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Polycab India Ltd
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Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of Polycab India Limited.We have with us today Mr. Inder Jaisinghani, Chairman and Managing Director; and Mr. Gandharv Tongia, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Gandharv Tongia. Thank you, and over to you, sir.
Thank you, operator. Good morning, everyone, and thank you for joining us on Polycab India's First Quarter Financial Year 2021 Conference Call. I hope you all are doing well. I'm Gandharv Tongia, CFO at Polycab India Limited.On this call, we shall discuss the Q1 FY '21 results, which was approved in the Board meeting held via video conference yesterday. We will be referring to the earnings presentation, financial results and financial statements which are available on the stock exchanges as well as Investor Relations page of our website. It can also be downloaded through the link or QR code on Slide 8 of earnings presentation.Joining me today from the management team, we have our Chairman and Managing Director, Mr. Inder Jaisinghani; and our Director, Mr. Shyam Lal Bajaj, on the conference call. Let me now hand it over to our Chairman, Inder bhai, for his comments.
Good morning, everybody -- everyone. I hope that you and your families are safe and healthy.Quarter 1 was significantly impacted by the headwinds of COVID-19. However, we saw progressive signs of improvement as the restriction in the movement eased and could improve further as India unlocks gradually. Despite challenges, we improved our liquidity position and remained profitable, which I believe is a strong sign of our organization's capabilities. We continue to prioritize safety and well-being of our employees, partners and customers. Polycab is proactively supporting society and communities across India. Our strengths coupled with new strategic initiatives will enable Polycab to maintain its dominant position in the wires and cables and expand presence in the electrical ecosystem.I'll now request Gandharv to take you through our earnings presentation. Thank you.
Thank you very much, Inder bhai. As you all are aware, we are going through extraordinary times, but as always, let me try and provide you with a general overview before discussing the first quarter performance.We continued with all supportive measures I had highlighted in the previous quarter call. And in fact, we have only augmented it further with the help of several NGOs. Our efforts have been appreciated by many, including local administrations. From an operational standpoint, currently, all our factories, warehouses and offices are operational, adhering to relevant guidelines from local and national authorities. Our distribution channel is fully active, but the larger dealers, distributors and retailers in metros and Tier 1 towns continue to be impacted by the outbreak.On the macro front, it is a kind of mixed bag. While infrastructure and construction activities continue, which is a good sign, many projects are facing labor shortages, which is delaying the execution. Most of the offices of companies and large dealers are located in metros, and due to erratic lockdown, orders are not getting finalized at the pace it should. On the other hand, if you look at many high-frequency data points, like power consumption, manufacturing PMI or unemployment rates, there are clear sign of economic activity picking up.Even we are seeing good momentum in towns with less than 10 lakh population. Currently, the sales in large metros would be 30%, 40% of the normal levels, while in Tier 2 towns and below, it would be close to 80%. Average normalization level in Tier 1 town is somewhere in between. This could possibly because of relatively lesser impact of virus and higher movement of goods and people and ample availability of labor in these geographies versus metro due to migration.We closed June month with about 15% decline in sales on a year-on-year basis, while in July, we are seeing slight growth at this juncture. Having said that, our assessment suggests that bulk of this could be attributed to pent-up demand and some stocking due to rising copper prices. The first wave of lockdown, which started in March, impacted demand as well as supply. As we started unlocking gradually around mid-May, trade sentiments temporarily improved and demand started progressing. However, the ongoing second wave of erratic micro lockdown is breeding a lot of uncertainty. So we should wait for 1 or 2 quarters for a clear trend to emerge. But all in all, we are optimistic, and we believe as and when economy starts to unlock, the recovery will be faster than general anticipation. Going ahead, we expect every quarter to be better than the previous, assuming things don't drastically deteriorate.As I had mentioned in the last quarter, we are undertaking several initiatives like conserving and augmenting our liquidity position through judicious cost management, deferring noncritical expense and availing additional credit lines. Result of this is somewhat visible in our improved cash balances, working capital and our overall financial position. Nevertheless, we truly believe there is always some space for further improvement and accordingly, we have commissioned a strategic project partnering with a reputed strategic consultant to drive cost optimization across the organization.Now moving on to presentation with Slide 4. For the quarter ended June 30, 2020, our consolidated revenue declined by 50% due to severe impact of COVID-19 and restriction of movement. Business for first 40, 45 days was essentially lost due to lockdowns. EBITDA declined by 75% year-on-year with 571 bps lower margin versus last year due to adverse operating leverage. Our staff cost at INR 812 million were lower 12% year-on-year, largely due to lower variable pay and incentives. A&P spend was curtailed given the virus outbreak and were meager 0.3% of sales. This spend may remain muted for the next 1 or 2 quarters depending on the market condition. However, over the midterm, it will be