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Finolex Cables Ltd
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Good evening, ladies and gentlemen. I'm Vikram, the moderator for this conference call. Welcome to the conference call of Finolex Cables Limited arranged by Concept Investor Relations to discuss it's Q2 and H1 FY '21 results.We have with us today, Mr. Deepak Chhabria, Executive Chairman; and Mr. Mahesh Viswanathan, Chief Financial Officer, Finolex Cables Limited. [Operator Instructions] Please note this conference is being recorded.I now hand the conference over to Mr. Mahesh Viswanathan. Thank you, and over to you, sir.
Good evening, everyone. Welcome to this conference call. So I'll open with some brief statement on the quarter. As you all know, gradually there has been an unlocking of the economy since July -- in fact, since June itself. And therefore, this quarter in comparison to the previous quarter was definitely much better. Volumes improved across all product category. However, we were still behind last year's numbers at this point in time. At September end, we were still behind last year's numbers.I think through the quarter, we have seen improvement in various parts of the economy. And for ourselves, we believe that we are at about 85% to 90% of where we used to be in similar period in the earlier years. So that's a brief opening statement.In terms of numbers, we recorded a sale of about INR 639 crores in this quarter compared to INR 715 crores in the previous -- corresponding quarter of the previous year. So that's at about 90% of what we achieved in the last year.In terms of margins, I think, again, we are coming back to our regular margin levels. Our gross margins this quarter was about 28%. Our comparable numbers in the previous year was 27%. Last quarter was 25%, obviously, was lower.Profitability. Again, as volume picks up, profitability numbers should improve. We are at about -- at PBT level, we're at about 14% as compared to 17.5% in the previous year, but up from 12% in the previous quarter.Segment-wise, again, electrical cable has done fairly well. We are at about 92% of last year's numbers. The laggard has been on the communications side. But that, as you know, is a segment which is impacted by the financial constraints that all telecom operators are facing. So that will take some more time to change and improve.What is positive about that segment is that while there is an issue on long-haul cables being sold or higher fiber content being sold, more and more small fiber count cables are coming into play. So work from home has provided this opportunity. And more and more cables around the FTTH operations are coming into play at the moment. While the kilometer numbers would be large, the value realization there would be lower because of the smaller count of fiber there.Positive thing again for us to report is that the new product segment, so that consists of fans, lamps, switches, switch gears and water heaters for us, that is showing improvement. And we're quite happy that the distribution effort that we have put in over the last 1.5 years is now starting to pay off, and we are able to see volumes coming in from this sector.And I think, as I've always maintained in the past as well, the moment we hit an annual turnover of, let's say, INR 125 crores to INR 140 crores, we should be breaking even there and I think that is still very doable.So with these opening remarks, I now open it up for questions. We're both here to take questions from you.
[Operator Instructions] We have the first question from the line of Sonali Salgaonkar from Jefferies.
Sir, my first question is regarding your other nonoperating income. We have seen a sharp decline on a year-on-year basis this quarter. Sir, could you throw some more light to that? And what is the trend that we expect in other nonoperating income going further into the coming quarters?
Okay. Basically, the dip is on account -- see, we -- our main nonoperating income would come from dividends. And as you know, that we have a considerable shareholding in Finolex Industries. And Finolex Industries, they declared a dividend in the month of March. That was the second dividend that they declared during the year '19/'20. And that amount, later on -- the dividend that they have declared in March was later on decided by them as to be the final dividend. So there was no inflow during the current quarter, but in the March quarter, we had that extra amount. So if you see the full year numbers, last year would have been higher by about INR 40 crores, INR 42 crores. So that's the only thing. Otherwise, there is no major change.
Understand. Sir, my second question is within the electrical cables and communication cables, could you help us probably give a color as to which end user segment are now resuming better as compared -- in the B2C as compared to the B2B currently?
