Polycab India Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Volume-led growth in a deflationary quarter: Consolidated revenue rose 11% YoY despite falling commodity prices, driven by mid-to-high teens QoQ volume growth in cables and wires, while exports surged 75% YoY.
• FMEG reset underway, margin target set: The FMEG business de-grew 12% YoY as a deliberate distribution revamp and weak rural demand took hold; management is confident of reaching 10% EBITDA margin by fiscal 2026.
• Margins expanded sharply on mix and pass-through: EBITDA margin improved 307 bps YoY to 12.8%, helped by strong exports and judicious pass-through of commodity price declines.
• Working capital structurally improved: Channel financing penetration and inventory optimization brought working capital days down to a sustainable 44-45 days, a level management expects to hold for at least a few quarters.
• What to watch next quarter: Whether the FMEG distribution revamp completes on schedule by fiscal year-end, the pace of new product launches, and any stabilization in rural demand as H2 seasonality kicks in.

Cables & Wires: The Volume Engine

• Volume, not price, drove the quarter: Revenue growth in the core segment was volume-led, with domestic distribution and institutional business both posting healthy growth; volume expansion in HDC and LDC verticals was in the mid-to-high teens range QoQ.
• Base effect masks underlying momentum: Copper LME and USD/INR were significantly higher in the base quarter, so reported value growth understates the volume performance; H1 growth percentages also appear elevated on a weak base.
• Institutional business picked up: The institutional side registered growth on fair traction from private capex, adding a second demand driver alongside distribution.
• Channel inventory is deliberately lean: Inventory in the channel was broadly comparable between Q1 and Q2; Polycab carries inventory for its partners and can supply within 1-2 days, so channel partners need not hold more than optimum levels.
• Wires are structurally more profitable than cables: At the EBITDA level, the margin difference between wires and traditional core cable businesses can be as high as 3%-5%; within cables, institutional business carries a slightly inferior margin profile to distribution.

Exports: Building a Sustainable Second Leg

• Exports delivered a breakout quarter: The business grew 75% YoY on a healthy base, led by strong orders from the USA, Europe and Australia, with good global demand from Oil & Gas, Renewables and Infrastructure.
• The strategy is distribution-led, not order-led: Management is building a sustainable distribution presence in identified geographies (US, Australia, Africa, Spain/EU), explicitly avoiding one-off orders; the approach mirrors what Polycab did in India between 2011 and 2016.
• Export margins are comparable or better: Export business carries similar margins to domestic but with slightly better working capital dynamics; at times margins are better due to mix and realization, though management attributes overall contribution margin improvement to a combination of factors, not exports alone.
• The medium-term target remains intact: The company is focused on achieving a consistent double-digit contribution from exports over the medium term.

Gandharv Tongia: "We are not looking for one off orders, what we are trying to do is have sustainable distribution presence in identified geography and this is what we did in India between 2011 to 2016."

FMEG: A Deliberate Reset With a Margin Promise

• The business shrank by design and by demand: FMEG de-grew 12% YoY, hit by a subdued demand environment from high inflation, especially in rural markets, and further exacerbated by a strategic re-alignment of the distribution strategy.
• Fans and seasonality added to the drag: The fans business, which constitutes 35%-40% of FMEG topline, had an off-season quarter, compounding the distribution-led softness.
• The distribution revamp is a course correction, not a crisis: Management characterized the softness as the expected consequence of strategic decisions to replace or support identified dealers and distributors; the exercise is taking time and causing a slowdown during the implementation phase.
• Sales force integration is now underway: Effective October, sales teams across lighting, fans, retail wires, switches and switchgears are being merged to get closer to the customer, with integration at both the sales team and dealer cross-sell levels.
• Contribution margin held up despite the topline hit: Gross margin was broadly comparable QoQ; organization-level expenses did not rise, but operating leverage was lost on a 10%-15% topline reduction; a few product categories actually had better contribution margin in Q2 than Q1.
• Switches are the bright spot: The switch business regained growth momentum, posting 123% QoQ growth as Polycab's own manufacturing plant started production; strong sales momentum is expected to continue in H2.
• FY23 is the base year: Management explicitly asked investors to treat FY23 as a base year for FMEG and expect the business to post decent growth from FY24 onwards, though no specific growth figures were provided for FY24 or FY25.

