Polycab India Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Record year, strong Q4: FY22 revenue grew 39% YoY and Q4 revenue grew 35% YoY, driven by healthy demand and execution despite two pandemic waves and unprecedented inflation.
• Wires and cables carry the quarter: The segment posted healthy volume growth and improving margins, while FMEG growth was temporarily hampered by a strategic realignment and switches supply challenges.
• Project LEAP is on track: Year 1 of the transformation delivered ₹12,000+ crore topline, and the company gained at least 200 bps of market share, putting the ₹20,000 crore FY26 target within sight.
• FMEG reset underway: A leadership overhaul, a new economy sub-brand (Etira), and a switch to in-house manufacturing for switches are all in motion, but near-term margins remain pressured and the 12% EBITDA target is a FY26 story.
• What to watch next quarter: Whether FMEG bounces back as management promises, the pace of the B2C mix shift, and any additional color on M&A plans expected by the September quarter.

Project LEAP: The Five-Year Transformation

• Year 1 delivered: The company crossed ₹12,000 crore in topline versus a FY21 exit of ~₹9,000 crore, putting it directionally on track for the ₹20,000 crore FY26 target.
• Four workstreams in focus: The first year concentrated on setting up the right organizational enablers, customer centricity, go-to-market redesign, and product portfolio optimization.
• B2B operating model redesigned: The heavy-duty and light-duty cables verticals were merged to unlock cross-selling and operational efficiencies, and a new model piloted in select states showed tremendous growth opportunity.
• Distribution footprint expanded rapidly: Direct town coverage nearly doubled, authorized dealers and distributors grew from over 4,100 to over 4,600, and retail outlet reach increased by ~25% to roughly 2,00,500 outlets.
• A new vertical for small-town India: The 'Emerging India' vertical was created to build presence in towns with up to 2 lakh population, supported by digital tools and structured playbooks.
• Digitization push: An end-to-end digitization pilot for front-end sales was successfully completed and is now being rolled out in phases, with the aim to digitize the entire distribution ecosystem.
• M&A evaluation begins in Year 2: The company has taken up evaluation of adjacent product categories and M&A initiatives as a workstream in the second year of Project LEAP, with additional color expected by the September quarter.

Gandharv Tongia: "We believe, we have an ambitious vision for our organisation, we also have the enablers, so execution has to be sublime."

Wires & Cables: The Core Engine

• Volume growth was broad-based: Domestic distribution-driven business saw strong traction, with wires growing ~60% in the Southern market and flexibles/light-duty cables growing ~60% in the Northern market.
• Institutional business softened: The institutional segment was subdued compared to the prior quarter, while exports grew nearly 100% YoY on strong demand from Oil & Gas, Renewables, and Infrastructure.
• Trade sentiment briefly rattled by aluminum: Significant volatility in aluminum prices, which touched nearly $4,000/MT before correcting sharply, temporarily restrained trade sentiment in cables.
• Margins improved sequentially: EBITDA margins continued to improve, led by judicious price hikes and better operating leverage; raw material inflation and price hikes were both in the mid-single digits during the quarter.
• Volume contributed a quarter of growth: Per an analyst's math, roughly 25% of total cable and wire growth came from volume, with the balance from value, reflecting the inflationary environment.
• B2B/B2C mix shifting strategically: B2B share has reduced from ~70% five to seven years ago to roughly 58-60% now, indicating a deliberate pivot toward a higher B2C mix.
• Margin range commitment: Management intends to maintain the traditional 11% to 13% EBITDA margin range and would like to improve from the current ~12% level as they go along.
• EHV gap acknowledged: The company is trying internally to figure out an adequate presence in the Extra High Voltage space, the only area where it lacks adequate presence.

Gandharv Tongia: "we are perhaps the only company the entire country or probably in the continent which can supply all types of cables and wires."