restored at normalized levels as we continue to invest behind our brands. Our higher finance costs emanate from borrowing availed by Ryker and some credit lines we explored to improve liquidity position in the near term. Other income was INR 336 million for Q1. A detailed breakup of our other income and finance costs have been provided on Slide 12 of our earnings presentation.Our profit before tax and exceptional items declined by 86% year-on-year. Our profit after tax at INR 1.1 billion is lower by 13% year-on-year. I would like to highlight that the current quarter profit includes 3 one-offs. Number one refers to INR 839 million adjustment on account of a favorable order received from Income Tax Appellate Tribunal in the current quarter. Second refers to the interest on this particular order, which amounts to INR 164 million, which is sitting in other income. And third one pertains to gains on previously held equity interest in Ryker amounting to INR 97 million, which is an exceptional item. The 3 adjustments are provided on Slide 9, below the P&L. Adjusting for these, normalized PAT would be about INR 75 million.Moving on to segment on Slide 5. Wires and cables, which is our largest business, declined by 51% year-on-year in the first quarter due to the slowdown in economic activity on account of outbreak of virus. Rising commodity prices did provide some support in the last month, especially in wires, which is seeing very good growth. Sales to Dangote were nil in the first quarter, as the project in Nigeria is facing some execution delays due to COVID. Despite that, exports continue to show resilience and was over 2x the base quarter. Optical fiber cable business was insignificant during the quarter, as the execution was delayed due to lockdown and subsequently due to onset of monsoon. The profitability in this segment was down due to adverse operating leverage.On Slide 6, FMEG segment contributed 14% to our business in this quarter. This segment declined by 43% year-on-year in Q1. However, June month was flattish. Recovery in lighting, luminaires and agro pumps was relatively better. Sales during seasonal months for fans business, that is, April and May, were lost. Segmental profitability was impacted by deleveraging. Some of our new launches planned in Q1 were deferred given the market environment, but we aim to push it into trade at an opportune time.While the consumer sentiment is weak at the moment, we will continue to strengthen our core capabilities and proposition to outperform the market. I'm very pleased to highlight that during the quarter, our Polycab Experience Center in Mumbai received an award for best retail store design.Other segment, which is largely our strategic EPC business, witnessed a decline in revenue and margins due to delay in execution owing to lockdowns. I feel immensely proud to announce that Polycab recently received an award for Excellent Digital Infrastructure Company in the 5th International ICT Excellence Awards 2020, held in Geneva. We will continue to scout for opportunities in large digital infrastructure projects, including smart cities, surveillance, BharatNet and digital village.The consolidated financials of this quarter also reflect Ryker Base, which is now a wholly owned subsidiary. Accordingly, we have created a new segment, copper, and disclosed the financial results. However, the impact is insignificant at this stage.Moving on to financials. Our balance sheet remains healthy with INR 2 billion of net cash position as of June 2020 versus INR 1.6 billion as of March 2020. We continue to work on our long-term strategic and structural initiatives in, like, increasing channel financing, inventory rationalization, debottlenecking of processes, increasing automation, augmenting supply chain operations with technology and building data analytics capabilities. These initiatives, coupled with specialized support, will certainly help us improve efficiency and strengthen our market positioning.On the distribution side, our direct reach remained strong at over 3,500 authorized dealers and distributors across geographies. Retail outlets reach increased to over 130,000 as of June 2020. Incrementally, our focus is to drive reach in lower-tier towns, semi-urban and rural, where our presence is limited at the moment. We have commenced our pilot project with the same agenda in mind. We continue to enhance our key influencers connect through project Bandhan, which now has over 141,000 electricians and over 43,000 retailers on board.Lastly, I would like to reemphasize on this slide that our company, brand and fundamentals are well positioned to circumvent the ongoing challenges. We remain stubbornly optimistic of the medium- to long-term development potential of our nation and the growth opportunities it offers led by structural drivers and government posts, but at the same time, we would be cautious and agile in our approach in order to deliver sustainable and profitable growth for all stakeholders.With this, I request the operator to open the line for Q&A.
[Operator Instructions] The first question is from the line of Atul Tiwari from Citigroup.
Sir, I think you said that in the month of July, so far, you have seen some kind of marginal growth in top line. Could you give some more color on your individual segment, especially the retail, B2B and exports? How are they panning out in the month of July on an individual basis? And what would be the blended capacity utilization in your plants as of now?
Thanks, Atul. Thanks a lot. Let me pick up your second question first. The capacity utilization as of now is hovering between 50% to 60%. And if there is a need, we can certainly increase the capacity utilization. On the first part, the B2C business is getting good traction from the market, which is retail wire as well as FMEG business. On the cables side, the institutional business is not gaining momentum at this stage because that's dependent on several factors, including signing up of projects, availability of decision makers in the offices and so on and so forth, which is a bit erratic as of now because of lockdowns.
