POLYCAB — earnings call
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Prepared remarks
(FINANCE) · Management
Polycab India Limited October 24, 2020
Moderator · Conference Operator
Ladies and gentlemen good day and welcome to the Polycab India Limited Q2 FY2021
Thank you.
We will now begin with the question and answer session.
The first question from is the line of Atul Tiwari from Citigroup.
Please go ahead.
Polycab India Limited October 24, 2020
Atul Tiwari
Thank you Sir.
First of all, congrats on continuing with strong performance in otherwise tough environment, it is quite heartening.
I had two, three questions, if I am allowed.
First is on the very strong margins that the company has been posting.
So, the question is how much of this is sustainable?
This quarter obviously your raw material costs are down as a percentage of sales sharply.
So, how much sustainability as far as margins are concerned to be factored in going ahead?
Then I will ask a couple of more questions.
Gandharv Tongia
Thanks, Atul.
Thanks a lot for your kind words, appreciating the performance.
Atul, we have had this discussion several times in the last few quarters.
The best way to analyse our performance is on annualize basis.
Having said that, we have taken several steps in the last couple of quarters.
If I talk about FMEG business to begin with, we have increased our focus on premiumization whereby we are able to improve our contribution and same is true for several other businesses within FMEG.
To give an example, say Fans, Premium Fans and all that.
In the Cable and Wire business, the B2C business which is a retail wire is more profitable than the regular B2B Cable Business and in the current quarter, B2C Wire Business has recorded a double digit healthy growth whereas the B2B Cable and Wire Business has registered a degrowth and which is also helping us in improving our overall margin.
But I will probably go back to the previous quarter when we discussed about the performance, I think for the purpose of your modelling, you can continue considering a range of 11% to 13% of EBITDA margins which is sustainable and if we follow that for your modelling purposes probably you will not have any negative surprises.
Having said that I think the cost initiatives which we have taken in the recent past including what we are doing in Project Udaan is slightly getting reflected in our profitability and I am hopeful that in the coming quarters Project Udaan and other cost saving initiatives would get reflected in our P&L both at contribution level as well as in the bottom line.
Atul Tiwari
In this FMEG margin of 8%, which is obviously quite good on your small base still, is it repeated sustainably because it went sharply?
Gandharv Tongia
Yes.
So, as I mentioned in my opening remarks, in the third quarter, we are expecting a charge because of IPL, which will probably, will give us benefit in the subsequent quarters as well.
But from the accounting point of view, we will have to book that cost in the next quarter.
But by and large, if you remember, until last quarter or until March of 2020, we were generally talking about 100 to 150 bps EBIT margin increase every year.
On the basis of whatever initiatives, we have taken in last almost 100 days, I now believe that we would be easily achieve a number which is better than 100, 150 bps. I think we should wait until end of this year to firm up this guidance.
But at this stage, I feel that to a great extent, whatever we have recorded in this quarter, would remain sustainable, barring couple of Polycab India Limited October 24, 2020 percentage points because of IPL spend and change in mix of sales because one of the large business is fans, which is slightly seasonal in nature.
Atul Tiwari
That is helpful.
Sir, the second one is on the -- on your comment about growth in October.
So, you did mention, I think, in passing, that in the month of October, across your business segments, you are seeing year-on-year growth.
So, I mean, any colour on what kind of growth you are talking about?
It is more like 5% or 10%, 15% or 20%?
I mean, any rough indication, low single digits, high single digits, low double digits?
Gandharv Tongia
Yes.
Atul, a couple of things.
One, probably 24 days in the quarter are not necessarily reflective of the performance.
We will also have a Diwali break coming in, in this particular quarter, in the month of November, which could have a bearing.
But as of now, if I just slice and dice the number on the base of first 23, 24 days revenue, the FMEG business is in healthy double-digit growth, followed by B2C wire and after that, it is a B2B cables.
Institutional business is still a challenge.
There is a significant amount of progress, from a Q1 to Q2 perspective.
If you remember Q1, our institutional business degrew almost by 70% to 80%, whereas in Q2, it has degrown at max by around 30% to 40%.
So, this business is still seeing a bit of a challenge.
We are a distribution company.
But overall, the B2C business is reflecting good growth in double digit, followed by B2B business and institutional business I think, is in red.
