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Finolex Cables Ltd
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Ladies and gentlemen, good day, and welcome to Finolex Cables Q3 FY '20 Earnings Conference Call hosted by Yes Securities. [Operator Instructions] Please note, this conference is being recordedI now hand the conference over to Mr. Tarang Bhanushali from Yes Securities. And over to you, sir.
Well, hi. Good afternoon, everyone, and I welcome you all to the Q3 FY '20 earnings call of Finolex Cables. From the management side, we have Mr. Deepak Chhabria and Mr. Mahesh Viswanathan. On the onset, we would like to thank the management for giving us this opportunity to host the call. And I would first let the management give some opening remarks, and then we can start with the Q&A.
Good afternoon, everybody. Thanks for participating in this afternoon's call. I'm sure you must have read, seen the results already. You must have also seen the presentation that we put out in the website. And so instead of spending too much time on the numbers on the presentation as such, I would like to get directly into the call -- into the questions. So I leave it open to you to start asking the questions, and we are happy to take the -- give our perspective on the results.
[Operator Instructions] We have the first question from the line of Sonali Salgaonkar from Jefferies India.
Sir, am I audible?
Yes, you are clear.
Sir, my first question is would you be able to share an update on the end-user segments of yours and the demand scenario that is currently in those segments? For example, in Electrical, how is Construction, Auto, Industrial and Power doing? And in Communication, you have already stressed that OpEx is down by more than 30%. So when do you expect that to revive going forward?
Okay. End-user visibility in Construction, in real estate is -- it is still very sluggish. However, for us, in this quarter, the -- within the Electrical space, the product line that grew -- there were 2 product lines which did well. One was the General Electric Wire, which is normally sold in Construction space; and the Automobile one. In the Construction space, I think we believe that our efforts on improving our distribution are starting to pay off, and we now have a better footprint than before in terms of reach and visibility across different markets. I think that has given us the volume increase that we have seen in this quarter. I don't believe that the market itself has -- the demand itself has grown. As regards to Automobile, here, again, we've been able to add new customers during the last quarter, which has resulted in an increase in volume. We recently qualified for supplying to Honda, and I think that has increased -- the initial orders have increased our volume a little bit. But beyond that, in general, in the economy, you would find that things are a little sluggish. And while -- and that is visible in most macro indicators as well. Optic fiber, we had mentioned in the press release that our quarter numbers were down by more than -- almost 1/3. And yes, the result -- I mean the reason is the issues that the telecom industry faces itself today, both from the government sector as well as from the private sector. So until a resolution is found to both BSNL and money flows back into those projects from government allocations or when -- until the issues of, I mean, the ADR are settled, I think you are going to see a period of disturbance. Now whether that is going to be 2 quarters, 1 quarter or 1 year is anybody's guess at this point in time.
Sure. Sir, if I look at your sales mix, it was almost 70% B2C and almost 30% B2B. So how is, in particular, the B2B segment doing? Because you had mentioned in your press release that there is some pressure on the industrial side of it, so just wanted to understand that -- are liquidity constraints causing this constraint or probably there's much more to this?
I think it's partly liquidity and partly general apathy towards additional investments at this point in time.
Sir, but are you seeing any renewal in traction in the bigger B2B projects? Or are you fairly seeing them as stalled right now?
I think it's very slow at this point in time. We don't have too much of evidence to say that things are moving, the way it shows.
Got it, sir. Sir, on the distributor and retailer count, could you help us with the recent numbers post the expansion that you have done?
We are now at slightly over 300 distributors. So our plan for the year was to touch a strength of 500. And on an average, each one of them would be able to cover approximately 300 to 350 retailers. So then your effective reach would have gone up to 124,000, 130,000 retailers from our past 30,000 to 35,000. So we are now at the 300 mark, and we still hope to be as close to 500 as possible in the next 1.5 months.
Sure. Sir, my last question, ad spend in new products, the absolute amount in Q3 and 9 months.
I don't have that right away in my head. But in the quarter, I believe we spent about INR 7-odd-so crores -- 1 second. Yes. In the quarter, it was INR 7.5 crores and about 1/2 of it to our newly products -- our new products.
Okay. Sure. So we even look at maintaining a 1.5% to 2% of net sales in terms of ad spend, right?
It will be around 1.5%, not 2%.
[Operator Instructions] Your next question is from the line of [indiscernible] from JM Financial.