Okay. But on an overall basis, I got this part right that so far in July, the top line has grown marginally year-on-year. It has not declined.
Another thing, which is worth highlighting, at this stage, is export growth. I'm sure you would have noticed that in the first quarter, our exports grew almost by 100%. In the previous quarter, it was almost INR 50 crore and now it's INR 100 crore. And important thing is both of these balances do not include Dangote sales. So without Dangote, we have been able to increase exports. So that's helping and we expect that it will continue to help. And the demand is broad-based, but particularly FMEG and B2C, which is retail wire, is helping us.
Okay. And just the last one. Obviously, in the month of July, we have seen some more lockdowns across various places in India at a localized level. So what is the color on that? I mean has it significantly impacted your distribution and demand or this is still manageable if it continues like this? So the point I'm trying to kind of get from you is that if these intermittent lockdowns continue, say, for another 2, 3 months, do you think that this flattish kind of revenue or some marginal increase in revenue will sustain or we may dip into a year-on-year decline again?
That's very interesting one. Let me afford to be slightly a bit more optimistic now than what otherwise I should be there on the investors call. Let's understand what is the pattern in Q1. We lost almost 1.5 months to 2 months because there was a complete lockdown. I don't expect that would happen. And since last week or so, we are hearing about positive development on vaccine. And even if there are lockdowns, there are localized lockdowns. So my expectation is that things will only improve from here. Q2 is going to be better than Q1.But at the same time, I think we should be cognizant of the fact that even if there is a lockdown, which is a localized, it would have some bearing on the performance. So I don't expect an absolute growth coming in, in the immediate quarters. But my sense is Q2 is going to be better than Q1 at this stage. The other important thing is export market, where not necessarily lockdown is having severe impact, would probably help us. So overall, my sense is Q2 is going to be better than Q1, and H2, ideally, should be significantly better than H1. I'm taking liberty at this stage. When the cost of being optimistic and cost of being pessimistic is same, it's better to be optimistic, right? So that is what I'm sharing with you as a friend.
No, no, no, great. And see, to be very frank, in the first quarter, congratulations on managing your balance sheet and cash flows very well. P&L, obviously, it was widely expected it will be weak, but balance sheet and cash flows did quite well in a very tough environment. So congrats on that.
Thank you. I'm glad that you are pleased.
The next question is from the line of Aditya Bagul from Axis Capital.
Congratulations on a good set of numbers. So sir, I have 3 questions, right? So let me take the first one. It's largely on exports. So we've seen a spectacular increase there. I wanted to get your sense on what has led to this increase, especially given that Dangote execution has not happened this quarter. So what has led to it? What are the key markets? And what are the key products? So something on that would be helpful.
Sure. Do you want to give me other 2 questions as well and then I can take all at one go?
Fair enough. So the second question was with regards to our B2B business, which is your institutional business, cables business, project business, et cetera. Just wanted to understand that all of these businesses, the execution has been largely stalled over the last 3 months and likely to be stalled for another couple of months. So just wanted to understand that how do we see whenever that implementation ball sort of begins to roll, do you believe that we get a demand in gusto, wherein we get a huge pent-up demand towards September, October, and that will sort of fuel growth much more than what we lost out earlier? So that was question number two.And question number three was largely on our long-term spot in terms of FMEG because the other 2 pieces, right, our cables and wires business, both domestically and exports, is doing reasonably well, both in terms of top line and margin. So just wanted to get your sense on how do you see the FMEG scale up, especially on the margin front.
Sure. Thanks a lot, Aditya. So let me go in the same order. Export in this particular quarter has got support from geographies like U.S. and Australia. In the base year, as I mentioned to Atul, it was almost closer to INR 50 crores of exports revenue. It's now almost INR 100 crore. And I'm sure you're aware that recently, we have incorporated subsidiaries in U.S. and Australia. And these are going to work like trading arms of the group. In the last few months, we have secured approvals from large key customers. For example, we have approvals from the macro companies in Australia, and there are similar such examples.So the export business is looking positive. The only thing which we should bear in mind and which is what I was alluding to in the previous question as well, that if there is a significant lockdown in any particular geography, for example, in the U.S. and Australia, which is, of course, beyond our control, it could have impact on bearing. But if I normalize that, the export is going to grow from here.The other important thing, which is important to note at this stage, is anti-China sentiment. Across the globe, the sentiments are against China, and that is helping us in improving our overall traction in the market. If you take a very broad global macro view, if China is going to get a setback because of anti-China sentiment, then a country like India should get some advantage out of it. And we as a market leader in cables and wires business should be able to maximize growth from that avenue.So overall, export looks positive. Dangote, though we couldn't execute anything or supply anything in the quarter, but we expect in a quarter or 2, we would be able to conclude the contract depending on the things in the Nigeria. And that will help us in improving our export line or export top line further.