Atul Tiwari
Sir, my last one is on the Dangote order.
How much of it is left to be executed?
Gandharv Tongia
I think we have to do around about Rs.150 Crores rounded off between October and by December.
In last 25 days, we would have supplied almost Rs.40 Crores in the month of October.
So, we need to do around Rs.100 crores or thereabout.
But the good thing is, Atul, Dangote has given us a follow-up order of almost $10 million.
And this is in addition to what we were talking about in the last quarter, that we are focusing now on distribution-led export growth.
So whatever growth we have registered in this current quarter, if I exclude Dangote, both from the current quarter as well as in the base quarter, export has increased almost by 5x.
And if you remember, I was talking about in the last quarter that we would like to have at least 10% of revenue coming from exports, which we have achieved in this quarter itself.
So, we would like to make it sustainable and the follow-up order we have received from Dangote is required to be supplied in next couple of quarters.
Atul Tiwari
So, this Rs.10 billion of follow-up orders will also be supplied fully by March2021?
Gandharv Tongia
Yes, yes, USD $10 million.
Polycab India Limited October 24, 2020
Atul Tiwari
USD $10 million.
Gandharv Tongia
It is a follow up order.
Atul Tiwari
Thank you Sir.
Moderator · Conference Operator
Thank you.
The next question is from the line of Aditya Bagul from Axis Capital.
Please go ahead.
Aditya Bagul
First of all, Gandharv bhai and the entire team at Polycab, heartiest congratulations, really good set of numbers amid really challenging times.
So my questions, I have three questions.
I think all of them are on the FMEG segment.
The first question that I wanted to understand from you is whenever we have reached a sizable base of Rs.800 Crores to 1,000 Crores annually in terms of FMEG.
So with this base and the growth in margins that you are confident about, can you help us understand that split the margin performance into how much comes essentially because of premiumization?
How much would come through cost control initiatives?
Some colour on how the EBIT margins would improve and what is the colour on that?
That is question number one.
Question number two is again on FMEG.
If I understand correctly, I think 18% to 20% of distributors are common between FMEG and cables and wires.
So, I wanted to understand whether that number is likely to improve meaningfully?
Or how do we think about that sort of a metric and the third question is far more long term.
One of our peers has sort of multiple sub-brands within its own umbrella.
That makes it a very, very, competitive player, especially within the FMEG segment.
With Levana in, do we have some thoughts on sort of expanding our product baskets into multiple brands as well?
So those are the 3 questions.
Gandharv Tongia
Thank you for your kind words.
Let me go in the same order.
FMEG, you are aware that we started this journey almost 5 years back and the focus was to establish a business and we launched almost all the products in a period of 12 to 18 months.
Today, probably, we are the fastest-growing FMEG brand in the country, with a positive EBIT and acceptable level of working capital.
I had mentioned it in the last quarter call that within FMEG, now we are trying to review our performances into two broad categories.
One, where the business is slightly larger when compared to others.
For example, Fans, Light and Switchgear, where the focus is on both, improving the topline as well as the profitability.
The other smaller businesses, though profitability remains a priority, the most important thing there is to increase our topline.
For example, pumps, which is a small business, but has registered over 100% growth in this particular quarter.
So the focus is to ensure that in existing businesses, we continue to improve our profitability and which is getting reflected in our second quarter performance.
Polycab India Limited October 24, 2020 I mentioned about a few new products, which we are going to launch in around a month or so, which would be next-generation products, IoT based and those products would be placed around premium category and that would help us in improving our profitability as well as establish Polycab as an aspirational brand.
Within the existing businesses, for example, fans, though we have entry level products or one which can be fitted into typical economic category, like for e.g. Zoomer, we are making a specific focussed effort to improve penetration of premium fans and that is also true for the other product categories.
So, both in the existing businesses, we want to increase the premium contribution wherever possible and improve the profitability of the core FMEG business also by taking pricing actions.
The second part is introduction of new products, new- generation products, IoT and all that.
So, all these put together would help us in improving the FMEG margin.
As a response to the previous question, I mentioned that generally, we used to give guidance of around 100 to 150 bps improvement in EBIT margin every year.
On the basis of whatever work we have done in the last 90 to 100 days, I have reasons to believe that we would be easily be able to beat that guidance.
