POLYCAB — earnings call
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Prepared remarks
DIRECTOR · MR. GANDHARV TONGIA – CHIEF FINANCIAL OFFICER
MR. GANDHARV TONGIA – CHIEF FINANCIAL OFFICER Polycab India Limited January 21, 2022
Moderator · Conference Operator
Ladies and gentlemen, good day, and welcome to the Polycab India Limited Q3 FY2022
Thank you very much Sir.
Ladies and gentlemen, we will now begin the question and answer session.
Anyone who wishes to ask a question may press “*” and “1” on your telephone.
If you wish to remove yourself from the question queue you may press “*” and “2”.
Participants are requested to use handsets while asking a question.
Ladies and gentlemen, we will wait for a moment while the question queue assembles.
To ask a question please press “*” and “1” now.
We have our first question from the line of Ravi Swaminathan from Spark Capital.
Please go ahead.
Ravi Swaminathan
Good afternoon.
Sir, my first question is with respect to the volume value mix.
What kind of volume growth we had seen either during the Q3 or nine-month number if you can give that it would be great?
I know multiple products are there, but if you can give a broad sense it would be great Sir?
Gandharv Tongia
Thanks Ravi for your question.
As you can see there is a significant amount of growth in value.
Particularly if I were to add colour on the volume, I think there is a slight increase despite having Dangote in base predominantly from the business verticals like HDC followed by LDC.
On FMEG also the growth is visible across all the product categories barring fans which was slightly subdued.
Polycab India Limited January 21, 2022
Ravi Swaminathan
Okay.
So, volume growth might have been kind of mid single digit or high single digit or how was it?
Gandharv Tongia
I would say that most of it is because of value and only part of it is because of volume, and within that the HDC is leading the pack followed by the other businesses, cables and wires.
Ravi Swaminathan
Got it Sir.
In terms of the demand, if you can give some colour on real estate-led demand, infra-led demand, more colour on that, and also how the demand is in urban and rural, how the demand for wire is, if you can give a broad thought process that will be great Sir?
Gandharv Tongia
Yes, let me split into two or three broad components.
Let me talk about first the typical B2B business.
As you would know that in first couple of quarters overall demand from the execution side was slightly subdued.
In the current quarter, there is an uptick in the demand and institutional business has recorded almost 150% growth in the revenue followed by dealers and distributors on all the product categories across all the regions.
If I give you colour on the export business, there is off course an element of repeat order but if I remove Dangote from the base there is an overall growth of 24% and Dangote also if I am not wrong in the last year December in the base quarter it had almost $20 million of contribution to the top line and in the current quarter also there is a $10 million contribution.
Wires I would say is slightly less impressive than typical B2B business in the current quarter and on FMEG side across all the regions all the product categories there is growth barring fans which is slightly subdued.
Fan now contributes to almost 35% to our FMEG top line followed by lighting and luminaries which would be roughly around 30%, and switchgears would be around 10% to 15% followed by pipes and fittings which will be around 10% to 12%.
Ravi Swaminathan
Got it Sir.
My only question is basically not only for Polycab but for multiple electrical companies, on one side there are talks of real estate seeing a very strong recovery but products like wires, etc., they are not seeing very good traction.
Any reason you can attribute to this as to why there is a dichotomy between real estate growing but wires not seeing that much traction?
Gandharv Tongia
We have seen a fair amount of growth on LDC and wire side, blended I would say is around 20% to 25% growth which we have seen in a few of these product categories.
Overall, availability of credit and softening of interest is also helping the housing sector and building sector, and as we go ahead it appears in the Q4 after omicron the overall private CapEx would help us in improving the top line of the industry as well as large players like us.
Polycab India Limited January 21, 2022 Affordability I think has been at multiyear high and it should get reflected in the demand for cables and wires business in the quarters to come.
Ravi Swaminathan
Got it.
My final question is with respect to the EBITDA margin.
What kind of range that we can see in the next fiscal year?
Can we go back to double digit kind of margins or are we seeing something similar to what it is likely to be this year, if you can give some thought?
Gandharv Tongia
Historically, in cable and wire, we have generally hovered between 11% and 13% on a sustainable basis.