Sure. Gandharv, just one more point on the export business. Would the margins at the export level also be similar to 11% to 13% that you've guided?
Yes, broadly, it varies from product to product. But generally speaking, we can take that as a base.And moving to -- there were a couple of other questions of Aditya. So the second part was on B2B, what we are seeing today. In the first quarter, we lost almost 50% of our institutional business because of impact on account of lockdown. I believe this will only improve from here. I know that decision-making is impacted because of unavailability of key personnel in the offices for the large customers, but since slowly and gradually, all of us have started going back to office, I expect this will only further improve.In few of the sectors, it could have a slightly different reaction depending on liquidity, but we expect this will improve. I think Aditya was trying to understand specifically whether it will result into a specific pent-up demand in a particular month. At this stage, we cannot reject that possibility. But to my mind, that is dependent on the liquidity of the end customers, and it will vary from case to case.Third one, I think, was on FMEG profitability, and this lockdown has given us enough time to think about our strategy in FMEG. One thing which is very clear, we have to unlock the synergies. And as a step in that direction, we have decided to merge our switchgear business with wires business so that we have common agenda, and we are able to consolidate and increase the cross selling.The second thing is, and let me spread it in 2 parts. Let's pick up the businesses which are slightly large, for example, fan business or lighting and luminaires business, there now the focus is twofold. One is we want to drive profitability. We are getting good traction in the top line, but the focus now is on profitability. And the second thing is we want to improve working capital significantly for these businesses. For inventories, we have already taken some steps, and we expect that will only improve on a go-forward basis, and the channel financing I expect will further increase there.On the smaller businesses, we will continue to drive our growth agenda. For example, our pipe business, where we would like to get into INR 1 billion revenue or thereabout. Then the product augmentation. We talked about IoT and home automation and getting to [ premium ] categories. Most of these projects are available and will be launched in the immediate future.The another important thing is though that's applicable at the company level, but that would also help in FMEG business is around cost optimization. We are going to work with a large strategic firm, which will help us in optimizing cost, and that will help all the businesses, including FMEG. I hope I have answered your questions, Aditya.
Yes.
The next question is from the line of Ashish Poddar from Anand Rathi.
Many congratulations on in-line results, though my [indiscernible]. I'll ask on -- more on the strategy side. So like we are focusing more on the liquidity, cash balance, anything. Even in the last quarter, I saw some CapEx of around INR 25 crores. If you can explain where has it happened?
So this is actually in continuation to our last year's CapEx. We had decided to incur almost INR 300 crore of CapEx in the last year. Actual CapEx was closer to INR 270 crore, INR 275 crore, and that amount has been incurred in the first quarter. In this year, we believe that our number closer to INR 200 crores or thereabout should be okay. But we will revise it upwards if there is an improvement in demand. And this CapEx is being utilized for broadly 3 things: one is debottlenecking for cables and wires business; additional capacities for FMEG business, for example, fan; and third is for exports business. There is some modification, which is required in our machineries, including some new machineries so as to maintain and meet the requirement, which are there in those geographies. So these are the broad 3 categories where we are spending CapEx.
So you're saying this year, it will be minimum INR 200 crores?
Yes. At this stage, it looks like around INR 200 crore, but we will continue to monitor it. And if we get better results in the subsequent quarters, we will probably revise it upwards.
The next question is from the line of Sonali Salgaonkar from Jefferies India.
Sir, my first question is regarding the industry. So you mentioned that July, you saw a slight growth in the top line. So ex export market, purely from the domestic point of view, are you seeing things improving, which could have contributed to the growth in your top line?
Yes, Sonali, that's true. Things are improving. The only thing which I highlighted in my opening remarks as well that whatever we are seeing has an element of pent-up demand and, at this stage, it's very difficult to segregate what is pent-up demand and what is the underlying growth. I think we'll have to wait for a quarter or so to get to a clear view on this. But as of now, things are apparently improving.
Understand. Sir, my second question is regarding construction activity. Now we understand that the key driver for cables and wires ex B2B business would be largely construction. As we understand, it's not -- the offtake is not happening as much in the urban areas, but just wanted your view on how are you seeing construction activity shaping up ex metros.
That's an interesting one, Sonali. In fact, what we are noticing slowly and gradually, construction activities are improving in Tier 2 towns, Tier 1 towns because of availability of labor. And I think largely, these geographies are not severely impacted by COVID. So that's good. In fact, our proportion of Tier 1 and Tier 2 town has increased in the current period. Tier 1, Tier 2 probably would have contributed almost 40% to our channel sales in the base quarter, which has increased almost to 55% in this quarter. And if trend continues, this will improve further. And because of this and otherwise as a part of our strategic initiative, we have now hired another consultant who is helping us in penetrating these geographies. And we are going to pilot new initiatives in select geographies in 3 states in the next 2, 3 months to see how we can further improve our penetration in these markets and take all the products of Polycab to the end customers.