But I think it is appropriate for us to wait until year-end before we revise that guidance.
But I am now more hopeful than what I was last quarter in terms of improving margins of FMEG.
The last thing before I come to the next question is on the working capital.
In the current quarter, we have taken several steps to optimise the working capital levels of FMEG business.
To give you an example, the inventory levels, we have been able to reduce significantly.
The channel financing percentage of receivables has improved, and it is now in high teens, which used to be in low teens and this activity will continue on a sustainable basis in the coming quarters as well.
This will also be reflected in the performance of FMEG P&L in the quarters to come.
You mentioned about the dealers and distributors.
You are right that there are common dealers and distributors.
But I think I am more excited about the recent initiatives, which we have taken, wherein we want to work on identified 3 states and ensure that we are available in all the key markets within those three identified states and provide all the Polycab products, whether it is FMEG or wires.
I think between now and the year-end, we would have the results of this pilot, which we are working on.
Depending on the learning from this pilot, we will probably replicate it across the country.
That will probably take us to each and every corner of the country; however, having said that, it is a long-term project, I do not expect that we would be able to cover the entire country in a few quarters.
But directionally, we believe that is the only way to ensure that we are available across the country.
The third thing is a very important one, this is about brand.
This is a question which internally we are grappling with.
I think we have reached to a stage where we can finalize Polycab India Limited October 24, 2020 our position, what we need to do as far as brand is concerned, but I will probably defer it to the next quarter or the year-end and come back to you in terms of final thought process on that and I am sure between now and the year-end, we would be able to update you on that.
Aditya Bagul
I think that answers all my question.
Best of luck for the quarters to come.
Moderator · Conference Operator
Thank you.
The next question is from the line of Chintan Sheth from Sameeksha Capital.
Please go ahead.
Chintan Sheth
Gandharv, congrats for a very good set of numbers, to the entire team as well.
Gandharv, on other expenses, if you can pull out any large items, which is resetting a strong savings this quarter because if I look at the numbers, sequentially, other expenses that significantly?
Gandharv Tongia
Chintan, thank you for your appreciation and kind words.
The other expenses have slightly changed, if I could call out 1 or 2 items.
One is the exchange difference, which was sitting in the base quarter as a loss, which is not there in this quarter.
The second one is, because of Ryker acquisition till last quarter, Ryker cost used to sit in subcontracting expenses.
But since now it is a wholly owned subsidiary, it is getting reflected in natural line item, for example, power and fuel.
And that is also giving us some sort of benefit.
Overall, if you see our power and fuel has slightly optimized.
But other than that, I do not expect there are any major items, which can be highlighted to you at this stage.
If you wish, you may go through the entire set of financial statements, which has a complete list of other expenses as posted on our website and happy to give you inputs if you want to understand any particular line item in the other expenses.
Chintan Sheth
Sure.
Sure.
And on the export, you mentioned $10 million of Dangote orders.
So, we must have received advance this quarter or it will come in third quarter?
Gandharv Tongia
No. This is a recent development.
So, there is no advance which is getting reflected as of September 30, 2020.
Chintan Sheth
But we will receive some advance from that, right?
I see, like in the earlier contracts, we had some 40% of the project early on before the price started.
Gandharv Tongia
Yes.
So it is a combination of both.
But Dangote is an existing customer now, and that is where we have additional level of comfort.
But yes, you are right, it would have combination of both advance as well as security as LC.
Polycab India Limited October 24, 2020
Chintan Sheth
Right.
Any number you want to point out on the IPL cost, which will likely to accrue in the coming quarter?
The run rate, how the percentage of sales will look likely, if not the absolute number?
Gandharv Tongia
I think we have incurred almost one-fifth of IPL spends in the September quarter and four- fifth which is 80% would be accrued in the next quarter.
Aditya Bagul
Thank you.
That is all from my end.
Moderator · Conference Operator
Thank you.
The next question is from the line of Garima Mishra from Kotak Securities.
Please go ahead.
Garima Mishra
Thanks for the opportunity.
Congrats on a good set of numbers.
Two questions from me.
First, have you thought about expanding your presence more across e-commerce?
And what is the portion of your sales currently go through that channel?
Gandharv Tongia
Thanks, Garima, for your kind words.