When we met in September quarter I had mentioned that slowly and gradually will start improving on the EBITDA margin.
In the second half of the year the likely exit number would be towards the lower end of the EBITDA margin which we have seen historically of 11% to 13%.
If you dissect our current quarter performance, you would notice that the EBITDA margins have improved in the Q3 in comparison to Q2 despite the fact that we have invested wherever we should have invested, like for example advertisement and publicity has increased from Rs.14 Crores to Rs.44 to Rs.45 Crores.
It seems that next year margins would be better than what we have seen in the current quarter, but at the same time I would like to be cognizant of the fact that pandemic is still not over.
If there is another wave of pandemic and it has significant impact on the business it could adversely impact the margins, but by and large it seems that we should be able to have better margins in the years to come.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Atul Tiwari from CitiGroup.
Please go ahead.
Atul Tiwari
Thank you Sir and congrats on pretty decent set of numbers in a tough environment.
My first question is on the pricing.
All the commodity price increases which have happened over the past year or so, have they been passed down into your structure of both cables and FMEG business or something still remains to be passed?
Gandharv Tongia
In our business on the B2B side particularly on the distribution business, we revise our prices generally on monthly rest after considering two variables; one is changes in metal prices of copper and aluminium.
Second, is change in the foreign exchange rate of USD- INR and which is what we have done in the current quarter as well.
On the other side of business, which is institutional and export we generally do it on back-to-back basis.
As you can see, between Q2 and Q3 there is almost 70 basis points improvement in contribution margin which means that we have been able to increase the prices slightly more than the actual increase in the raw material cost at the product basket level and as I mentioned to Polycab India Limited January 21, 2022 Ravi a while back we believe that in the quarters to come we should be able to improve our margins slowly and gradually.
Atul Tiwari
Would it be the right characterization to say that most of the commodity price hikes have already been passed on and from hereon whatever price hikes you take it will kind of trickle down to the margin number and we will get to the more normal 11% to 12% kind of margin.
Is that right characterization?
Gandharv Tongia
Yes, I would like to add one element to your understanding that in our business the input cost is not constant.
It undergoes change multiple times in a year as you know because copper and aluminium are traded on LME and that is where it is a moving price, but generally from an understanding point of view give and take few basis points here and there, we believe that we should be able to pass on the increase in input cost to our end customer and slowly and gradually we should be able to improve on margins both at contribution level as well as at EBITDA level.
On a long-term view, you know this already Atul that we are working on Project Leap with the help of Boston Consulting Group and there are several enablers which are in place.
Once those levers are used we should be able to improve our profitability both for B2B and B2C, however, it will take a while to fully achieve the true potential of these levers.
Atul Tiwari
Okay and my second question is on the channels.
How many dealers and distributors you would have currently on cable and wire side and on FMEG side, and what is the portion of those are currently covered under channel financing, and how many or how much can we potentially cover under the channel financing?
Gandharv Tongia
Give and take some numbers we have around 4100 dealers and distributors in our family.
50% of them are on FMEG.
In terms of value, advance plus channel finances put together in cable and wire we would be around 70% of our top line.
In FMEG business, it has improved reasonably well and we are in late 40s, almost just shy of 50%.
Theoretically speaking, this number can go right up to 80s and 90s, and that is where FMEG channel financing penetration should improve in quarters to come and there is an upside which is possible in cable and wire business as well.
Atul Tiwari
Okay, great, and my final one is obviously we have seen across the industry some tapering down of demand in December and after Diwali got over, so how are things now qualitatively, do you see demand bouncing back in Q4 from the retail category or will it take some more time, if you could share some broad qualitative colour on that?
Polycab India Limited January 21, 2022
Gandharv Tongia
Absolutely, you are right Atul.
Second half of the quarter got impacted particularly the last two to three weeks of December got impacted because of omicron and pandemic.
If I were to take a view today, sentiments are positive.
Though in the month of December few of the dealers decided to reduce the inventory levels in the channel.
As of today, the things have improved.
Dealers and distributors are inching back to normalcy, and you know this data already that omicron wave in most of the large cities have already peaked or about to peak in the next few days.