Understand. Sir, my third question is regarding, again, from the industry perspective, the inventories in the channels. Now we understand that because of the lockdown imposed in March, there were a higher amount of inventories starting of April. So could you just give us an update on whether the channels have completely liquidated the inventories? Are there still some lying around?
So March inventories have been fully liquidated. In fact, in June, there was a significant increase in copper prices, which led into some sort of a stock pileup at the dealer's end, and slowly and gradually, that is going down. In fact, our sales, to be very precise, was comparatively better in the first fortnight of June month, and second fortnight, it started going down after we revised our prices because of improvement in copper prices. So as of now, while we are speaking today, it has started inching towards normalcy, and from now it will only improve.
Understand. Sir, and lastly, any thoughts on the upcoming festive season? This is particularly from the point of view of our appliances. Sir, one last question, if I may squeeze in. Any impact from China or any big imports from China which you think you could derisk from? That's all from my side.
Yes. So let me pick up China first. We don't have any dependence or any significant dependence on China. If I talk about cables and wires business, most of the materials are either sourced from countries like Japan or domestically, if I talk about metal consumption. And in nonmetals, we have negligible dependence on China, where we have alternate supplies already available domestically as well as across the globe. So that -- there is no dependence there.And in FMEG, we are uniquely placed because all along, we always believe in Make in India, and we have almost everything manufacture insight within the company. So that's positive unlike a few of the other players in the industry. For a few of the SKUs in fan business, particularly premium fan, we have some dependence, but the contribution of that would be hardly anything. And for that also, we have alternate supplies available in India as well as in countries like Taiwan and others. So overall, my sense is it would be less than 1% or probably even lesser than that as far as China dependence on the procurement side is there.On the sales side, as I explained to Aditya a while back, it will probably help us in improving our exports. So that's going to be slightly positive for us.On your first question, sorry, I forgot the first question, Sonali. You'll have to repeat.
Sir, your thoughts on the upcoming festive season. Are you expecting a lot of demand -- a lot of pent-up demand to be unleashed, especially into your FMEG categories?
Broadly, directionally, the sales pattern should increase slowly and gradually in the subsequent quarters. Now the festive things are dependent on how good or bad the condition is, right? So for a few of the religions, even this period is also festive, but because of COVID, I don't think they can step out and carry our celebrations. So if things improve on the COVID front, certainly, it will help us in improving our top line.
Understand, sir. And are you seeing any excessive discounting in the industry in any particular category?
No, not at this stage.
[Operator Instructions] The next question is from the line of Amit Mahawar from Edelweiss.
I just have 2 specific questions. Gandharv, first one is for you. What's our FY '21 focus in terms of specifically our working capital profile and balance sheet quality, very specifically? And second question is more for Inder bhai. I can understand -- how do we look at exports? Because capacity availability is pretty high for us. Domestic retail demand, especially in wires seems to be pretty on a weak wicket. So how far can we grow on exports? And Inder bhai can also touch upon the global dynamics in terms of competing countries, which basically we have to keep in mind. So these are 2 specific questions.
Thanks, Amit. So on balance sheet, there are 2 development needs which we have, if I may use those words, one is we have to further optimize the inventory level. And in the last call, I had mentioned that we are working with one of the consultants to optimize the inventory. And we want to do 2 things. One is we want to reduce the overall amount, and within the reduced amount, we want to increase the number of SKUs which are available. So they're moving in the right direction. In fact, if you recollect, in the first 3 quarters of last fiscal, the inventory was slightly looking better than the year before that.In the fourth quarter, we got some impact because of COVID, but from there, it is only improving. If you dissect our inventory numbers, we have been able to optimize the inventory at FG level. At the RM level, there is some higher level of inventory because of goods in transit. So directionally, we believe that we have to further optimize the inventory, and it will only improve from here onwards.On the receivables, the channel financing in cables and wires business is in mid-60s, which can slightly go up. And in the case of FMEG, it can significantly go up, and that is where we'll continue to remain focused. So that is how we will be able to improve the working capital.Before I answer your exports-related specific question, wire, though there was a degrowth, but the degrowth was not as significant as what we noticed in the cable business. Cable got severely impacted because of absence of institutional business. Institutional business almost degrew by 80% or thereabout, and wire business degrew at that rate.Exports, there are 2, 3 things which we are trying to do. One is we have identified 10 geographies or customer sectors where we want to penetrate. And in that direction, we have taken steps by incorporating subsidiaries in Australia as well as in the U.S. and will continue to further augment. The utilization is not directly comparable because in few of the product categories, specifications are different and not necessarily the same machineries can be used for producing the output, which is required for the export businesses. Over the mid-term, we would like to have at least 10% of revenue coming from exports business.
Okay. And maybe, lastly, on the same question, some dynamics with respect to how our -- which are the competing markets where we face competition in supplies of cables, especially in industrial and utility cables?