You already know that 80% of our business comes from distribution.
75% of the 80% comes from dealer portal, wherein our dealers key in their orders and then those supplies are made without any significant human intervention.
So on the distribution side, we have already implemented it, and this 75% will only improve in the subsequent quarters.
On the B2C side, we do not have such a facility as of today.
But probably in a few months from now, we would have a typical e- commerce facility to provide our B2C products.
Garima Mishra
Second, my question is also on demand.
Do you think the second quarter, you had any element of pent up demand because a lot of products, when not available in the first quarter and customers may have picked up some purchases?
A related question to that, how sustainable do you think these current demand trends are because if you see from a very top down perspective, we are talking of negative GDP and incomes getting loss.
So how does that tie with the very strong demand trends that you are seeing across your product categories?
Gandharv Tongia
Yes.
I think that is an interesting one, Garima, thanks for asking.
I do not think there is any significant element of pent-up demand in Q2. There was some to the extent of Q1 in the month of June or slightly partially in July, but not considerable amount in the second quarter.
When we talk about GDP degrowth, I think the maximum component of degrowth is coming from this first quarter, which is behind us.
And I do not expect that by and large, companies are going to witness the same amount of degrowth, which was there in the first quarter, in the coming quarters.
It could vary from industry-to-industry and company-to-company, but I would be really surprised if any company goes back and Polycab India Limited October 24, 2020 declares performance, which is more or less in line with what we experienced in the first quarter.
And that is why we believe that the second half should be better than the first half.
But as I called out in my opening remarks, there are some challenges, which are outside the influence of the company due to COVID environment.
That is where I think we should remain slightly cautious.
But overall, I think the second half is going to be better than first half.
Garima Mishra
Thank you.
Moderator · Conference Operator
Thank you.
The next question is from the line of Manoj Joshi, individual investor.
As there is no response from the current participant, I have muted the line.
We will take the next question from the line of Devansh G from SIMPL.
Please go ahead.
Devansh G
Congratulations on a very good set of numbers.
Sir, my question was predominantly relating to the benefits, which have come from the RYKER acquisition.
Sir, correct me if my numbers are right.
I think we are seeing 3.5% savings in contract expense per quarter.
And I think that translates to Rs.50 Crores, Rs.60 Crores.
I think we did Rs.200 Crores acquisition for RYKER.
So if you could just reclarify on those numbers again?
Gandharv Tongia
Sure.
Thanks a lot for asking.
Let me just give you a background about Ryker before I specifically deal with your particular question on saving.
Ryker is a result of our thought process of having backward integration.
For us, copper is the most important raw material, and Ryker converts a form of copper into another form, technically it is called copper cathode, which are generally procured by us from countries like Japan and Ryker then converts that form of copper, which is cathodes, and into rods and then these rods are used for the manufacturing of cables and wires.
What we are comparing is not necessarily the correct way of comparing because till last year, this particular entity was a joint venture.
As per the accounting standard, any expenses paid to a joint venture used to be disclosed as subcontracting expenses depending on nature of the item whereas now, it is a wholly owned subsidiary from May of this year, and because of consolidation principles, anything paid by Polycab to Ryker is required to be knocked off.
But overall, there are savings on account of two reasons.
One is we get economies of scale advantage and second is the overall quality of our purchase is under our supervision.
Right from procurement to consumption, and that is where we get operational advantage.
Ryker is going to help us in improving overall profitability, but I do not think the magnitude would be to the extent of what you had mentioned a while back.
Devansh G
Okay and another question was relating to exports.
So probably, we used to do around Rs.50 Crores to Rs.100 Crores run rate.
I think it is around Rs.190 Crores, Rs.200 Crores Polycab India Limited October 24, 2020 this quarter.
So if you can just throw some more light on the soft points on the way we are trying to build up this export business?
And since we are a challenger in this export distribution-led business that we are trying to create, so if you can just throw some more light on that?
Gandharv Tongia
Yes.
So in the current quarter, we did almost Rs.225 Crores of exports as against the base quarter where we did almost Rs.153 Crores.
But this export journey actually started almost 2.5 or 3 years back when the Chairman and Managing Director and other team members decided to ensure that we have all the required approvals in place.
In India, you would have seen or heard some like ISI approval.
Similarly, in developed countries, approvals are required.
