Polycab India Ltd

NSE:POLYCAB

Earnings Call Transcript 2021-Q2

[Operator]

MD&AOperatorLadies and gentlemen, good day, and welcome to the Polycab India Limited Q2 FY '21 Earnings Conference Call. We have with us today management of Polycab India Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gandharv Tongia, Chief Financial Officer. Thank you, and over to you, sir.

[Gandharv Tongia, Chief Financial Officer]

Thank you, operator, and a very good afternoon, everyone. I hope you all are doing well. It is a pleasure to have you on the call. I am Gandharv Tongia, CFO at Polycab India Limited. Thanks for joining us today to discuss our Q2 FY '21 earnings. During the call, we will be referring to the presentations, financial results and financial statements, which are available on the stock exchanges as well as Investor Relations web page of our website. It can also be downloaded through the link or QR code on Slide 10 of our earnings presentation. From our management team, we have with us our Chairman and Managing Director, Inder Bhai; as well as our Executive Director, Finance, Mr. Shyam Lal Bajaj. Let me now hand it over to Inder bhai for his comments.

[Inder T. Jaisinghani, Chairman & MD]

Good afternoon, everyone. Welcome to call. I'm delighted with the Q2 performance given the context of the current challenging business environment. Overall demand trends are encouraging, and many of our customer-facing business has started seeing growth compared to last year. At the same time, we have tightened our belts to improve profitability without bargaining on long-term brand development and innovation initiatives. While we remain optimistic of robust economic potential for mid- to long-term, government initiatives and reviving consumer sentiments should support demand in the months to come. We remain focused on augmenting our brand positioning in the Electricals space and creating long-term shareholder value. I now request Gandharv to take you through our earnings presentation.

[Gandharv Tongia, Chief Financial Officer]