So in the cables, there are opportunities available in several geographies, as I mentioned a couple of them. There are geographies available, for example, Africa, where lots of World Bank projects are getting implemented. And in these projects, Amit, the important thing is there is no import duty, and that is where an exporter from a country like India is competitively on better footing. So these are the geographies which are available. Around 10 to 12 geographies of customer sectors you can build in, and that is where we'll continue to work in the quarters to come. And on the products, products will continue to be LV and MV.
[Operator Instructions] The next question is from the line of Aditya Bhartia from Investec.
Gandharv, you mentioned that channel financing proportion for wires and cables would possibly be somewhere around mid-60s, and for FMEG business, it's likely to be lower. Could you just give us an indication how this would have stood maybe 4 to 5 years back?
It was almost nil 5 years back.
Understood. Understood. And on the power cable side, is it possible to share the proportion of cable sales that come from power ACBs?
You know our business model. So what we do is almost 80% of our business comes from distribution. And distribution -- or dealers and distributors, they in turn supply to the end customers. So for us, it would be very difficult to give you that bifurcation.
The next question is from the line of Chintan Sheth from Sameeksha Capital.
And congrats for the good set of numbers. On the industry side, cables and wires, how the industry has grown? Or compared to industry, how -- I just wanted to understand the relative performance of Polycab. That is one.And second, on the FMEG side, if I look at our growth, we did -- you said lighting and agro pumps are doing better. Fans are launched peak season. What -- how are things on other product categories? You mentioned pipes, you want a INR 1 billion target. By when you are targeting that? And similar guidance -- in the longer term, what's our target in terms of each product category revenue?
Thanks, Chintan. So the first one, at the industry level, I think almost everyone has degrown in this particular quarter because of lockdown. The impact has been more severe for the unorganized players because of unavailability of funding and other associated issues. We'll have to wait for other companies to declare their results, and then we can take our view on the industry degrowth.On FMEG, I think, directionally, 2 things which are important for us. One is, in whichever business category we are, we want to be market leader. We have to reach into top 3 and eventually to move towards #1 position. As I explained a while back, there are 2 things which we are trying to focus. On the businesses, which are slightly larger within the FMEG business, we want to increase the profitability there and improve the working capital so that we can improve the overall ROCE, return on capital employed. And for the smaller businesses, we want to increase the growth rates and get them into INR 100 crore club. And from there, then we want to monitor their growth on the financial metrics.
Right. So INR 100 crores for pipes. What are the targets -- where are we right now in terms of fans, lighting and switchgears? If you can, your near-term, medium-term target in terms of revenue.
No, I won't be able to give you a number. As a company, we are not giving guidance. I can share with your directional thought process, what we want to achieve and that remains that for the large businesses, we want to improve the profitability and improve the ROCE by optimizing the capital employed in those businesses. And for the smaller businesses, we want to further up the growth rate in top line. That doesn't mean that the growth will come at the cost of profitability. Profitability would certainly be there, but once you reach to a scale, you can further improve the profitability. And the project on cost optimization, which we are doing, will certainly help us in further augmenting the profitability.
Sure. And lastly, if I may, on the regional mix, how the revenue has moved from -- west already impacted because large markets like Maharashtra has been under severe lockdown. How that revenue mix has moved and then geographically where the growth is coming from? You mentioned Tier 2 has been growing faster, but if you can provide North, South, East, West, where the growth is coming.
So let's split that into business. If I talk about cable LDC business and, to a great extent, wire business, the degrowth is across all the quarters almost in the similar range. In the case of FMEG business, the South and East would have degrown by 20% to 30% and North and West would have been degrown by 50% to 60%.
Sure. And how they are panning now currently?
So as of now, almost all the regions are showing signs of recovery.
Southwest maybe -- Southeast maybe faster compared to Northwest?
I think 20 days data is not necessarily good enough to reach that conclusion. We'll have to wait for at least a month and 2 before we conclude.
No, I was just thinking about June and July, not only July number. June, how has been the response?
Yes. I think we'll have to wait for a month or 2 before we conclude and comment on July performance.
The next question is from the line of Sabyasachi Mukerji from Centrum PMS.
Sir, 2 questions from my side. First of all, you said that industry business continued to remain weak. If you can split between the government and private entities. The reason behind asking such question is, a few days ago -- a few weeks ago, government actually pushed the public entities to announce their CapEx plans. And I think if that has anything to do with on the order inflow and order finalization.
Sure. So we as a company directly we don't deal with the government customers. It makes our -- on an annualized basis, contribution of government customers to our top line would be around 1% or 2% or 3%, not more. Our dealers and distributors certainly supply to government. On the private, we have sizable customers available, but it's quite possible that they in turn are also executing large government orders. And both the businesses put together have degrown significantly in this particular quarter by almost 80%. And as I mentioned in my opening remarks, it is expected that the recovery should start soon because most of the offices have started resuming and decision-making probably will start happening.