Okay. So we've seen growth happening in the wire segment, which is going for housing. And we believe we've, post-September, of course, reached pre-COVID levels. It's been steady declining. We've seen a lot of launches of projects mainly in the south. I'm still awaiting data from other places to know what's happening. But I do understand residential is doing better than commercial.Now if you look at our LDC product range, we have automobile wires also in there, where wires are going for harness making. In that segment, last couple of months, we saw a surge taking place in the wire requirement by the harness makers, probably for -- because of the uptick in the cars and 2-wheelers, this is happening.So then there are sectors like agriculture. Because of the monsoon, a very good monsoon all over the country, a large segment of 3 core flat cable and winding wires, which goes for the agriculture sector, was subdued for us. Rains have gone more than normal. And the market hasn't opened up as yet. But we do believe it will -- the next 15 days, it should open up, and we should start seeing good business there again.Then we'll come to the communication sector. We see a good demand in LAN cables for computer networking. That segment, we are running full house. We are, in fact, expanding equipment and capacity in that segment. I think a lot of demand is coming because of the COVID and people working from home and they're wanting high-speed communications. So for high-speed Internet, we are adding LAN cables or fiber to the home. So there is demand for LAN cables, and there is a lot of demand for small fiber count, 1 or 2 fiber, design for fiber to the home. In fact, we've ordered more machinery to expand for the small fiber count cables as well. And this trend will continue even if COVID goes away because people are getting used to working from home. So those segments are doing pretty well.In the power cables a little bit and the flexible, which is the panel wiring, we still see subdued demand, not picked up as much as yet.And of course, the new product lines, as Mahesh explained, because of our distribution efforts, we are seeing good growth over there. Though the base is small, but we are seeing a hefty growth because we are able to touch more retail outlets now and place our products there. And so we are trying to go from 50,000 retail outlets to 1,50,000 retail outlets by the end of the year. And so we do believe we will do some good growth there this year.
Understand. Sir, how much is LAN and FTTH accounting to our communication cable revenues right now?
LAN is roughly about INR 100 crores a year. And see, in the fiber part, there is -- we've seen in the communications segment, a drop, I think, was 34%?
35%.
35% drop is what we've seen. That's mainly because of the telecom companies not expanding as they used to. A lot of tenders of the state governments, which were for center and state-sharing basis, they have slowed down. There are some new tenders coming in from Tamil Nadu, we quoted. There -- like the Prime Minister had announced in 1,000 days to connect all the gram panchayats. Those tenders, I think, are out and still to be quoted. So there would be some demand coming in there. But telecom is always a bigger demand in the communications segment, which right now is not doing very well.Even the fiber prices have dropped from $6 to $3. This is because of the phenomenon of China, when China Mobile suddenly scrapped $100 million -- 100 million fiber kilometer tender, the worldwide prices dropped. So -- and of course, we all are aware of the AGR issues and all that of the private telecom companies, and hence, their ability to wanting to expand and spend money. Based on that, telecom right now is having a lower sale. And even if you go on and buying or selling a lot of small fiber counts, it will be a very small percentage of the sale loss because those fiber counts are going 48, 96 of that type. And here, we're talking 1 and 2 fiber. So ratio is completely different. Nevertheless, it's a new product line which will grow for us, but not in the same proportion until telecom picks back demand.
Understand, sir. Sir, thirdly, on the CapEx, I mean we did maintain our earlier guidance of INR 2 billion CapEx over the next 18 months, though we had deferred by about 6 months. Any update on that?
It's not changing. In terms of numbers, it doesn't change in a big way. It's more or less around the same number. Timing-wise, there could be some changes depending on when international travel really opens up, when the technicians from overseas can come and commission certain lines. So that could be the only difference. Otherwise, the timing is pretty much the same. Give or take a couple of months here or there, it should be the same.
Understand. Sir, and lastly, how much of our revenue generating from B2C right now versus B2B? And also, sir mentioned that we'll be increasing the retail outlets from 50,000 to 1,50,000 by the end of the year. I mean that's a pretty ambitious target. How do we go about doing this thing? That's it from my side.
