for this year we believe our main priority will be aggressive market share gains as against margin improvement.”

Gandharv Tongia

opening

“This will also be supported by our new growth initiatives in Project Leap.”

Gandharv Tongia

opening

“Improving investments in infra and construction projects along with our business development initiatives under project Leap gives us some optimism to believe that our business will improve over the near to midterm.”

Gandharv Tongia

opening

“We remain committed to double digit sales contribution target over the medium term for this business.”

Gandharv Tongia

opening

“We will continue to calibrate this going forward.”

Gandharv Tongia

opening

“On slide 16 and 17, we have introduced Project Leap in our Q4 results around mid May and are happy to share some more progress updates today.”

Gandharv Tongia

opening

“For the benefit of everyone, Project Leap is a multiyear program that includes a range of strategic teams and initiatives focused on growth, profitability and long term capability building for the organization across B2B and B2C businesses with a goal of achieving greater than Rs.200 billion or Rs.20,000 Crores sales by FY2026.”

Gandharv Tongia

opening

“We are about six months into the project and things are progressing well.”

Risks & concerns — 14 flagged

While it is difficult to provide an outlook on inflation, we are certainly prepared with what we can do and what is in our control.

— Gandharv Tongia

As of now considering the input cost pressure it seems that we would probably exit towards the lower end of this particular range as far this fiscal is concerned, but over the midterm to long term we believe that cable and wire margins will bounce back.

— Gandharv Tongia

The unorganized players are generally finding it difficult to survive more particularly because of availability of credit and higher input cost.

— Gandharv Tongia

Because of our long term association with our vendors, predominantly the international ones we do not necessarily see any major challenge in terms of availability and we remain probably number one customer for most of our vendors and the largest customer as well.

— Gandharv Tongia

Given the festival season is on play what kind of pricing pressure or competition we are looking specifically on the distribution B2C side of the business.

— Chintan Sheth

But are we seeing the demand pressure because of continuous price hikes in the distribution side.

— Chintan Sheth

And right lastly if I can take in the copper segment because it is very difficult to predict the quarterly numbers.

— Chintan Sheth

I think difficult to comment because utilization is significantly lesser than what otherwise we would expect considering the installed capacity but as I mentioned in my opening remarks we will continue to explore ways and means to improve the profitability.

— Gandharv Tongia

For example you take steel, aluminium, PVC and that is where it becomes a bit of difficult thing to increase prices on account of all increase in key raw materials.

— Gandharv Tongia

No because as you know when you procure copper at that stage you do not price the inventory, so there is no price risk which you carry when you have any inventory which is there are in your system.

— Gandharv Tongia

I mean the market dynamics are complicated and the commodity prices are also volatile so the situation is dynamic but as I understand today taking everything into account is now how many quarters it would take?

— Atul Tiwari

We have broad roadmap for 20000 Crores level as of now but what we are trying to do now is challenge that internally and ensure that all the teams at the corporate level as well as business levels are totally aligned.

— Gandharv Tongia

Great and is it fair to say that relatively higher inventory on the raw material as well as semi finished good is in a way cause of relatively higher volatility on margin, is that fair to say, if your raw material and semi finished good inventory comes down with your targeted programs is it fair to assume that you the probability of your margin would be less volatile.

— Shrinidhi Karlekar

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Q&A — 13 exchanges

Hi Sir good afternoon. Thanks for taking my question. My first question is with respect to broad volumes/value breakup of the wire and cable segment. So basically we are seeing some 45% growth. So how much would be led by price increase and how much would be led by volume growth. I know a lot of sub products are there within wires and cable. If you can give us ballpark numbers it would be great.

Gandharv Tongia

Thanks Ravi. Thanks a lot for asking that question, so if we go business by business. I think FMEG is a fair balance of volume and value whereas in the case of cable and wire business, the overall growth most of it is coming because of the value, because of the increase in underlying cost and a part of it is only because of volume, but within the business the overall underlying numbers could vary for example LDC and wires would be slightly different from HDC because HDC is slightly dependent more on institutional business which still remains slightly suboptimal but overall FMEG I think the fai

Thank you for the opportunity. Gandharv I have two questions. First on the competitive intensity what you alluded in the cable segment. Now what is your view. Is it short lived? Can this get extended to next year also. So any thoughts there because that will also define your margin improvement trajectory as well.

Gandharv Tongia

Broadly Naval it seems that this year because of the utilization level at the industry level and the pressure of raw material cost, copper, aluminium, PVC and steel, our company’s EBITDA margins would be towards the lower end of the historical EBITDA margins of 11-13% but I think from next year onwards things would start improving and we should be able to go to the conventional 11-13% EBITDA margin range. And the recent new project which have been announced more particularly from the private side would also help us in improving the execution and profitability both at the industry level as well

Thanks Gandharv for the opportunity and for the decent numbers given the circumstance. One question is on the current demand environment. Given the festival season is on play what kind of pricing pressure or competition we are looking specifically on the distribution B2C side of the business.