At this stage, it seems that the second half of the current quarter should be better than the first half of the current quarter.
Overall, macro elements like uptick in private CapEx should also help us in improving and augmenting the top line of the company on cable and wire side.
On the B2C side as well as on dealer distribution, we are focusing and improving our presence in all the accessible markets, helping our dealers and distributors, and all these initiatives would also help us in improving the top line.
So, to answer your question, the sentiment got impacted in the month of December adversely a bit, but as of now things have started improving.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Aditya Bagul from TATA Mutual Fund.
Please go ahead.
Aditya Bagul
Thank you and good evening.
Congratulations on good set of numbers in the challenging times.
A couple of questions from my end, firstly with regards to the B2B segment it has seen a sharp recovery.
Can you help us understand what are some of these end-user industries that is driving this growth and what is your outlook over a period of the next one year especially when it comes to the B2B part?
Gandharv Tongia
Thanks a lot for your kind words.
On the B2B side, as I mentioned a while back, the improvement in the demand is emanating from private CapEx.
As I mentioned to Ravi a while back, institutional business has recorded 150% growth which is a meaningful number in our B2B business.
On the dealer side, there are several sectors where we have seen uptick in demand, whether it is coming from real estate, infrastructure, renewable energy or manufacturing, but I would say it is broad based and it is coming from most of the geographies, so it is not that only one particular region of the country is contributing to the demand, it is coming from the all the geography and that is where we have been able to also record a decent volume growth even if we consider Dangote in the base.
Aditya Bagul
Sure, I wish to process this a bit further.
If you can help me understand is there a chunky nature to this B2B sort of institutional demand or is this more industrial CapEx like demand?
Polycab India Limited January 21, 2022
Gandharv Tongia
There is no particular one industry or sector which is contributing to this demand.
I would say this is largely broad based.
I think the private CapEx spenders are not shying away from making the commitment and incurring the cost which is benefitting us in terms of the improved performance in the top line.
Aditya Bagul
Understood, thank you for answering that.
My second question is I am trying to understand the premiumization trend especially in our FMEG business, can you just throw a little light on how you see some of our premium products like Levana or Hohm and how do these fit into our Project Leap over a period of the next three to five years?
Gandharv Tongia
Premiumization is an important focus area as part of Project Leap.
We are working on several elements.
One is to ensure that we have the right product available in our product portfolio to meet the premiumization.
Second is we should have right GTM and dealers and distributors who can cater to the end demand or end consumer, and that has helped us in slightly improving the overall contribution of premiumized product to our top line.
Fan is hovering between 25% and 30%.
Purocoat fan which was internally innovated has also helped us in improving the overall premiumization agenda within the fan business, and similarly for lighting we have recorded a growth in premiumization on downlighters and others.
Hohm, Silvan and Smart – these are the areas where we are still working.
I would expect that in the next fiscal and that too in the second half of the next fiscal we should have some meaningful numbers coming to our P&L through Hohm and Silvan IOT, and that remains a focus area for us.
Overall, the idea is to have a balance of premiumization as well as regular products so that we have right EBITDA and EBIT margins in the B2C businesses and we are able to improve the margin from the current levels to almost 12% by FY2026.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Nitin Arora from Axis Mutual Fund.
Please go ahead.
Nitin Arora
My first question is on the demand side, though you stated that value growth is also the large proportion, 99% as well, but just talking about the two quarters, the last quarter on a base of 5% decline we did 44% growth and the copper prices were up roughly 40% to 45%.
Moderator · Conference Operator
Sir we seemed to have lost the line of Nitin Arora.
Thank you.
We take the next question from the line of Charanjit Singh from DSP Mutual Fund.
Please go ahead.
Polycab India Limited January 21, 2022
Charanjit Singh
If you can just help us understand one, in terms of the quantum of price hike exactly, how much you would have taken in cables and wires, and if we have to look at from a nine- month perspective volume growth in cables and wires what it was, if you can give the figures here?
Gandharv Tongia
Sure, as I mentioned to Atul and Ravi, most of the increase is coming from value, where some contribution coming from increase in volume and if I even consider Dangote in the base there is some improvement in volume.