So if you recall, we've been saying now for close to 4, 5 quarters that we have been spending a lot of time on improving the distribution reach. So our initial target was that we should have a distributor strength of about 500 numbers, each of them covering approximately 300 retailers each. And that's where the 150,000 number comes from.So as we stand today, at the beginning of this month, the distributor count was 488. And the opportunity that they had to cover has crossed 110,000. Unique billing has crossed 50,000 numbers. So we still have 5 more months to go. So we are expecting that in the next 4, 5 months, the opportunities that we have given to the distributors to be able to reach those 120,000-odd retailers. They should be able to capitalize on them and take the unique billing up. So we are tracking this on a daily, weekly, monthly basis. So there is quite an amount of interest around it because as you are able to have more larger footprint in the market, your volumes will also improve. So that's basically what we're trying.
And this is exclusively for the new products, right?
No, it covers our existing products also. So there are -- it doesn't mean that they are only selling fans, or water heaters or lamps, there are also people who are selling wires.
Right. Sir, and what is our B2B-B2C mix?
See typically, the optic fiber sale would be B2B largely. And power cable would be B2B. Some amount of flexible sales, which is the industrial wires, that would also be through rate contracts, so that will be B2B, and auto cables are B2B. So if I take all of them, traditional mix would be around 65-35 or 70-30.
Understand. 70% B2C. Sir, and just one last clarification. Sir mentioned that fiber prices dropped from $6 to $3. What would be the time frame?
No, over the last 7, 8 months, it has been dropping. And currently, there are some people who come and offer you ridiculous prices like $3, okay? There are some who say, "No, I want to cover for the exchange," and so that number changes to maybe $3.5 or $4. So it is in that range is what he was trying to say.
Right. So $6 was probably about 7, 8 months back.
Yes.
[Operator Instructions] We have next question from the line of Sunil Jain from Nirmal Bang Securities.
Yes. First question relate to your gross margin. No doubt, we are seeing some inflation in a lot of commodities including copper and all, so are we be able to sustain this gross margin in coming periods?
We have always treated our raw materials, the major raw materials at least as a pass-through. So there may be a time lag. But eventually, the cost of those items moves on to the customer, whichever way it is. If it is going down, also we reduce prices. If it is going up, we also increase prices. The timing may differ. There is more pressure on the downward side from the market, whereas more pressures from us when the costs are going up. But with a small lag, the price changes are transmitted to the market. That's why you will see -- not just now, you will see across multiple quarters, our gross margin numbers are more or less steady, unless it has to do with a big change in the mix. Otherwise, the numbers will be more or less steady.
Okay. So normally, the time lag is quarter or so?
No, no, no, it doesn't go for a quarter. It's a month maybe. The longest is about a month. It's a couple of weeks. We just want to make sure that any change seems to be like a change which is a sustainable change. It's a permanent change. One-day blips, we don't make changes, but something that we are able to observe over a couple of weeks, then we make the change.
Okay. And sir, second question was, you are targeting increasing your distributor to, say, 500. So will there be any change in your credit terms to them? Or it will be remain stagnant...
It is the same. It is the same across all product lines. The credit terms are the same to whether he is a distributor or a channel partner who has been with us from early times. We are very clear that we are not a bank, that credit risk is something that we do not want to take. We are happy to offer the customers a choice of financing, but without any recourse to the company. That's basically how we do it.
And sir, last question from my side, related to your expansion of distribution network. So are you also planning to support this expansion with some sort of advertisement, large-scale advertisement or something? Is there any budget for that for the next 6 months?
Yes. In fact, we have been spending and increasing the spend on advertisement over the last few years. This year, of course, with COVID hitting everybody, discretionary spends have come down a little bit. But in the long run, yes, we will need to support them. And whatever support is required in terms of ad or any other marketing support, those are things that we will continue to do.
So generally, how much is the percentage of sales you are targeting?
Okay. Leave out this year, the average last couple of years was about 1.5%.
We have next question from the line of Ajay Sharma from Cycas Investment Advisors.
In the last quarter, you mentioned that -- or in the last con call, you mentioned that the working capital of the industry had improved in general that even your competitors were not really offering much credit. Now I just wanted to ask, is this situation still prevailing? Or is the industry going back to the pre-COVID level of working capital and channel financing and all that stuff?
