Polycab India Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Project LEAP pulled forward by a year: Consolidated revenue grew 30% YoY, crossing ₹10,000 cr in H1, putting the ₹20,000 cr full-year target within reach in FY25 itself.
• Wires margin compressed on competitive intensity: The Cables & Wires segment stayed within its 12–14% guided EBITDA band, but retail wires saw margin pressure as peers with spare capacity chased volume during a copper rally.
• Cables capacity story intact, wires is not: Management believes industry cable capacity additions will fall short of demand, while wires overcapacity makes periodic margin skirmishes likely.
• FMEG losses widened on purpose: Higher A&P and employee spends to build vertical-wise sales teams pushed FMEG losses up, a deliberate investment phase management expects to pay off as real estate demand strengthens.
• What to watch next quarter: Whether H2 margin accretion materialises as guided, the pace of international business recovery, and any signs that competitive intensity in retail wires is easing.

Cables & Wires: The Two-Speed Segment

• Domestic wires outpaced cables for the first time in many quarters, driven by deeper penetration in emerging markets and new product ranges that now contribute nearly half of retail wire sales. Western and Southern regions, especially Maharashtra, Telangana, Karnataka and Tamil Nadu, led the growth.
• Institutional business continued strong growth, while domestic distribution-driven business was slow early in the quarter before picking up pace toward the end.
• Wires margin compressed as the entire industry, sitting on additional capacity, maximised volume growth during a 14% cumulative copper rally. This competitive intensity was the primary reason for sequential margin decline in the segment.
• Cables capacity dynamics are structurally different: management estimates industry capacity being added will fall short of expected demand, which it sees growing at roughly 2x real GDP over the next 3–5 years. Exports represent an additional demand layer requiring further capacity.
• Channel vs institutional mix stands at 90:10, with cables and wires split 70:30. Wires grew ahead of cables, but since wires are only 30% of the mix, the channel growth rate did not exceed institutional. On the cables side, channel sales were almost nonexistent in the first month of the quarter due to a 12–15% copper price correction.
• The 300 bps YoY gross margin compression is not solely from wires: the major part is the lower contribution from the higher-margin international business, whose share of top-line fell to 6.1% from 9.3% in Q2 FY24.
• Operating leverage turned negative in Q2 because new capex capacity came online, lowering utilisation, and finished goods inventory from Q1 was liquidated, reducing the need to manufacture.
• Margin improvement over the past 2–3 years was driven by multiple variables: improved sales through channel, a changed mix of cables sold domestically, and improved contribution from exports, not just a capacity advantage.

Upadhyaya: "we genuinely believe that even the capacities which are being put up right now, those will fall short. So we don't envisage a scenario in which a similar thing plays out in cables, which has played out in wires in this quarter."

International Business: Rebuilding After a Soft Patch

• International revenue rose 36% QoQ, with healthy order books across countries excluding the U.S. and significant new demand across countries and sectors.
• YoY contribution remains depressed: international business was 6.1% of revenue vs 9.3% in Q2 FY24, and margins in international have also been affected. This is the single largest driver of the YoY gross margin compression.
• Export demand momentum varies by geography, but Indian players are small relative to the overall opportunity, so weakness in any one geography should not materially affect them. Freight cost spikes or closed trade routes remain a risk.
• Geographic diversification is underway: Q2 saw large cable supplies to the Middle East and Australia, plus a couple of new countries added. New countries are being added on a quarterly basis, with a couple more in the pipeline for the remainder of the year.
• U.S. export diversification has progressed over 5–7 years: Polycab now has approvals for various cable types beyond solar, positioning it for the U.S. power T&D upgrade cycle requiring low-voltage and medium-voltage cables.
• Export margins, irrespective of geography, remain higher than domestic margins, though they vary by geography, product, and cable type.
• H2 is expected to show improvement in international business sales compared to H1. A detailed export guidance, including expected contribution from international business and domestic growth rates, will be released during the course of this financial year as part of the next 5-year guidance.

FMEG: Investing Ahead of Demand

• Revenue grew 18% YoY, driven by channel expansion, product architecture enhancements, and an influencer management program. Fans posted robust growth on a lower base, while Switchgear saw heavy growth supported by strong real estate demand.
• Losses widened due to higher organisational expenses: increased A&P spends relative to Q1, in line with industry trends, and higher employee expenses from adding manpower for vertical-wise sales teams.
• Lights & Luminaires saw healthy volume growth from new SKUs and distributor/retailer additions, but sales value declined due to ongoing price erosion.
• Switchgears is the margin focus within FMEG: gross margins are around 40% with room for improvement, and the business is already EBITDA positive. Polycab is currently between the top 5 and top 10 players, with a stated ambition to reach the top 3 over the next 5 years.
• Switchgears leverages existing wires distribution: distributors who sell wires, and end customers like real estate players, allow cross-selling. Polycab offers a 7-year warranty versus competitors' 5 years.
• FMEG demand is expected to pick up next year, fuelled by robust real estate growth.

Upadhyaya: "whenever we target a particular business, the target is to be among the top 3 players within that business, and that is something that we are targeting even in the switchgears business. It might take us a bit of time. But probably over the course of next 5 years, that is something that we definitely will target to be one among the top 3 players."

EPC: RDSS Execution Drives the Surge

• Revenue grew 241% YoY, with profitability up 263% YoY, driven by strong execution of the RDSS order book. Segmental margin improved ~80 bps QoQ to 11.8%.
• A similar quarterly run rate is expected over the next 2 years as the ₹4,800 cr RDSS order book is executed. EPC is expected to contribute a mid-to-high single-digit share of consolidated top-line, with annual sustainable operating margins in the high single digits over the medium-to-long term.
• Cables supply margins within RDSS are similar to normal cable sales in any other sector; the EPC margin accrues separately in the EPC component.

Demand Environment & Macro Tailwinds

• Government spending and infrastructure investments picked up after the general assembly election, with further increases expected over the remaining months to meet budget targets.
• Real estate is on solid footing: low inventory levels, rising prices, and healthy project launches drove H1 FY25 to record the highest number of half-yearly new project launches and sales in the last decade.
• Expected interest rate cuts in India in H2, following global counterparts, are expected to further boost demand momentum and real estate uptake. As borrowing costs decrease, private capex should improve.
• Private investments are expected to pick up pace going ahead, complementing the government spending recovery.

Guidance & Commitments

Key Metrics