So just want to understand what is the share of auto and non-auto in our mix at this point of time?
Auto will be approximately 10%, 11% of Electrical revenue.
Sure. Sir, and what is the share of this [indiscernible] 1.1 kV cables in our FY '19 Cables business?
I'm sorry?
What is the share of the [indiscernible] 1.1 kV cables in that particular business?
See, the general wire is less than 1.1 kV. Agricultural wire is largely 1.1 kV and less. The wires which are flexible wires are all 1.1 kV and less. So I really do not understand your question. Are you saying -- are you wanting to know how much is the general wire?
Yes, sir.
That will be about 70% -- 65% to 70%, somewhere around that.
[Operator Instructions] We have next question from the line of [ Deval ] from [ SIMDL ].
Sir, just a strategic question relating to our FMEG space. So what is the whole strategy in terms of -- since we are a late entrant in the segment as compared to players who have reached a decent scale, I mean, what's our sales pitch to our distributors in terms of pushing our product? I mean what kind of price discounts we are giving or in terms of better credit period or the quantum of credit period, if you can specify, to our distributors? If you can just throw some light on these aspects.
Yes. As a company, we do not offer credit to any B2C customer. It's true for cables. It's true for the newer products as well. There is some overlap in our customers who carry both the traditional products as well as the newly launched products. So therefore, we do not want to create a situation where cash flow becomes an issue. So we have taken a position that we will not offer credit, but we will try and arrange credit for those people through the distributors or through channel financing, which is how we are trying to work that around. So that's on credit. You had -- in terms of pricing, we will be comfortable -- obviously, being a later entrant, our prices will not be carrying a premium as compared to the leading players. It will be at a slight discount to the larger participants. What value of discount will depend on the individual product line and individual modules, but there will be a slight discount to the leading players.
Sir, but I mean, like in terms of giving credit, [indiscernible] were already established, [indiscernible] giving credit. Then I mean, what is the kind of value proposition you're offering to the distributor to keep our FMEG products? Because in pricing also, we are offering some discounts. And in credit, we are doing a cash business, which makes their working capital very -- I mean, not cash [heavy] but still, they'll be more comfortable to keep someone else's product who are established brands. So...
So that's why I said we are arranging the credit to a channel partner, channel finance. So that means I protect myself, whereas somebody else who's a bank takes the credit.
But I mean it's like a short-term borrowing even if it's someone who're doing channel financing. I mean...
What is the requirement of the distributor, that he needs to have funds to rotate? Now whether he gets it from me or from a bank, as long as I'm arranging it for them, how does it matter?
[Operator Instructions] We have next question from the line of Lalaram Singh from Vibrant Securities.
Sir, do we have any presence in the cables for renewable energy, that is wind and solar?
Yes. We have products for the solar farms. In fact, we are -- ongoing expansion is on that. We have just started the various [ comments ] to construction of a plant which would -- from where the cables meant for the solar industry would be produced using electron beam technology. Currently, the same thing we are trying to achieve through a chemical installation process. But going forward, we will be using electron beam technology to do the final jacketing and insulation.
And how big would that capacity be, the ebeam capacity?
We are putting 2 ebeam accelerators, one which is 1.5 to 3 mV, and the other one is 0.8 mV. So this -- so that will handle different sizes. In fact, the smaller one can later on also be used for other applications; let's say, in automobile applications where the thermal requirements are increasing.
Okay. And is it a strategic focus for us going forward as well in the sense that -- are we bullish on renewable energy?
Yes, we are. That's why we are investing this money in it. It's going to cost us close to INR 75 crores to INR 80 crores. Construction has just commenced. We have put in the advance for the equipment, and we expect all of these to be ready in the next 7 to 8 months.
Okay. And how are the margins and the terms in this segment, at par with our current business profitability?
It is going to be B2B, so it'll probably be lower than your traditional B2C margins, but it will be broad.
Okay. And how much presence do we have in the power cable side [ ex utility ] as a overall cable strategy?
As overall revenue, on a yearly basis, it comes to somewhere around INR 180 crores to INR 200 crores, which is slightly less than 10% of total revenue -- of the electrical revenue. We are a very small participant in the power cable sector. Primarily, as you know, this is a business which is utility-driven and within the utility, specifically the discount-driven. So you have issues on collection. You have issues on prices, price levels. And you have another issue which nobody wants to talk about, which is bribery. So that is something that we really don't want to get into. And so we have kept our business exposure here very small. We know how to make a power cable. We're pretty good at it. But these 2, 3 things have prevented us from expanding on this line.