Gandharv Tongia

So overall the environment has improved, the customer sentiments are positive because of vaccination drive, unlocking and festival season. On the B2B side I think government focus on infra plus structural reforms are helping. In terms of B2C business we have been able to pass on almost all the cost increases. In the traditional cable and wire business we have not been able to do that, but it seems that as we proceed in this year we should be able to pass on most of the increases. You know this business model already. Generally for the distribution business the list price is revised once in a m

Sir I have one question with respect to this 600, 700 basis point erosion in gross margin that we see, I just wanted to understand what is the lag in terms of the price increases that we have taken and what are they in the wires and cable side and what is the extent of the raw material price inflation for you. If you could give us may be on an overall basis and usually in our past instructions our communications we have always mentioned the copper and the pricing is back to back so just wanted to reassess why this 600, 700 basis point of deviation and is that we need to take another 7% price h

Gandharv Tongia

Thanks a lot for asking this and highlighting. As I mentioned in my opening remarks the product basket level, the increase in raw material between Q2 versus Q1 is in mid single digit. The price hike which we had been able to take is in lower single digit and that is where you would see the contribution contraction between Q2 and Q1. Q2 of last year we were sitting in a better base and that is where it was slightly different set of numbers, but another thing which I would like to highlight is copper and forex is what is generally considered at the industry level as well at the company level for

So actually my question was on similar line. To your mind how many quarters it will take for the cable and wire business margins to reverse back to the normal. I mean the market dynamics are complicated and the commodity prices are also volatile so the situation is dynamic but as I understand today taking everything into account is now how many quarters it would take?

Gandharv Tongia

You know this industry Atul whenever there is an increasing trend in commodity prices that is where there is a slight impact on the EBITDA or contribution margin and whenever it is decreasing trend it positively contributes to contribution margin and EBITDA margin. Having said that I would like to reiterate that this year we would probably exit at the lower end of the traditional cable and wire EBITDA margin of 11-13% but over the next mid to long term we should be able to bounce back to historical margins and from there we should be able to improve with the help of Project Leap. Okay thanks.

So Sir first of all congratulations on good top line performance during the quarter. Secondly if you look at what I am trying to understand is what is happening on the cable side and obviously in the opening remark you sounded very optimistic on the mid to long term growth prospect, but when do you see the demand to normalize in volume terms and how do we see from next three to four quarters point of view.

Gandharv Tongia

Thanks Manoj. Thanks for highlighting and complementing us on our performance. As of now give and take few areas here and there we are already at pre pandemic levels for most of our businesses and we believe that because of positivity in the customer sentiments, unlocking, festive season, push by the government and increase in private capex the second half is going to be better than first half both in terms of top line performance as well as bottom line performance. Right. So in this case when you say you would be delivering somewhere around 11-13% lower end of the range, so by and large we sh

Sir my question in response to the price hikes versus market, how much there has been a gap what we have taken a price hike in cables and wire segment versus what you could have taken and in terms of competitive intensity if you can explain the market share what it is right now and this competition we are facing is what kind of players which has risen up. That’s my first question.

Gandharv Tongia

Great. Thanks Charanjit. On the market share we believe we would have gained market share but I think to assess it in a quantified manner I think we should wait till the year end because that is when we will have visibility of data of all large players. On the pricing as I explained to the participants the input cost level if we see at the product portfolio, I think the cost increased by mid single digit and we were able to take price hike in lower single digit and that is where there is contraction in contribution margin. This is because we wanted to balance top line growth, utilization, as w

Thanks for the opportunity. Just wanted to ask regarding this 200 billion revenue guided how much could be the contribution you are looking from FMEG, especially if you could mention that and secondly you have actually delivered industry leading growth in FMEG as well as in cables and wires over the last two years together if you see that as well not only one year growth but the margin performance has been weaker than peers. So are we looking on any strategic approach I mean focusing more on growth and gaining market share currently and then using the operating leverage in future to downstroke

Gandharv Tongia

As far as FMEG contribution to the top line target of 20000 Crores is concerned, I think growth in the B2C business priority. We have entered into FMEG business almost 5 to 7 years back and we have already delivered industry leading growth both at a top line level as well as bottom line level and we believe that we would be able to further unlock value there. As I mentioned to Charanjit, please give us time till the year end and we would like to then given you both granular information in terms of the breakup of 20000 Crores. On the profitability I think what we are trying to do in the current

Thank you for the opportunity and congratulations on good set of performance on top line and working capital. I just have one clarification question. In terms of margins are you guiding the full year FY2022 company should be able to meet lower end of EBITDA margin guidance of 11 to 13% which itself imply kind of a 12 to 13% margin in H2. Just a clarification on that.