Okay. Okay. Second one on a bit on the industry. In the pre-COVID situation, we saw industry declining in double digits in the last financial year. In every quarter, it was declining. What is the near-term and medium-term outlook from your side on the industry? And what kind of -- do you -- are you seeing any kind of consolidation happening in the industry?
So if we dissect the industry growth rate or degrowth rate over the last few quarters, predominantly, the growth or degrowth, in fact, in the scale only, degrowth is coming from unorganized sector. The large players are able to either maintain their market position or are able to. And we are no exemption to that. We have been able to improve our market positioning. We believe that because of GST, demonetization as well as liquidity crisis, which was witnessed in last fiscal, will probably increase the proportion of organized business in this particular industry, and that is where a large player like us would gain out of it.Over the midterm, generally, this industry grows at 1.5x to 2x of GDP growth rate, and that is how we should see the growth coming at the industry level.
Okay. Last question, if I can squeeze in, on the financials. I was just seeing your operating cash flow of almost INR 300 crores this quarter. I was just trying to add things up from EBITDA to cash flow from operations. I was seeing almost INR 140 crores dip in the other current assets. Apart from that inventory, receivables and creditors who are almost offsetting each other here and there, this INR 140 crore dip in other current assets, anything specific over there?
So when we procure our metals, for example, copper, it has an element of embedded derivative, which is as of the balance sheet date required to be valued and classified as per the nature. For all practical purposes, you can treat it as a trade payable. This is an accounting adjustment which is required to comply with the IFRS requirement. But practically, it is nothing but a trade payable. So on an overall basis, broadly, if I give you numbers, our receivables have given us around INR 200 crore of cash in the cash flow statement, partly offset by around INR 63 crore of inventory increase. And trade payables, including this derivative element, which I've talked about, has given us around INR 120 crore, which is then offset by almost INR 35 crores of tax outflow. So overall, the number is around closer to INR 300 crore.
Okay. Okay. One question on the fixed assets. I see almost INR 250 crores of jump. Is it because of Ryker consolidation?
That's right. That's true. Ryker used to be a joint venture till 6th of May, and we were following equity accounting as of 31st of March. Since now it's a wholly owned subsidiary, we are required to do line-by-line consolidation, and that is why this number has increased.
[Operator Instructions] The next question is from the line of Mayank Bhandari from B&K Securities.
Sir, I wanted to understand, as you highlighted that this year, CapEx is going to be about INR 200 crores. Sir, how much you are going to spend on the fans, particularly?
Broadly, you can take around 35% amount will be invested in FMEG, and balance will be utilized for cable and wire business.
35% will be on FMEG?
Yes. That's true.
As you highlighted, sir, in normal base quarter, 40% almost is coming from Tier 1 and Tier 2. So how much will be from the metro cities?
So the base quarter contribution of metro cities to the top line was closer to 60%, which has now reduced to almost 45%.
So 60% of metro and 40% Tier 1 and Tier 2 is you've classified?
That's right.
The next question is from the line of Achal Lohade from JM Financial.
My first question was, would it be possible for you to give a mix in terms of wire, specifically, for the first quarter FY '21 and last year same quarter?
So wires and FMEG both put together constitute B2C for our purposes, and that has significantly increased. In the base quarter, it was closer to 35%, and it is now around 43%.
But you won't be able to separate it out in terms of wires, specifically?
Yes. That is not being disclosed formally now.
Got it. And the second question I had is, given Mr. Ramakrishnan has moved out, is there any change in terms of the management for the FMEG and the other businesses?
So Ram joined us in 2011, and he was instrumental in shaping Polycab version 2.0. And over the period, we have hired several business managers and inducted them into our leadership team. In fact, as a matter of fact, probably today, we would have almost 40, 45 individuals who are drawing more than INR 1 crore of salary. Idea is not to highlight their salary. Idea is to highlight the quality of talent which we have inducted in our leadership team. And these persons are responsible for day-to-day operations of the company under the guidance of Chairman and Managing Director as well as the Board. In 2018, as part of succession planning, Ram stepped down from the Board as well as a Joint Managing Director and continued as a mentor to these business leaders who were inducted as well as to the second generation of the promoter family, and he ceased to be a KMP in 2018. And since then, these managers are managing the business. And I must say that they are doing a well job at this stage.A few months back, Ram, as he was about to attain his superannuation age, he wanted to devote more time for social welfare, and he wanted to complete his Ph.D., which is known to a few of you already. So he decided to leave the company, and 30th of June was his last working day with the company. And as I mentioned that he was in mentorhood since 2018 and the large leadership team anyways was managing the business, there is no impact on the business because of Ram's exit from the company. And certainly, we value Ram's contribution to Polycab over the years.