Got it. One final question. Do we have any presence in cables for railways?
No, not at the moment. We are working on some possibilities there. But we do -- we worked once with railways on fiber optic -- on the fiber optic side.
Okay.
Okay, not in electrical, but on the fiber optic side.
But we plan to foray into electrical as well?
We are looking at it. We are seeing what is possible. The ebeam plant when it goes live, it will have capability to make cables for railways, which are cured with ebeams. So at that time, we will get into instrumentation cable, which is specialized towards the railways.
We have next question from the line of Abhineet Anand from SBICAP Securities.
First of all, just wanted to know for the new products, at 9 months, what is the breakout, sir, in terms of enhanced features and others?
For individual?
Yes, sir.
I will share it with you except I don't have them right away. I don't have the sheet with me -- in front of me.
Okay. Secondly, we have had -- apart from in the optical fiber, the commentary is that we have had issues with telecom not [spending] and also some of the pricing impact of China, right? So I just wanted to know, the latest issues going around China, is it going to have some -- another round of negative impact or something?
We -- at this moment, as far as optic fiber is concerned, over the last 1.5 years, the large volumes available from China have depressed the fiber prices globally. Now with plants having been closed there for 1.5 months to 2, we are not really sure what that will do to the fiber prices. However, that is not impacting us because we have -- we draw our own fiber for the most part. And we -- what we need, we buy from our joint venture who gets the glasses from the U.S. So that should not impact us immediately. There are some intermediary items like tapes and stuff which were being imported, which are also available in India. Due to pricing, those are being imported from China earlier on. The availability of those items in the short run may be an issue. But then there are manufacturers in India who can provide those material. So in terms of making products available, I don't think there should be a major issue. Costs might be a concern there.
And our agreement with Corning, if you can maybe give highlight on that. How -- so what part of production is being done around [indiscernible] [roofing] and then [indiscernible] beyond which we do not? There is some clause, right? If you can explain.
Well, we have a capacity of 2.5 million kilometers. So anything that we require in excess of that number, we can buy it from the joint venture.
And as of now, how much of this 2.5 million is being utilized?
Currently, last 3, 4 months, not much because the industry...
Let's say for the year.
This [indiscernible] have an issue. For the full year, we should not have an issue on that.
So you won't see this hitting anytime soon, right?
No, no. Not immediately, no.
Okay. On this tax rate, I think YTD, our numbers are below 25%. So for the full year, what should be our guide on this tax rate, sir?
I think it should be somewhere around 22%, 23%. 25% is the standard rate. We have some dividends, so the profit would include that dividend also. So somewhere around 23% is what I think we should end the year.
And just 1 last question. What is the status of the case [indiscernible] that's been going on for some time now?
There is not much of a movement. The cases which have been filed on individual basis, hearings are still going on at different fora. And there was one case which was filed by the company where, again, it has just come up for hearing and not the main case. One application which the opposite side has filed had just come up for hearing last week. So that is -- if you ask me in the 3 months what has happened, nothing.
We have next question from the line of [ Manuj Puri ] from Equitas Securities.
Sir, just in your spiel -- opening comments on ECS business, can you throw some light? Sorry to make you repeat again.
Comments on the ECS?
Yes. Electrical cable segment, sir.
Okay. What I said was on the electrical cable side while values are lower, there were 2 product lines where the volumes have actually increased. One is on the electric wires, the general electric wire, and the second is on automobile cables. On electric wire, while the market has not grown substantially, our market has not been on the positive side, I think we have been able to increase volumes because our distribution strategy is slowly paying off now and products are now visible and available in different countries across the market. So that has led to a 5% volume increase there. And on the auto cable, I mentioned that we have added some new customers during the quarter, which have led to growth in the volumes there. That is the 2 segments that are there.
So it's [indiscernible] and secondly, on communication cable segment, you already indicated that there is very limited visibility. But if you look at, I think, over the last 5 -- 4, 5 quarters, the quarterly run rate has constantly been moving on the lower side. Are there any risks to this current number? Or do you see this is at the bottom now and whenever things improve, like we would be growing from here on? Because, this quarter, we have done somewhere around INR 90 crores, which was INR 106 crores last quarter, in Q2 of FY '20. So do we see this as the bottom or we still believe that there could be some risk to this INR 90 crore run rate as well?