To give you an example, UL approval in the case of U.S. and that we started almost 2.5, 3 years back.
Now we have almost all the approvals in place.
There are a few, which we are still working on.
But that is the effort which we took almost 2, 2.5 years back, and is getting reflected in the export topline now.
The second thing, which we have done in almost last around 500 days or so in addition is to the Dangote sale orders which we secured, we have started penetrating the markets in the identified geographies.
For example, Australia and U.S., now we have wholly owned subsidiaries in the U.S., as well as the Australia and the objective is two-fold.
One is to have a local distribution presence in these developed economies, and this is what precisely we did even in India.
Until 2010, 2012, we were a typical B2B business.
Slowly and gradually, we started moving away from B2B to our distribution-led business.
And today, we are only a distribution play.
The same thing is what we want to replicate in the export arena as well.
The second thing when we are talking about export, in addition to distribution, is there are identified sectors where we want to ensure to be present, to give you an example, say, oil and gas.
So we want to ensure that in the identified sector, the few select major players within those sectors should be our clients.
And that is where we are making efforts.
It is a long way to go but on the basis of whatever work we have done in last 2, 2.5 years, and the numbers, which we have been able to report our export revenue in the recent quarters, I think we have done a decent work there and the direction and pace is in line with what we initially contemplated.
Devansh G
Sir, just a bookkeeping question.
So this is regarding the travel and conveyance, which obviously now will be at a very low level.
When do you expect this number to normalize?
Because almost there is a Rs.5 Crores, Rs.6 Crores delta this quarter, which is one and also in rental cost, I mean, I think it is around normally around Rs.5 Crores, Rs.6 Crores.
Over there, we have booked around Rs.1 Crores, Rs.1.5 Crores.
So we have Rs.3 Crores or Rs.4 Crores delta over there as well.
So if you can just reclarify on these 2 numbers.
Polycab India Limited October 24, 2020
Gandharv Tongia
So I think couple of things.
COVID has changed how entire world is functioning, and we are no exception.
The good thing is since last around couple of years, we started making investment in technology.
The entire sales force is now on sales force automation tool and now they are not required to come to their physical offices.
From their respective homes, they can directly go to the market, and we get reports with the help of technology, which we have implemented in like things like their beat paths, the number of retailers attended by them and so on and so forth.
So we are leveraging technology, and that is where we feel that the travelling cost not necessarily would be a significant cost.
But the export business may require some work of travel, and that is where it could almost like a comp off or an adjustment.
But directionally, the use of technology will increase as a matter of fact, has already increased in the last couple of quarters.
That is on this.
On the rental one, I think one thing which I thought you would have already known, there is a new accounting standard by the name of Ind AS 116, and rent expenses in general are routed to depreciation line item unless there is a particular line item or particular lease cannot be covered under 116 and that is what is getting reflected in rent.
But overall, rent expense is not significant in our case.
And it is quite possible that rent expense on the offices would reduce in the coming quarters.
I hope I have answered your question?
Devansh G
Yes.
Yes, Sir, that was quite elaborate.
Thanks a lot.
Moderator · Conference Operator
Thank you.
The next question is from the line of Mayank Bhandari from BNK Securities.
Please go ahead.
Mayank Bhandari
Sir, I have a question particular to your sub-contracting expense only.
In FY2022, we had about Rs.199 Crores of subcontracting expense in the other expense, which was about Rs.66 Crores in FY2018. Sir, overall, what does this comprises of?
Is it related to only your EPC business?
Or it also as component from the cycle plant?
Can you just break it down in terms of?
Gandharv Tongia
So this is the cost, which is paid to our contract employees and whatever work we get it done by third-party vendor as job work.
Mayank Bhandari
Sir, gone down significantly in this quarter.
Any guidance for FY2021?
Gandharv Tongia
This has gone down because till last year, such cost used to be reflected in the P&L because it was a payment to Ryker, which used to be a JV entity.
Now as a wholly owned subsidiary, it is required to be eliminated and is not required to be reflected.
As a contrary to that, whatever expenses are being incurred by Ryker, say, for example, store consumption, power and fuel and all that, those have been added on line-by-line addition basis in accordance with the accounting principles as per Indas.