In terms of price hikes, in the Q2 there was some impact on the contribution and that is why there was a contraction in contribution margin.
In the Q3, there was almost improvement of 70 bps. The raw material cost at the product basket level increased by mid single digit and the price hike we have taken is slightly more than that and which is what is getting reflected in expansion of contribution margin by 70 bps, and we will continue to take pricing action to offset the increase in input cost in the quarters to come.
Charanjit Singh
If you are to compare the price action what you would have taken versus industry, is there is a gap between this?
Gandharv Tongia
Are you trying to ask that whether the price hike we have taken is in line with the industry?
Charanjit Singh
Yes, that is the question.
Gandharv Tongia
In all fairness, we are the largest manufacturer of cable and wire in the country.
We are the market leader, price leader and of course quality leader.
I think we have acted like a market leader in the current quarter.
We have taken the price hike which was required to be taken to ensure that we are able to offset the input cost.
It is quite possible that a few of the market participants have followed what we have done.
There could be some aberration where the market participants or peers have not necessarily followed what we have done, but by and large we have taken the price hike which we felt was necessary to offset the increase in input cost.
Charanjit Singh
Okay.
Another question on the volume growth perspective.
As you are entering into Q4, generally there are more infrastructure, construction, heavy and even from the industry perspective there is a thought process that the activity on the government infrastructure side should continue to remain strong, so any thoughts on what is the kind of volume growth which you can seen in cables and wires side separately?
Polycab India Limited January 21, 2022
Gandharv Tongia
You know us, we do not give guidance on future performance.
If I were to provide you a long-term guidance, we are fully committed to Project Leap agenda whereby we want to double our revenue in five years, fiscal 2026, which would mean that Rs.9000 Crores of top line of fiscal 2021 would be Rs.20,000 Crores by fiscal 2026, and it will come from all the businesses both B2B and B2C.
Charanjit Singh
Okay, just roughly on the FMEG front, we have built a very strong team and we are getting onto a journey where we expect to grow much more faster than the industry, so from FMEG perspective we have seen that the growth has not been as strong as what we have seen for the other larger players.
If you can touch upon how this journey is panning out from FMEG perspective and this new team when you seen their activities starting to pickup, just on the FMEG journey if you can give some more colour on the future perspective, how do you plan to ramp up?
Gandharv Tongia
On a two-year basis if I see the FMEG top line performance we have registered a growth of 57% which would roughly mean 25% to 30% annualized growth.
In terms of achieving the true potential of Project Leap agenda, there are several enablers on which we are working.
One which I briefly touched upon in the opening remarks is having the right resources in the management team and that is where we have invested heavily in getting the best of the talent of the industry.
In the last quarterly call, I had updated all of you that Mr. Vivek Sharma has joined us from Panasonic.
He was the MD of Panasonic and after super annuation he has joined us as Deputy Managing Director.
Tapas has joined us from Havells and he is heading our fans business.
Similarly, there are other team members who have joined from other large companies like Crompton and other large B2C players.
These management professionals with the help of BCG are in the process of revisiting and revising and revitalizing the product portfolio, GTM, geographical expansion and augmentation of dealers and distributors.
We have already improved penetration in a few geographies in the current nine months.
Once we implement all the items which we have identified in the blueprint I would expect that we would easily be able to achieve the top line of B2C business by FY2026. Also, we would be able to have meaningful improvement in the bottom line.
I think we will have to give some time to the new team members who have recently joined our family and post that we should be able to get to the numbers which we want to achieve as part of Project Leap.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Sathvik Jain from Generational Capital.
Please go ahead.
Polycab India Limited January 21, 2022
Sathvik Jain
I have a couple of questions.
The first is I guess you are in investment mode in the FMEG business.
How are the internal targets at the business level?
Secondly, you had briefly told about how you are passing on the inflation to the end consumer.
If you could throw some more light on it across the verticals?
Gandharv Tongia
Sorry I missed the first part of the question.
I think let me attend the second part and then you can repeat the first part.