The visibility -- forward visibility is very limited. So I think beyond 6 months, it's very difficult to comment on the order book. So I do not know how things will pan out, whether these 3 players will [play it safe], their ADR issues today and on the 17th of March, whether the INR 6,000 crores that has been promised in the budget will be available to BSNL on -- in the next quarter to BSNL or not. So it depends on those. And unless that funding is made available, yes, you will see some stagnation.
That's right. Right. Sir, we [should not be] seeing any uptick, so this should be something which we should normally expect, at least for now -- as of now for next 6 months?
Yes, this trend is what you should expect.
We have next question from the line of Nishant Sharma from HDFC Securities.
Just a follow-up question on the distribution or dealer credit. Sir, you said you will be arranging credit for the distributors or the retailers. Sir, we would be having any guarantee or we would be providing any guarantee in terms so that they can get the C credit? Or how would we be helping them in terms of getting credit? If you can just explain that part.
We have channel finance arrangements with about 5 banks. All of them are on a nonrecourse basis to Finolex. So the risk is something that the bank takes. The credit call is something that the bank takes. All I am doing is to negotiate a rate for them, a promise to the bank that if somebody defaults, then I will not supply further. So because I am negotiating on a bulk basis, I'm able to get a better rate for those people. And sometimes, we are able to push through things like no processing fee or lower amount of collateral and so on. But beyond that, we are not liable for any losses that they may cause.
Okay. Sir, it's not that the supply -- I mean nothing would come on to us as a company?
Absolutely, absolutely.
We have next question from the line of Mayank Bhandari from B&K Securities.
I just want to know what is the number of dealers overlap between our Consumer business and Wires businesses?
Out of the [middle discounts] [indiscernible]? Yes, out of the 4,000-odd channel partners, maybe about 1/2 of them overlap. And out of the new distributors of new -- people who only distribute -- maybe out of the 300, maybe about 75 to 80 are selling both.
Okay. And what is your expectation in terms of breakeven on the other segment like?
At revenue level of somewhere around 125 to 140, we should break even. This year, the charge on advertisement 2 of the other product lines have been rather heavy, and that's why you see the results the way they are.
Okay. And yes, lastly, CapEx number for FY '20, if you can.
We had said in the last couple of calls that over the next 18 to 24 months, we would be spending about INR 200 crores on various projects. That was partly on -- the major items were the conduit plant, the ebeam facility, expansion in optic fiber and expansion in the LAN function and some backward integration in terms of tapes, yes, and steel wire. So with the current situation on the telecom industry, maybe the -- part of the money that we'll reserve for the optic fiber expansion will get postponed in terms of timing. The conduit plant is nearing completion. The building is more or less ready. Machines are in the process of being installed. And I think testing and commissioning should happen somewhere May or so. So June onwards, we should be able to see some products coming out of there. The ebeam facility construction has started now, and we should finish construction over the next 7 to 8 months and afterwards, commissioning and selection would start. These are 2 major ones. The steel wire and -- yes, that facility should start -- in terms of construction, that should start next. So this is where we are.
[Operator Instructions] We have next question from the line of Sonali Salgaonkar from Jefferies India.
Sir, I wanted to understand the revenue and profit numbers for fiber JV.
The fiber JV is at breakeven now. Primarily, market conditions are driving this. But we have no -- [most] sales has come down substantially compared to last year, but the results are at a breakeven level. On the EHV JV, volumes are slowly going up. I think this year, we will end the year somewhere around INR 115 crores to INR 120 crores in revenue as compared to somewhere under INR 40 crores last year. There would still be losses, somewhere probably around INR 20-or-so crores this year. Going forward, we expect things to change further as they have changed over the last 1 year or so. We are getting decent positions on the various standards that are coming up and so that should improve profitability. The one thing that we are still not able to control is the timing of decision-making in the utilities. Tenders take a fairly long time to get decided upon. And even after decision, for the final paper order to come to you and the supporting approvals in terms of the design approval, the approval for civil constructions there, those take a very long time and sometimes our fixed costs are not getting fully absorbed. So it's a challenge that we have to learn to overcome. That's something that is still remaining.
Sure. Sir, anything on the order book?