Polycab India Limited October 24, 2020
Mayank Bhandari
Sir, secondly, we have seen that we have done pretty good in terms of receivables in last 2, 3 years, the receivable days have improved.
And we are continuously focusing on channel financing in FMEG also.
Sir, next 2, 3 years, would you give any guidance for receivable like after the channel financing has increased in FMEG as well a level of, let us say, wire and cables, what you have?
What would it look like overall in receivable space?
Any guidance you have?
Gandharv Tongia
Yes.
Mayank, we, as a company, generally, do not give guidance, but I can certainly add a few thoughts here.
In the case of Cable and Wire, the channel financing percentage, our penetration is almost 60%, 65%, whereas in the case of FMEG business, it is in high teens.
And that is where we have significant amount of improvement scope.
In the coming quarters, our expectation as well effort would be to increase the channel financing percentage within FMEG business.
I do not think it is quite possible to get to 100% channel financing.
It is impossible.
But even if we are able to achieve a channel financing percentage, what is there in cable and wire, in the FMEG business, this will significantly reduce the receivables because the contribution of B2C business is slowly and gradually increasing.
If I talk about FMEG business, it is almost 10% of our topline.
And if I talk about the B2C business, it is almost 40% of our topline.
So in the years and quarters to come, I would expect this number to further improve.
Moderator · Conference Operator
Thank you.
The next question is from the line of Manish Agarwal from Edelweiss.
Please go ahead.
Manish Agarwal
Congratulations on a great set of numbers.
Sir, firstly, on the FMEG part.
So we are seeing great advertisements, very catchy advertisement actually doing this IPL season on our arena of lighting parts and cable and wires as well.
So on FMEG business, big picture question, like are you seeing some traction?
I know it is very short-term to answer but is it leading to some traction?
Is there some way we do measure the consumer demand or the consumer pull that comes along?
Second question, Sir, on the cable and wire segment, sir.
So Sir, what is your view on the extra high-voltage segment?
I mean, how big are we there?
Or is it a big niche market?
Some colour on that part, Sir.
Gandharv Tongia
Thanks, Manish.
Thanks for noticing our advertisement, and thank you for your kind words, appreciating our advertisement.
I think if I am not wrong, what you are trying to understand is whether the advertisement will result into any short-term benefits in the topline.
And if that is correct, answer is yes.
The time frame is unknown.
But we, as a company, we believe that we have to make and continue to make investment in strengthening our brand.
We have achieved a fair amount of success in last 5 years.
If I am not wrong, 6, 7 years where you used to spend only Rs.10 Crores on advertisement or Polycab India Limited October 24, 2020 probably Rs.5 Crores, but last year we would have invested almost Rs.100 Crores.
So that is where we are cautious that for a B2C-oriented business, we have no option but to invest in A&P, and we will continue to do that.
And this will only increase in terms of absolute amount in the coming years because the B2C revenue will increase.
That is where it is going to help us in over augmenting the top line of the B2C business.
This also has a rub- off effect on the B2B business.
So overall, it is going to be a positive for the topline growth of the organization.
The second thing, I think you were trying to understand our overall plan of action on extra high voltage.
EHV typically is done in EPC arrangement and for EPC, the company should have PQs prequalification in place.
As of now, we do not have any such prequalification or PQs for EHV business.
However, since last few years, we have been working on EPC business, and we have obtained a few prequalification’s, not in EHV.
But over the period, we have strengthened our prequalification’s in EPC but if we would be able to venture into EHV only when we have EHV qualification, which presently we do not enjoy.
Moderator · Conference Operator
We will take the next question from the line of Ankur from HDFC Life Insurance.
Please go ahead.
Ankur
Good evening and congratulations on the good set of numbers.
I have 2 questions.
One, if you could talk about the overall industry.
Obviously, the degrowth you see on the cable side and domestic business, and the kind of growth the industrial that has seen on the wire.
I am assuming just like you saw this good growth on the wire business, the industry would also have.
So that is one, if you could comment on that.
Gandharv Tongia
Yes.
Thanks.
Let us split the industry into 2 parts, one is organized, and second is unorganized.
In the first quarter of whatever we were able to gather, we believe that there was a significant amount of degrowth in unorganized sector but in the second quarter, there are some signs of revival in unorganized because a few of them have been able to manage debt capital issues, working capital issues and availability of labour issues.