Gandharv Tongia

The guidance is for the second half that we should be in the lower end of the margin it is quite possible the aggregated 12 month number is slightly lower than this, but these are interesting times we will try our level best and improve our margins but as of now we were to guide. - my guidance is that second half we would be more towards the lower end of the margin. Fair enough and the midterm guidance does not change at all right whatever you endeavor under your long term planning as well as short term that does not change with what commodities have changed right? Yes absolutely. Okay there i

Good afternoon Gandharv and team. Just couple of questions first under FMEG what feedback we are getting in collecting information from other companies that entry level competition under FMEG will increase and generally premium is done better, but demand is quite steady but entry level competition under fans and FMEG categories are quite high would you agree this and what is their analysis of competition there and going ahead does it really impact our own new products once it is there. That’s the first question.

Gandharv Tongia

So this is true for all the businesses, particularly immediately after the pandemic because most of the businesses are trying to balance utilization top line and bottom line. We have seen in few pockets the competitive intensity has gone up including the FMEG business, but you would have noticed that in the second quarter we had been able to improve on margins and we are maintaining our pricing points. Premiumization will probably help us in improving our performance but from a customer’s point of view we want provide a better product at a price which is competitive. Got it so essentially in t

Thanks for taking my question and congratulations on good set of numbers in this challenging time. The first question I wanted to ask you is are we having e-commerce sales and if we are having e- commerce sales are the margins very different?

Gandharv Tongia

We do not have traditional e-commerce presence as of now for example in the online e-commerce players, we do not have any significant presence. We have taken some baby steps in the last 10 to 12 weeks, but it will take a while to reach to a level which is acceptable from a brand and a company like us, but having said that in our traditional cable and wire business 70 to 80% of dealers and distributors place orders through our dedicated app and to that extent we have online channel available for them. On the e-commerce business the way it is generally construed and understood, we believe that w

Thanks for the opportunity. Sir in FMEG if you can just highlight on the premium portfolio because there has been quite a lot of new launches in the last three or four months so how has that trend been and the product acceptance and the learning from it because premium category I think we launched in last three or four months.

Gandharv Tongia

Yes absolutely premium is focused agenda within fan business as I mentioned to one of the participant that by end of this year we should be able to give you a target number of premium business contribution to FMEG business but if I have to give more color to you. Within Fan I think we are in 20s or just about the thirtys as far as premium contribution is concerned which can go up. The recent acquisition in the form of Silvan and launch of Hohm would help us in improving premiumization and the last participant was enquiring about e-commerce, e-com will also help us in improving premiumization s

Thank you for taking out time and attending this call. In case if you have any follow-up questions please feel free to reach out to us at investor.relations@polycab.com. We would be pleased to attend your question and provide you additional clarification and inputs. With that note wish you a very happy Diwali and please stay safe and healthy. Thank you.

Management

Speaking time

Gandharv Tongia

Moderator

Chintan Sheth

Shrinidhi Karlekar

Ravi Swaminathan

Naval

Pritesh Cheddha

Charanjit Singh

Abhishek Puri

Rahul Agarwal

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Opening remarks

Gandharv Tongia

Thank you operator. Hello everyone and thank you for joining us today. I am Gandharv Tongia, CFO at Polycab India Limited. On this call, we shall discuss the Q2 results which was approved in the board meeting held on Friday. We will be referring to the earnings presentation, financial results and financial statements, which are available on the stock exchanges as well as investor relations page of our website. It can also be downloaded through the link or QR code on slide 9 of earnings presentation. Joining me today from the management team, we have our Chairman and Managing Director, Mr. Inder Jaisinghani on the conference call. As always, I will request Inder Bhai to share his thoughts before moving onto to the presentation. Over to you Inder Bhai.

Inder Jaisinghani

Good afternoon everybody. We had a healthy Q2. Robust sales growth was underpinned by market share gain across categories. Given the strengthening microeconomic fundamentals, we see a massive opportunity to spread our wings across B2B as well as B2C categories by leveraging on our strong brand equity and increased consumer affinity for our products. Structural reforms focused on infrastructure development augurs well for most of our product categories. We are also in the process of building Polycab of the future. A company with robust governance practices, top talent, strong business model,a customer centric culture and a purpose to serve the communities. 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. Looking at the economic environment Q2 has been reasonably good. The sequential improvement we saw since unlocking last quarter has largely persisted. Overall demand in B2C category like wires and FMEG remains upbeat in line with improving consumer sentiment; however, increasing retail prices has been a slight hindrance, but these are also the times which breeds the innovation. Our cables business is seeing higher competitive intensity as the demand environment though improving, continues to remain albeit suboptimal. Having said that increasing governments focus on infra activities, strong real estate demand and good demand visibility across various end user industries will likely improve the sales momentum further in the coming quarters. We have noted relatively better levels of new CAPEX announcements in the past three quarters, more so from the private side. As these projects come under execution phase, we do expect it to provide a fillip to cables and wires de

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