Polycab India Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Highest-ever Q1, soft base: Revenue and PAT hit a record for any first quarter, but the YoY growth percentages are optically inflated by a weak June last year when commodity prices suddenly collapsed.
• Wires & Cables volume surged 50-60%: Domestic distribution stayed strong while institutional business accelerated, and international revenue jumped 88% YoY on demand from the US, Australia and Europe.
• FMEG remained a drag: The segment stayed EBIT-negative as weak consumer sentiment and LED price corrections of 10-12% offset early gains from channel realignment and the BEE fan transition.
• Margin levers are firing: Wires & Cables EBIT margin improved ~330 bps YoY to 14.8%, helped by price revisions, operating leverage and a richer international mix, while gross margin rose ~150 bps on commodity tailwinds and scale.
• What to watch next quarter: Whether FMEG demand actually picks up in Q2 as management expects, the pace of the ₹20,000 Crore revenue target recalibration, and any M&A deployment from the cash buffer.

Wires & Cables: The Core Engine

• Volume growth was broad and deep: 50-60% volume growth came from sustained domestic distribution momentum and a sharp acceleration in institutional business, with the North leading geographically, followed by West, South and East.
• International business is scaling fast: 88% YoY growth was fueled by Renewables, Oil & Gas and Infrastructure demand in the US, Australia and Europe. The company leased its first US warehouse on the eastern coast and plans more to shift toward a distribution-led model abroad.
• Margins improved structurally: EBIT margin reached 14.8%, up ~330 bps YoY, driven by judicious price revisions, better operating leverage and the growing contribution of higher-margin international business.
• Commodity tailwind has a shelf life: Gross margin improved ~150 bps YoY partly because copper fell from \$10,500 to \$8,500 per metric ton in June last year, weakening the base. From Q2-Q3 last year, commodity prices normalized, so that base effect will fade.
• Copper volatility is hedged away: Management stressed that copper price swings have no bearing on annualized profitability due to its hedging framework and risk management.
• Capacity has headroom: Overall cables and wires utilization sits at 60-70%, with a few factories slightly above 70%, leaving room to absorb demand without a step-change in capex.

Gandharv Tongia: "As of now, the focus is more on the cable business. Wires are generally a very competitive market in most international areas. We believe we should continue to remain focused on the cable side of it."

FMEG: Waiting for the Turn

• Consumer sentiment weighed on the quarter: The segment stayed EBIT-negative, saddled by fixed costs in the absence of scale, though channel finance penetration reached 91% and channel realignment benefits began to show in a 3% YoY and sequential uptick.
• Fans are transitioning: Healthy sequential growth came as older non-BEE compliant inventory with channel partners was mostly sold off, triggering fresh sales of newer BEE compliant inventory. Another 20 fan SKUs are in the pipeline for Q2 and Q3.
• Lights & luminaires corrected sharply: The category de-grew marginally on a sequential basis as LED prices corrected by 10-12%, though 50-60 new SKUs are planned for Q2 and Q3.
• Switches and switchgears showed green shoots: Switches continued impressive growth on improved availability from in-house manufacturing, while switchgears benefited from pricing revisions in 10kA MCBs and the launch of new 6kA category MCBs that contributed 20% of incremental sales.
• The 10% EBITDA target stands: Management committed to reaching an EBITDA margin of about 10% in FMEG by FY26, with year-on-year improvement directionally, though the path depends on consumer demand returning.

Chirayu Upadhyaya: "We expect that going forward, maybe in Q2 or Q3 onwards, you will start seeing consumer demand come up in the FMEG segment as well."

Project Leap & Strategic Execution

• The BCG joint project is delivering: Initiated in May 2021, most strategies are now implemented or being implemented, and the improved P&L performance in FY23 and Q1 FY24 is attributed directly to this work.
• Product and capability milestones are stacking up: The company is setting up an EHV factory, has built the largest R&D and product innovation team in the country, achieved backward integration across practically all raw materials, and supplied cables to INS Vikrant as well as refineries and automotive industries.
• Cross-selling is the next lever: Post-merger with the wires vertical, management identified top wires retailers not yet selling switchgears and will aggressively pursue cross-selling to drive FMEG penetration.
• Whitespace expansion continues: The company targets penetrating a further 140 whitespaces during the current year.

International Business: The 10% Bridge, Already Crossed

• The FY26 target is already in range: Project Leap set a target of 10% revenue contribution from international business by FY26. The business has operated in the 8-10% range over the past two to three quarters, and management acknowledged the international opportunity is large enough that the contribution might increase beyond the original target.
• A recalibration is coming: Because the opportunity is proving larger than planned, management said it will need to recalibrate the international target and come back to investors, though no timeline was given for that update.
• The model is shifting to distribution: Leasing the first US warehouse on the eastern coast marks the start of a gradual shift from a project-led to a distribution-led model in international markets, with more warehouses planned to cover all geographies.
• Cables first, wires maybe later: Management was explicit that the near-term international focus remains on cables, calling wires a very competitive market in most international areas, though a premium wire product portfolio may be considered in a few quarters.

Chirayu Upadhyaya: "Within Project Leap, as you are aware, when we started in FY21, we set the target that by FY26 we wanted to achieve about 10% of the contribution through the international business... What we have realised is that the international opportunity is quite large, and it might be possible that the contribution might increase, but we will have to see and recalibrate that and we will have to come back to you."

Capital Allocation & Balance Sheet

• Working capital spike is temporary: The increase this quarter was driven by higher anticipated growth and preponed copper procurement ahead of an annual maintenance shutdown of smelters. Management expects to return to a comfortable 50-55 day working capital cycle going forward.
• Capex is steady at ~₹600 Crore annually: This covers the EHV factory setup, export facilities, maintenance capex and FMEG capex, with additional export capacity expansion possible through both brownfield and greenfield routes as demand increases.
• Cash deployment priorities are ranked: First, capex for the EHV plant, FMEG facilities and export facilities. Second, increasing dividends in absolute terms year-on-year. Third, potential M&A in FMEG or wire and cable that can add significantly to capabilities. Fourth, maintaining a cash buffer on the balance sheet.
• A&P spending will rise: Management plans to increase advertising and promotion spend to 3-5% of B2C top-line going forward, funding brand building through ICC event sponsorships, TV commercials, distributor and retailer meets, and digital marketing.

Chirayu Upadhyaya: "Third, utilization would be, may be, an M&A. If we come across some company in both either FMEG or wire and cable category, that can add significantly to our abilities, we are open to acquiring such a company."

EPC: A Small but Growing Contributor

• Revenue grew 63% YoY to ₹122.7 Crore: Profitability rose 47% YoY with segmental margin at 12.5%, and management expects annual sustainable operating margin in the high single digits over the mid to long term.

Guidance & Commitments

Key Metrics