The next question is from the line of [ Anand Singh ] from Unifi Capital.
Just wanted to come back to the export potential. Now you mentioned our target is to have 10% revenue from export over the medium term, so that I imagine is like 2 to 3 years. Is my understanding correct?
It is 3 to 5 years is broadly I would like to peg at this time.
Yes. So sir, 3 to 5 years, 10%, given that we are talking about shifting of interest towards India from China and rest of the world, is that -- 10% goal in 3 to 5 years, is that our base case expectation? Or is it kind of like optimistic? Or is it -- I'm just trying to understand how should I kind of put it in the context that the opportunity size is huge, and we are just talking about number over 5, 10 years -- 3 to 5 years of 10%. So why is it guidance that you are kind of giving is relatively subdued with respect to the opportunity globally available?
So Anand, you know this company already. We have always given a guidance. And generally, we have delivered a better performance. And that is why we believe that 10% is a good number to talk about. And you and me are -- anyways we are going to exchange notes on a quarterly basis and a yearly basis so we can always revisit on the basis of actual numbers.
And in terms of margins, given that this will be mostly a B2B business when we do exports, it's a bit lower margin as compared to domestic business. Is that the expectation here?
No, it's fairly comparable.
Okay. So very similar to the overall business margin that we have, same we can do in exports?
Yes.
The next question is from the line of Ashish Jain from Macquarie.
Sir, my question is on, again, the cables and wires business. One is, is wires now contributing like 1/3 of our cables and wires segment? Can you just confirm or comment on that?
No, wires and FMEG both put together constitute B2C segment for our internal analysis, which is almost 43%. Earlier, it used to be around 35% or thereabout.
Understood. Sir -- and you spoke about wires doing much better than cables during the current quarter, at least. Is that a trend in specific regions or geographies? And are you seeing that trend improving as we speak? If you can just give some color on what led to a better performance in wires. Because I thought even that is very closely linked to new construction? So what really led to the surprise in your view?
So cable, as I mentioned and alluded to, that in the case of cable institutional business, there was a significant element of degrowth, which has impacted the cable business growth. In the case of wire, the growth -- or degrowth is consistent across all the regions. There is no one particular reason this is doing better or worse than others.
The next question is from the line of Chetan Gindodia from AlfAccurate Advisors.
So my question is more on the institutional cable business. So institutional cable business would now be contributing the -- so 43% is wires and FMEG. So rest of it would be entirely -- most of it would be institutional cable. Is my understanding correct? And secondly, what would be the driver for institutional cable business to improve from here? Is it only the faster decision-making that might be the driver here that might lead to the increase? And especially with most of the companies cutting down on their CapEx in FY '21, so is the outlook likely to remain subdued due to lower new projects?
Yes. So I think let me just take a step back and explain you the business model. We are not a typical B2B company. 80% of our business comes from distribution, which is true for cable as well as wire as well as for FMEG. So when I'm talking about institutional, this is only balanced, 20%, 25% or 15% of institutional business, which has degrown. The distribution business is totally different than the institutional business. The private CapEx is one of the drivers. Of course, you know the government CapEx is important, but there are things like BharatNet project, and all of us are aware that government wants to improve digitalization and get connectivity to the -- to each and every village of the country. So if country wants to get to that level of the utilization, the government and private CapEx will continue, and that will help us in improving our top line. So overall, the business growth will come, but we are not only dependent on institutional cable business.
The next question is from the line of Prashant Kutty from Sundram Mutual Fund.
Sorry, I think you've clarified enough number of times in terms of the cables and wires business. But just to -- probably for the sake of reiteration and apologies if I'm repetitive, one, you said that 45% of our business is the wires business and FMEG business. And I assume exports is also growing at an exponential pace. The institutional part of the business or, let's say, the rest of the business, whichever -- ex of wires and FMEG, what would be the kind of decline you're running at as far as that part of business is concerned, let's say, as of June, July is concerned? Could you just give us some sense on that?
So for the first quarter minus that business across product category, that number would range between 40% to 50%, 60%.
And like you said that if that number has been improving as July kind of improve from that minus 40% to, let's say, an improving number? Or is it still where it is?
For July, 20 days are not good enough to reach to a conclusion. My suggestion is, I think we should wait for a quarter. In the next quarterly call, we can deep-dive into Q2 performance.
Okay. No, the reason I asked is because -- did you make a comment in the start of the call that you are actually seeing growth in July? That's the reason I asked...
Yes, that's right. Overall -- at overall level, July month so far is positive on the basis of 20-21 days' revenue.
Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Gandharv Tongia for closing comments.
Thank you, operator. Thank you all the participants for your time. In case if you have any question, you can always write to investors.relations@polycab.com. I hope all of you stay safe. Take care. Bye-bye.
Thank you. Ladies and gentlemen, on behalf of Polycab India Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.