FMEG: A Business in Reset

• Topline growth temporarily hampered: The business underwent a realignment exercise to improve sales force efficacy and achieve distribution synergies, which temporarily restrained growth; switches saw a decline due to supply challenges.
• Leadership overhauled: A veteran from Panasonic was hired as MD of the B2C business, and a fans leader was recruited from a peer company, reflecting a recognition that the strategy that built a ₹1,000 crore business will not scale it to ₹5,000 crore.
• Switches moving in-house: Given prolonged supply-side challenges, the company is transitioning switches to in-house manufacturing with a new state-of-the-art facility in Daman likely to be completed in FY23.
• Premiumization gaining traction: Premium products now contribute 16% to overall FMEG revenue, up from 7% last year, driven by increased share of premium fans, lights, and panels.
• Etira launched for the economy segment: A new sub-brand, Etira, was launched to play at lower price points and drive penetration in semi-urban, rural, and alternate channels; it has seen a strong initial response in housing wires and will be extended to other categories progressively.
• Margins improved sequentially but remain weak: Profitability improved on a sequential basis but was much lower than last year and expectations, pressured by higher advertising, staff costs, and input costs.
• 12% EBITDA target is a FY26 commitment: Management is confident of achieving a 12% annualized EBITDA margin in the FMEG business by FY26, and expects to further improve on existing margin levels in the current year.

Gandharv Tongia: "what got us to Rs. 1000 Crores will not necessarily will take us to say a number Rs. 5000 Crores, we have to change the strategy"

Working Capital & Balance Sheet

• Receivables optimized: Improved channel penetration in cable and wire (~70%) and FMEG (~50%) helped reduce receivable days; these facilities are without recourse.
• Inventory optimization underway: A new logistics head, Vipul Agarwal, hired roughly eight months back from a peer, is driving optimization and delivery time improvement.
• Payable days declined structurally: Copper, the most significant raw material, was historically imported via LCs with 90 to 180-day terms; logistics challenges in FY22 forced a shift to domestic supply, which is generally cash-and-carry, reducing payable days. Management expects to restore LC options and return to regular payable days.
• Office space acquired: A one-off investment of roughly ₹200 crore was made to acquire around 55,000 sq ft of office space in Mumbai, close to the existing head office; a move is expected by Q3 FY23, and part of the cost will be compensated by monetizing the existing Mahim office.
• Capex guidance for FY23: Sustainable capex is pegged at ₹300 to ₹350 crore, with two-thirds allocated to cable and wire (export capabilities, high-utilization categories, backward integration) and one-third to FMEG (in-house switch factory, high-utilization facilities).
• Cash deployment philosophy: The business is generating a fair amount of cash, and management prefers to use it to meet growth ambitions and improve shareholder returns rather than let it sit idle.

Demand Environment & Competitive Position

• Demand broadly healthy despite inflation: The demand environment remained encouraging, and management noted that if a product meets specifications and customer requirements, there is practically no challenge on demand, though some inflationary challenges exist in a few product categories.
• B2C sentiment warrants caution: Management will remain watchful of consumer sentiment and how it plays out for B2C categories given broader inflation, though it does not anticipate inflation to be any more challenging in the B2B segment.
• Channel inventory manageable: In FY22, channel inventories were at acceptable levels. Since April 1, a correction in copper and aluminum prices led dealers to reduce inventory slightly to avoid margin loss, but this is not expected to be material. FMEG inventory is also at acceptable levels.
• Market share gains confirmed: The company gained at least 200 bps of additional market share in FY22, and management aspires to enjoy a leadership position and further enhance it across segments.
• FMEG ambition is top-three, then number one: The guiding principle, attributed to the Chairman, is that if you are in a product category you should be number one; in FMEG, the aim is to get into the top five players, then top three, and eventually move upwards in select categories.
• New adjacent categories entered: The company entered niche spaces like defense, automobiles, and railways, which carry good margins and require product innovation.

Gandharv Tongia: "Inderbhai believes that if you are in a product category you should be the number one, if you do not want to be number one, you should not be there in the product category and that is the guiding principle for which we are trying to follow across all the business segments where we operate."

Guidance & Commitments

Key Metrics