So there, I think there is a bit of a rebound within the unorganized sector.
But overall, the unorganized sector has decreased over the period, including between last year and this year.
On the organized sector, I do not think we should take a view on a six months basis because overall, the private capex spend has not increased in the first six months.
First quarter was not necessarily was very impressive.
Directionally, the private capex has improved in the second quarter on a sequential basis.
So I think we should wait until end of this year before we take our view on the organized wire and cable market.
Polycab India Limited October 24, 2020
Ankur
That is fair.
Sir, I was asking about the overall industry degrowth in cable, if you have a number in Q2?
And similarly, any numbers you can share on the overall industry growth on the wire side would be...?
Gandharv Tongia
You have to wait for the results of the other large players before we take our view on the overall industry level.
But it seems that large players would have increased their overall top line in the B2C wire category.
Ankur
Thank you.
That is all.
Moderator · Conference Operator
Thank you.
The next question is from the line of Bhoomika Nair from IDFC Securities.
Please go ahead.
Bhoomika Nair
Congratulations on a good set of numbers.
Sir just wanted to understand a little more on the B2B cable segment.
As you mentioned, October has seen a growth across all categories.
Now would it be fair to say that from March onwards, given that there has been almost a stalled work in terms of institutional projects that will kind of start picking up?
For the next 6, 9 months, they should logically be a strong growth for B2B cables?
Or is that something, which will come actually more back ended and will still remain sluggish for the next one of the quarter?
Second is on the FMEG margin profile that we saw at a very strong level of 8%.
If I remember correctly, we were talking about 100 to 200 basis point margin improvement on an annual basis each year.
So does this change that guidance or that kind of an outlook in any manner?
Gandharv Tongia
Yes.
Bhoomika, when we are trying to study the pattern in B2B, we will have to understand the overall capex - government level as well as private capex.
The private capex has certainly improved between first quarter and second quarter.
But I think it can further be improved.
And government has increased spend, which is visible, but it can again be further improved.
But I think the worst is behind us.
I do not think there is any two-view about it.
It will only improve from here.
It could take a quarter or two to overall get to the position where all of us would like to.
But significantly, I feel that overall, H2 should be competitively better than H1 on B2B.
As far as B2C is concerned, I think that is already visible.
Whatever we have witnessed in second quarter as well as whatever witnessed in the first 20, 25 days of October month, so I think B2C is given.
But the B2B, I think, directionally should improve, but we should just be cautious and monitor it at a regular interval.
On FMEG profile, Bhoomika
Bhoomika Nair
Sorry, Sir, just one thing in month of October, like you said, 2Q saw about a 20%, 30% decline for us in terms of B2B cable, that trend would have continued in terms of a decline into October as well?
Or is there an improvement?
Polycab India Limited October 24, 2020
Gandharv Tongia
I think in the case of B2B business, we should not take up a view only of 20, 25 days because in our experience, we have seen at times, the supplies are done in the second fortnight into B2B business, and that is where 25 days sales is not necessarily be reflective.
So I think we should park it for quarter and take a view on that.
But directionally, what I am trying to allude to is, it looks like that B2B is now bouncing back.
And in the coming quarters, we should be able get a comparatively better number what we have seen in H1.
Coming to FMEG profile, Bhoomika, I do not know whether you were able to capture my earlier comment.
What I was trying to highlight is, we have taken several initiatives.
One is increase in the topline as well as profitability of the larger businesses within FMEG.
Second, is the smaller business, where we want to increase our topline while maintaining their profitability.
Third, is we want to launch new products, which are next-generation IoT-enabler product.
And the fourth is focus on the working capital, where we have already reduced the inventories to a fair extent, but we can further improve there as well as increase the Channel finance percentage.
So all these things put together, we feel we would be able to improve the overall FMEG profitability.
I know that we used to give a guidance of 100 to 150 bps improvement every year.
But it seems on the basis of whatever work we have done in the last 90, 100 days that that can be further revised upwards or on the higher side.
But probably, we will wait for a quarter or two before we finally call out on the guidance.
I am pretty confident on whatever work we have done so far and hopeful that FMEG profitability will continue to improve from here onwards.