As of date, I think the order book is about somewhere around INR 120 crores, INR 130 crores.
Sure. Sir, a last bit on the channel financing that you spoke about. So of your total sales, how much would channel financing be contributing to?
I think about INR 600 crores to INR 650 crores annually.
[Operator Instructions] We have next question from the line of Lalaram Singh from Vibrant Securities.
Sir, may I know the gross debt and cash figures?
Debt is 0. Liquid money in the form of investments in debt funds and fixed deposits will be around INR 1,400 crores to INR 1,450 crores.
1-4, okay. And sir, one last question is within the ebeam cables, you said that we want to cater to the solar and also railway. So how big is the capacity in terms of how much sales can you support in terms of those?
You say how much sales would be supported?
Yes.
I think this investment should -- when it's running fully, should turn about INR 250 crores or so.
So -- and the investment should be around INR 90 crores to INR 100 crores?
Yes, but that's largely on the building and site. So tomorrow, if you need additional lines, they can be populated.
Got it. And is that market fundamentally very different from the power cable market?
In a way, it could be because we will also be looking at EPC companies. We'll be looking at solar power plants, which are not necessarily your power utilities.
Okay. But still, there's not as -- it's less risky as the B2C business, right? So we are very selective in the [orders] industry which we undertake?
No, but the solar cable will be sold from both angles, B2B and B2C. For example, there are many small players who install solar power on top of building towers for homes or commercial buildings. Even they [ require ] such cables, which is sold through our distribution network. So you will have both kinds of sales: a large volume going to an EPC contractor setting up a solar farm; and then, of course, the retail side also through our distribution network.
[Operator Instructions] We have next question from the line of Tarang Bhanushali from Yes Securities.
Sir, what would be our 9-month Capex? And what are we targeting by the end of the year? And of this INR 200 crores, what would be the amount for the OFC part? So again, next year what would be our CapEx target?
Out of the 200, about 60 was work for OFC, so that will get postponed. And this year, I think, including the conduit, we would be spending maybe around 75 to 90, in that range, depending on how much work gets done.
And the rest would be in FY '20 going on?
Right.
Okay. Sir, on the housing wires part, so what we have seen is that most of the listed players have been able to increase market share. So is it that the unorganized market has been losing market share over the last 1 year because everyone has been trying to gain market share? And what we hear from your commentary that the whole market has not gained, but most of the companies have gained in terms of volume or value. So is the unorganized share going down significantly?
It is definitely down as compared to [ 3 GSE ] periods. And I think I've made this comment a couple of times in the past as well. Overall market has not grown substantially, whereas, like we said, every listed company has reported some volume gains. So clearly, it would have only come at the expense of the unorganized players. I think that is the -- that's the right plan to do over there.
Sir, and on the J-Power subsidiary, so we said that this year, we will be close to around INR 120-odd crores. And with the order book at 132, do you think that next year we will be somewhere close to the 150 to 200 mark or, again, the execution delays will keep us guessing?
The intent is to grow beyond 250, so that's our internal target. But like you said, some things are beyond our control. And however much you push, when there is a delay in clearing the design, not that when the clearance comes, there is a big change in what you have proposed and what comes back signed, then there's not much that we can do when such things happen. But hopefully, that should improve because the utilities have now experienced us. And when they see that time after time there is no change in the basic design that we propose, they should also get over their initial hesitation and do things faster.
And sir, on the communication cables part, so along with our revenues, our margins have also come down significantly. So will that also -- as you mentioned that revenues will be similar to Q3 numbers over the next 6 months. So even margins will be somewhere close to that or we will see some improvement because we would be having some high-cost inventory with that?
No, it's not the -- the reason for margin going down is not the -- nothing related to inventory. It is basically that you're not able to absorb the fixed overheads.
Right. Sir, what will be our utilization for 9 months?
I think in the last 3 months, power plant [ has not worked ] for more than 20% there.
Okay. And sir, on the electrical wires part, what will be our current utilization levels?
About 2/3.
[Operator Instructions] As there are no further questions, I'd now like to hand the conference over to the management for closing comments. Over to you.
Thank you. Thank you for participating, and I think there is 1 question which I passed on. So I think that is from SBI. So I will get in touch with you and provide you with whatever information you want.
Thank you very much, sir. Ladies and gentlemen, on behalf of Yes Securities, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.