I think the second part is how have we passed on the increase in the input cost to the end customer and if my understanding is right on the question, the answer is for the dealers and distributors we reset or revise our list price on a monthly basis and that is what we have done, even in the current quarter, almost all the increases in the input cost had been passed on to the end customer.
For the exports as well as institutional businesses generally it is on a back-to-back basis and that is where we have been able to pass on the input cost increase as well to the counterparty or to our customer.
If that answers your second part of the question I would request you to just repeat the first part.
Sathvik Jain
Yes, that is helpful.
The first part was basically you are led by the FMEG business that is on a scale up mode.
Internal factors included targets at the FMEG level as such.
Gandharv Tongia
I think you are trying to understand ROCE target for the FMEG business.
If that is the current understanding, objective is to improve profitability for all the businesses as well as have better capital allocation including for FMEG or B2C businesses.
As of now, as you know there are two levers to improve ROCE, one is better profitability and second is better capital allocation.
As far as better profitability is concerned, we are targeting to get to around 12% of margin by FY2026 and we are taking all the required steps to achieve that.
The second is on capital allocation.
Slowly and gradually we are increasing utilization of our factories in FMEG as well as in cables and wires.
If I were to illustrate this with the help of one example is fan business where our existing facility is almost being fully utilized.
We are in the process of setting up another facility which should be operational sometime in the Q1 of the next fiscal and that will also help us in augmenting the top line as well as the profitability.
So, we will continue to make efforts to improve the profitability of the B2C business and ensure that our assets are sweated to get better returns.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Devansh Nigotia from SIMPL.
Please go ahead.
Devansh Nigotia
Thanks for the opportunity.
It might be a repetitive question, but when we are looking at the real estate demand and against that when we are looking at the demand from real estate ancillaries like fan, lighting and retail wiring, it does not add up.
So, if you can help us Polycab India Limited January 21, 2022 understand how does this lead and lag effect play out because is it that currently the existing inventory in real estate is being sold and the new construction is yet to pick up in a big way?
If you can just share your thought process of how is it on your interaction with the customers and how is actually the demand shaping up?
Gandharv Tongia
Sure, as you have noticed that in all the businesses we have recorded a significant amount of growth, in cables and wires as well as in FMEG.
The FMEG on a two-year basis has recorded a 57% of growth in top line and similar numbers are there in cable and wire businesses, of course the percentage is different because of higher base.
I would not say that we are not able to see an uptick in demand or there is a disconnect between the real estate revival as well as growth in our sector, but we need to look at this construction cycle in its entirety because a few of our products are used towards the end of the construction phase and that is where we will have to dive deep into the greater details of the cycle of real estate and correlate with our industry.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Aniruddha Joshi from ICICI Securities.
Please go ahead.
Aniruddha Joshi
Thanks for the opportunity.
Sir, just one strategic question, the FMEG business that you are working on is doing completely excellent.
This is a highly competitive business, fans and all these are relatively far more penetrated categories.
So, here growth is to gain market share which is again relatively a bit tough task.
What is the management’s thought process on businesses something like kitchen appliances where there are not many big players and even the top five players have less than 45% market share and I think the segment is also pretty fast growing segment.
Considering Polycab’s strong brand distribution, what is our thought process on that as a segment?
Gandharv Tongia
It is a great question Aniruddha.
In the board room as well as management team, we have deliberated on this several times.
Let me give you two perspectives.
If you were to visualize all the products which Polycab is manufacturing and offering to the end customers and compare with the typical electrical/hardware store you would be able to see almost all the products.
When we want to move away from this product category to something like kitchen equipment there are two or three things which are additionally required to be considered.
One is the kitchen equipment’s are not expected to be channeled through electrical/hardware stores.
Second, the target audience is different.
In electrical/hardware stores, generally man of the house would be involved in the decision-making, whereas in the kitchen equipment the lady of the house would have a say, and the last thing is the brand Polycab which we have today not necessarily would go well, and which is a matter of Polycab India Limited January 21, 2022 discussion and deliberation even internally, with the kitchen appliances.
So the current thought process for the time being is to ensure that we have complete coverage of all the electrical products and as part of Project Leap explore the exigencies and then monetize those exigencies as we implement Project Leap initiatives between now and FY2026.