The only thing which I would like to call out at this stage is spend on IPL, which will be accounted for in the third quarter because the accounting standard requires us to account for it now, which from a business standpoint, probably you would agree is more like an investment.
So that could slightly impact the profitability in third quarter.
But overall, directionally, profitability of FMEG should improve from here onwards.
Bhoomika Nair
Thank you very much.
Moderator · Conference Operator
Thank you.
The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.
Please go ahead.
Prashant Kutty
Thank you for the opportunity Sir.
Pardon me, the questions were asked before as I joined the call today.
Just one big, firstly, correct me if I am wrong, when you have highlighted around the last quarter, and also in a couple of conferences that we were tracking at a positive sales growth around August or so, July, August or so, we ended the quarter with a negative growth rate in the full year or in the 2 quarters.
Anything that is deviated from that last 1.5 months or so, sir, if you could share your thoughts on that?
Polycab India Limited October 24, 2020
Gandharv Tongia
Yes.
So probably, Prashant, we will have to go to the context in which we were having discussion.
But on an average, if I see within the quarter on different periods a month 2 or 3, generally, the B2C business has registered growth.
The B2B business predominantly because of institutional sluggishness, there is a bit of degrowth, which has been witnessed.
So I am not able to recollect what was the context when we had the last discussion but broadly, the trend as of the end of the quarter is in line with what we really experienced throughout this quarter.
Prashant Kutty
Just a clarification, you said that October is now almost seeing a recovery in almost all businesses.
I mean, a positive traction in almost in all businesses.
Is that a fair assumption?
Gandharv Tongia
That is true.
The only thing is, and this is what, again, I would like to call out, which I mentioned a while back.
20, 25 days is not necessarily reflective of the month or quarter performance.
And second is institutional is still a challenge.
Prashant Kutty
Second question is on the margin part.
So just wanting to understand over here if you look at it on the FMEG margins business, we far more looking at a more sustainable number, I think, reported about an 8% margin at an EBIT level.
What do you think, is this clear of operations to be a sustainable EBIT margin level?
I do understand your comments.
You said that you will look to increase in your guidance is actually, you might even look to increase that as well.
But looking at the scale of operation, and the kind of growth you are doing, I mean, even after considering, let us say, expensive IPL and so on and so forth.
Let us say, a normalized basis, is 8% a sustainable number in, let us say, maybe from 1 year or two perspective?
Gandharv Tongia
Yes.
So Prashant, over the medium term, we would like to get to the industry benchmark of margins.
What I was mentioning to Bhoomika a while back that I think probably we will wait till the end of this year and come back to you with a revised guidance.
But whatever work we have done in the last 90, 100 days gives us a lot of confidence and conviction that our margins would improve here onward but just bear with us till end of this year before we come back to you with the revised guidance on the EBIT margins of FMEG business if, at all, we need to make any upward revision.
Prashant Kutty
The last bit, sorry, is the pricing increase you have seen it rise.
If you could highlight that, what was that for the quarter?
I am sorry if you could highlight them.
Gandharv Tongia
Prashant, could you please just repeat?
There was some disturbance on the line.
I could not completely follow what you mentioned.
Prashant Kutty
Sorry.
I was asking what was the pricing increase taken in wires business for this quarter?
Polycab India Limited October 24, 2020
Gandharv Tongia
Prashant, our business, in our case, it is a simple pass-through generally speaking.
So whatever is the increase in copper, copper LME side as well as change in the foreign exchange rate in USD/INR, it generally passed on a monthly basis and that is what we have followed in this quarter as well.
There is no exception there.
Prashant Kutty
Thank you.
All the very best to you.
Good performance.
Gandharv Tongia
Thank you Prashant.
Thanks a lot for your kind words.
I am glad that you liked it.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen, due to time constraint, we will take that as a last question.
I would now like to hand the conference over to Mr. Gandharv Tongia for closing comments.
Gandharv Tongia
Thank you all for taking out time for this call.
In case you wish to know more about us, feel free to reach out to me or you can write to [identifier removed].
Lastly, let me be amongst the first few to wish you a very Happy Dussehra and Diwali, in advance.
I hope you all have a great festive season ahead, filled with lots of happiness.
Thanks a lot.
Bye- bye.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen, on behalf of Polycab India Limited, that concludes this conference.
Thank you for joining us.
You may now disconnect your lines.