No, I think channel financing, everybody is going to use it as a means of reducing risk from one selves. Some of us do it. Like for us, we do it with a no-recourse basis. Others do it with certain percentage of recourse to themselves. But that is something that is there to stay. I think the larger companies, our -- I think few of them take a punt on the pricing. Most people would follow some kind of a hedging out there. So the trick is in terms of how you manage your receivables and how you keep a tight control on inventories.So for example, we do not buy anything more than what we can consume in a month. So that's been our practice for a long, long time now. And so our exposure to the changes in the market are therefore minimal. How each company would do it might vary, but broadly, this is what we follow. But I think overall, the trend in the industry is that they would like to see more turns and lower capital investment in inventories that are received.
Okay. Okay. That's very helpful. And on the same topic, in the last conference call...
Everybody is at the same space or not is a different matter.
Okay. Okay. I see. And on the same topic, you also mentioned in the last conference call that the company was looking at increasing their market share by catering to dealers that already had an outstanding credit balance with other competitors because you said that competitors were not sending over more products to their dealers until they clear their credit balance. So has there been any progress on that front? Any change in the company's market share?
Yes. When we talked last time, that's what was happening in the market. The competition was going slow on giving them products. So we've got a lot of the competitors dealers to buy our products. That helped us, and it is providing us the growth in the retail counter is what we are looking at. Because once you start a relationship with someone, even after some time if the original supplier comes back, the retailer doesn't really stop his relationship with the new company. He tries to keep both. So we are hoping it does benefit us, and we will continue to get business from them.
Okay. Okay. That's great. My next question was, what is happening with the J-Power Systems joint venture. Have you seen any progress on that front? In your annual report, you still said that your time horizon was 1.5 more years of subdued performance. Any changes there?
No, the performance is still subdued. Because while consumption at the retail end has shown an uptick, consumption at a project level on newer public installations, that is still slow. And decision-making within the government machinery, because if you see all these utilities are majority government-owned, decision-making is still slow. So while tenders have come up, no major decisions have happened in the last 4 to 6 months.
Okay. Okay. Fine. And my last question was, if you could just tell me what some of your internal goals are for the FMEG sector, your segment? Do you have any goals there, like, you wanted to be like 5% of revenue by a certain year? Or what should we expect from that division going forward?
Which division?
Your FMEG, your appliances.
Okay. The new ones, the newer ones, okay. See, traditionally, if you see, electrical cables is about -- has been approximately 80-plus percentage of revenue, communication has been around 15% and others has been 5%. So our idea was of getting into some of these products as, a, if they were alive; and b, we wanted to derisk depending on -- depending upon one product segment for a substantial part of our revenue. So I think the goal is, over a period of time, bring this to a size which is equal to communication cables, at least.
Okay. Okay. Right. And any time horizon for that, 3 years, 5 years?
Yes, about 3 years.
[Operator Instructions] We have next question from the line of Hiren Trivedi from Axis Securities.
My questions have got answered. I just want to have one quick question for the CapEx. So what is your CapEx plans for FY '21 and '22? And on the profitability of the FMEG segment, as you mentioned that you are targeting around, say, maybe 15% of the overall revenues in next 3 years. So any -- on the EBIT levels, any margin guidance or something that we can look at?
Okay. I'll answer your first -- the CapEx question first. We had said that we would be spending approximately INR 200 crores over the next 18 to 24 months, and that still stands. So major part of the spend is going to happen on putting up an electron-beam facility to cure cables for industries which require cure cable.The second one was to add some backward integration there. So tinning copper as well as copper-clad steel, so these would be 2 backward integration projects. There is the conduit plant, which is more or less ready at Goa. We're waiting for the technicians to come in from overseas to commission it and some expansion on the optic fiber cabling equipment.So this is broadly the areas -- are broadly the areas that we are spending money on. And the time horizon was between 18 to 24 months. That has not changed much in the last 6 months or so, unless there are delays in the -- in travel opening up and restrictions still being placed on technicians coming in from overseas. Barring that, we do not see any major change.Your second question was on the newer product lines. So yes, we said we would like to see it reaching a level of 15% of revenue over the next 3 years. At -- we think at a turnover of about INR 140 crores, INR 150 crores, it would be profit neutral. Below that, the cost of advertisement, et cetera, would be a dream. But since it is a necessary investment, we are continuing to do that. So once we reach this number of INR 150 crores, I think we should be making money there.So does that answer you?