Aniruddha Joshi
Okay, and what are the products if you can say that we would be focusing on in FMEG apart from fans and maybe geysers?
Gandharv Tongia
We have several FMEG products already available.
We have fans and water heaters.
We have lights and luminaries.
We have switches and switchgears.
We have conduit pipes.
We have a bit of agro pumps and there are some adjacencies which are being explored, but nothing on the kitchen equipment side as of now.
Aniruddha Joshi
Okay, about air coolers or irons, etc., those kinds of products?
Most of the other companies are not even in kitchen appliances, but still continue to do sell these products.
So, any plans on completing this portfolio?
Gandharv Tongia
There are some products which are available in the product category which you have mentioned, but as I mentioned these are adjacencies and these are being explored, and we will continue to do that, but if you go back to my earlier comment the idea is to first cover all the electrical products and then explore if at all we have to go beyond that.
Aniruddha Joshi
Okay, last question, you said in the opening speech that multiple new professionals have joined the company.
What are the key areas that they will be working on over the next two to three years?
Is it like minimum 1% to 2% market share gain in each of the product categories that we are working on or is it improvement in the profitability and margins?
What are the basic three to four key reasons on which they would be focusing on?
Gandharv Tongia
The new professionals who have joined the organization as well as the current leadership team totally focused on only one initiative or agenda which is Project Leap.
The objective is to achieve Rs.20,000 Crores of top line, improvement in profitability, and there are several enablers to achieve this vision.
For example, improvement in our dealers and distribution base, improvement in GTM, expansion and penetration of the geographies where we do not have meaningful presence, improved exports, but if I were to summarize and give you input in a single statement it is only Project Leap agenda which is what being targeted by all of us in the leadership team of Polycab.
Polycab India Limited January 21, 2022
Moderator · Conference Operator
Thank you.
We have the next question from the line of Shrinidhi Karlekar from HSBC.
Please go ahead.
Shrinidhi Karlekar
Thank you for the opportunity.
I just want to know how far has the company reached in terms of human capital addition.
I see very interesting hires from the industry for new as well as existing roles.
I just want to know how far has the company reached?
Is the top team already in place for most of the roles that have been identified under Project Leap?
Gandharv Tongia
I would say as part of the phase one of Project Leap most of the senior resources have been already hired.
I do not think that at this stage under the phase one we need to do any additional significant hiring for the top leadership.Having said that, at the middle level and lower level we will continue to make an investment and that is required for initiatives like increase in overall dealers and distributors, further penetrating the geographies where we do not have meaningful presence, and so on and so forth.
Shrinidhi Karlekar
The second question is on the business and state distribution utilities.
Any colour on how it has been recovering that pie of that market?
How much of company’s cable and wire business directly or indirectly comes from state distribution utilities?
Gandharv Tongia
We do not directly deal with government entities generally speaking.
Government’s contribution to our top line directly would be less than 2-2.5%.
Of course, our dealers and distributors serve these companies.
There is some improvement, but since this is a secondary sale I will not necessarily have adequate colour to give to you, but to answer your question from the primary sales point of view we do not directly have significant supply to government orders.
Shrinidhi Karlekar
I am just trying to understand would you have some colour on indirectly how much would it be?
Gandharv Tongia
I think there is some improvement over the period, but since it is secondary, it is difficult to give you a precise colour, but generally speaking power distribution reforms have helped and it will continue to help us in improving the demand at the industry level.
Moderator · Conference Operator
Thank you.
As there are no further questions, I would now like to hand the conference over to Mr. Gandharv Tongia for closing comments.
Over to you Sir!
Gandharv Tongia
Thank you everyone for taking out time and attending this call.
In case if there are any unanswered questions please write to us at [identifier removed] and we would Polycab India Limited January 21, 2022 be extremely pleased to attend your queries and provide clarification.
Stay safe and take care.
Moderator · Conference Operator
Thank you very much Sir.
Ladies and gentlemen, on behalf of Polycab India Limited that concludes this conference call.
Thank you for joining with us.
You may now disconnect your lines.