Gandharv Tongia: "I do not think there is any challenge. These are strategic decisions which we have taken and we are implementing it and that is where whenever you do a bit of a course correction you would witness some softness in the numbers."

Margins: Mix, Pass-Through and a Long-Term FMEG Target

• Consolidated EBITDA margin jumped 307 bps YoY: The 12.8% margin was driven by strong growth in exports and judicious pass-through of the benefit of decreasing commodity prices.
• Cables and wires EBIT margin expanded 304 bps YoY to 11.7%: The improvement was mainly driven by exports and judicious price revisions.
• FMEG posted a slight EBIT loss: The loss was entirely a function of the topline reduction; contribution margin did not contract, and some hiring and IT/digital investments also flowed through costs.
• The FMEG margin ambition is explicit: Management is confident of reaching 10% EBITDA margin in FMEG by fiscal 2026, with improvement expected every year starting next year.
• A&P investment will ramp gradually: Polycab has onboarded Interbrand and Ogilvy as consultants and plans to invest 3%-5% of B2C revenue in advertising and promotion, executed gradually over time.

Gandharv Tongia: "We are confident of getting 10% of EBITDA margin by fiscal 2026 in this particular business."

Working Capital & Cash Deployment

• Working capital days reduced to 44-45: The improvement came from three levers: channel financing penetration (75% in cable and wire, 60-70% in FMEG), inventory optimization to around 90 days, and mapping payables to inventory with a 10-15 day gap.
• The improvement is structural, not temporary: Management believes 45 to 50 days is a sustainable number for at least a few quarters from now; optimum channel inventory levels are expected to continue.
• Capex run-rate is ~₹400 Cr per year: Roughly two-thirds is allocated to cable and wire (broad-based, including export facilities, backward integration and maintenance) and one-third to FMEG (new capacity for switches, switchgear, etc.).
• Cash deployment priorities are ranked: First, capex; second, M&A, where the company will continue to scout and up its game; third, dividend payout, where the ratio has increased every year since listing; whatever is left after maintaining a war chest will be returned to shareholders.
• Backward integration is quality-led, not cost-led: The philosophy behind copper, steel and component backward integration is to control the entire value chain for better quality, which management believes drives customer confidence; better margin is a possible byproduct, not the objective.

Gandharv Tongia: "I would believe 45 to 50 days is sustainable number for at least few quarters from now."

Organizational Changes & New Initiatives

• Vertical restructuring reflects channel overlap: The Fans vertical was merged with Lights & Luminaries, and Retail Wires was merged with Switches and Switchgear, citing significant overlap in distribution channels; reporting segments (cable & wire and FMEG) remain unchanged.
• A Chief Digital Officer has been hired: Mr. Ritesh Arora joined from a large Indian organization to drive digital transformation; a separate Digital vertical has been created, focused on end-to-end digitization of front-end sales, customer experience and deep analytics.
• Etira is gaining traction as a second brand: The brand generated almost 100% revenue CAGR between Q4 last year and Q1/Q2 this year, with Q2 slightly better than Q1; it has now launched in wires and very recently in switches.
• Etira pricing is disciplined: The pricing premium versus the unorganized segment is capped at mid-to-high single digits; availability is the key differentiator helping gain traction.
• New city and distributor expansion continues: 120 new cities were penetrated in H1, generating ₹112 Cr in incremental revenues; 115 new distributors were added in retail wire and 187 in FMEG during the current year.
• 300+ new products are in the pipeline: A new product portfolio roadmap has been identified, mostly in Fans and Lights verticals, to be launched in the coming future.
• BEE rating changes are seen as a positive: Management believes tighter norms will drive better compliances, better product quality and energy conservation, benefiting large players like Polycab.

Gandharv Tongia: "We believe changes like these would be positive because it will drive the sector to better compliances, better quality of the product and at a country level it will help us and we are getting into energy conservation."

Guidance & Commitments

Key Metrics