Sure, sure. Yes.
[Operator Instructions] We have next question from the line of Raj Ojha, an investor.
I just wanted to understand how is our demand scenario from real estate side, like post COVID situation? So how is demand from real estate side coming in?
Can you repeat the question again? How is the demand from real estate, is it?
Correct. Correct.
So since the lockdown, we were also wondering how much are we going to get affected. And what we understand is earlier stage, whatever was affected was because of the labor was moved out from various cities, going back home, the effect was because of that. And as people came back, wherever their wiring projects were on, they continued because if you add in real estate sector anything which is under construction and started with wiring, it makes sense for him to complete the wiring and complete the building and sell the product. But what worries us is looking at the lockdown and its effects and demand for future, how many new projects would get launched. And if there is a smaller amount of project getting launched, then he would face a wiring downturn at a later stage in life. So we haven't really got a handle on exactly how much that effects would be at the moment.
Or when it could be.
Yes. So that time will tell us in that sense. But there would be also shake up in terms of organized and unorganized sector. So while we may get affected on the demand side at a later stage, we may also gain from unorganized sector business moving to organized sector. So exactly how that will pan out, we don't have the correct number to share with you at the moment.
Okay. Good. My second question is, sir, from the balance sheet from September '20. Okay, under current assets, can I get the breakup of about INR 816 crores balance sheet assets, is it possible?
Yes, that's mostly in fixed deposits or in money market first.
Okay. What will be the proportion of that, sir?
I think -- one second. Give me a minute, I'm just looking at the numbers.
Please sir, please.
About INR 800 crores is fixed deposits.
INR 800 crores is fixed deposit and remaining is your money market investment, right?
Yes. Yes.
Okay. And then last question is, sir, like, do you -- do we cater to railway sector as well because they are focusing more on modernizing? So is there any scope coming in from that side?
There are opportunities. So in certain product lines, we are registered with RDSO. So on the fiber side, we are registered with RDSO. On the cable side also, our registration is pending with them. Their requirements are for standard electrical cables is not much, but they do require, I think, certain cables which are rubber insulated, which at present, we do not make. So that is something that is potential as we go forward.
[Operator Instructions] We have next question from the line of Ajay Sharma from Cycas Investment Advisors.
It's me again. Just a quick follow-up to the previous question. So the economy has been open now for 1 quarter, but you guys still are not really sure if what's happening in the unorganized sector?
No, he didn't say that. What he meant to say was, there is a pickup in the real estate offering, meaning our wires are getting consumed. But the understanding is that these wires are being consumed in projects which were left unfinished when the lockdowns happened. And now that people have returned to -- the migrant labor has returned, so those projects are getting completed. But new projects being commissioned, our new projects starting off from the ground, that is still not very visible, except if you go into certain areas in the south. So what we said was if there is a slowdown there, then there may be a dip in the future for wires that go into residential construction.
A year later.
Maybe that might happen after a year ago -- a year later or 8 or 9 months later. But one thing is we...
Okay. So that is one segment, right?
Yes. Yes. So all we're saying is we would not be surprised if there is a dip going forward.
I see. I see. And -- okay. So then the unorganized sector, then it's still not...
No, the unorganized sector, what he said was while we may not -- while we'll not be surprised if there is a dip going forward, there is the positive from gaining all of the unorganized sector because when lockdowns happen, those were the people that were hit most. They didn't have access to people or money.
Yes. So they're still under stress, right?
They didn't have access to people or money. So whatever volumes they were selling in the past, some of it has come into the organized space. So we must have gained some share over the last few months.
Okay. And like my question was just that it's not going to go back to the way it was now like the impairment that's happened in the unorganized sector is permanent, right?
I hope so.
[Operator Instructions] As there are no further questions from the participants, I'd now like to hand the conference over to Mr. Mahesh Viswanathan for closing comments. Over to you, sir.
Thanks, everyone. Thanks for joining in this evening. I hope we've been able to explain the numbers as well as answer any questions that you have had. Thank you very much.
Thank you very much, sir. Ladies and gentlemen, on behalf of Finolex Cables Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.