Thank you very much, Inder bhai. Overall, Q2 has been quite good for us in many ways. I will try and highlight a few of these during the presentation. On the domestic demand side, we are surely seeing signs of improvement with unlocking. Infrastructure and construction entities are back in action, and labor does not seem to be much of a concern now. Tier 1, Tier 2 and below towns saw healthy double-digit growth. Large macros are still facing impromptu restrictions in many states, which is dragging the overall momentum. However, on a sequential basis, we have seen considerable recovery here as well. In Q2, we also saw a certain new infra investments. Requirement for wires and cables is generally back-ended in the construction cycle. Hence, materialization of these projects will bode well for the demand in near term. Investments from private site continue to remain soft. However, improvement in consumer sentiment and reviving demand in end-user industries, we are still confident on business outlook and boost investments. Macro indicators like IAT, manufacturing PMI, power consumption, et cetera, are also charting up broader recovery path. And hence, overall, we are quite optimistic and believe the worst is now behind. In fact, we have kicked off the new quarter on a positive note. As of now, we are witnessing healthy growth in all segments despite the fact we have a strong base of last year. Having said that, it is also worthy to note how many developed countries are witnessing a second wave of contagion and long terms. And we will remain cautious and [ a lot of ] well-calibrated approach to ever-evolving dynamics of the market. Moving on to presentation with Slide 4. For the quarter ended September 30, 2020, our consolidated revenue was down by 6% Y-o-Y as against minus 50% Y-o-Y seen in Q1. B2C category posted a healthy double-digit growth, while B2B wires and cables are on a recovery path. EBITDA increased by 16% Y-o-Y, resulting with a strong 272 bps Y-o-Y improvement in margin versus last year on the back of higher contribution and cost-saving initiatives. Our staff cost at INR 897 million or 4.2% of sales, and our A&P spend at INR 134 million or 0.6% of sales were broadly in line with last year. Our A&P side, we continue to participate in TV media during IPL season, in line with our long-term brand development objective. Our finance cost at INR 114 million were lower by 10% Y-o-Y basis. Other income at INR 327 million was higher due to exchange gain. A detailed breakup of our other income and finance costs have been provided on Slide 14 of our earnings presentation. Our profit before tax at INR 2.88 billion and profit after tax at INR 2.21 billion, increased by 25% and 14% Y-o-Y, respectively. Also, please note that Q2 FY '20 had a tax write-back of INR 243 million for prior periods due to reduction in statutory tax rate. Adjusting for that, PAT would have grown by 31% Y-o-Y in Q2 FY '21, which reflects our overall improved profitability. Let me also take this opportunity to highlight our cost optimization program with BCG, which we have internally named as Project Bandhan, the Project has been progressing well. While we are still in early phase, we have started identifying and plucking low-hanging fruits. Success of this project will be one of our key strategic priorities in the near term. We are quite optimistic that it will help us build a lean cost structure, which is sustainable and also institutionally new ways of working. On Slide 5, in this first half ended September 30, 2020, our revenue and EBITDA declined by 26% to 25% Y-o-Y, respectively, largely reflecting the severe impact of COVID-19 on Q1. PAT grew 3% Y-o-Y, led by few one-off days in Q1, as highlighted on Slide 11. Moving on to segments on Slide 6. Wires and Cables, which is our largest business, saw decent recovery with improving economic activity, but closed at about 7% lower versus last year. On the domestic side, distribution channel performed better than the institutional business where we had to pass on some margin dilutive business. Geographically, north and east has been better for us in the last quarter. Robust momentum in exports continued despite the weak economic sentiments, underpinning our effort to expand our global reach. We received approval as well as orders from several large multinational energy and infrastructure companies in developed countries. We also made inroads into CIS countries during the quarter. On the whole, export revenue grew by 47% Y-o-Y and contributed almost 10.7% to overall top line in Q2 despite a stronger base. Sales to Dangote amounted to INR 440 million for the quarter. And excluding that from current and base quarters, export was 5x of last year, led by a good traction in U.S., Australia, Asia and Middle East. OFC business faced some sluggishness due to postponement of new projects. However, we are positive or good order flow in current quarter for domestic and abroad for OFC business. On the profitability side, segment EBIT margin grew 387 bps Y-o-Y, supported by better contribution. On Slide 7, FMEG made a strong comeback with sales growth of 25% Y-o-Y growth in Q2. This segment contribution to overall sales increased 268 bps Y-o-Y to 11.4%. Growth was fairly resilient across most categories and regions. Fans grew strongly despite higher competitive intensity. Easing price environment in lighting business helped value growth as well as profitability. Pump sales more than doubled on Y-o-Y basis, helped by channel expansion and product quality. Switchgears saw a revival, however, switches remained muted due to operational issues. While FMEG growth has been quite resilient, our teams have done a commendable job on the profitability side. FMEG segment EBIT margin rose from 3.3% in Q2 FY '20 to 8% in the previous quarter, led by calibrated pricing action, premiumization, productivity improvement and working capital intervention. While this label margin may not be sustainable in the subsequent quarter as we expect a bulky charge of IPL-related advertisement cost for the year as a whole, we expect the merger to be better despite the Q1 hit. For the first 6 months of FY '21, margin improved from 3.5% to 3.7%. Having made our mark in the FMEG space, we are now stepping up on the innovation panel in a meaningful way. In about a month's time, we are launching a totally new portfolio of premium products, which are IoT-enabled with voice command capability. With a blend of functionality and design fueled with technology, it will cater to evolving needs of new age consumers. This portfolio will cut across FMEG categories and function on a common Polycab IoT platform. We are very excited to roll this out into the market, and we believe this will be a pivotal movement in uplifting Polycab into an aspirational brand. We are also launching host of electrical wiring accessories, including extension boards with USB ports, multi-plug holders, et cetera. These are entry-level products at every electrical counter and will help seed new consumer. In summary, we will continue to augment our brand and capabilities to outperform the market while progressing towards achieving industry level profitability over the medium term. FMEG will be a key value driver for us over the long term. On Slide 8, Others segment, which is largely our standard EPC business, witnessed a decline on account of a stronger base. The revenue was down by 65% Y-o-Y to INR 580 million. EBITDA stood at INR 92 million, down 60% on Y-o-Y basis. The copper segment, as disclosed in the financial results, largely reflect record base, which is a wholly owned subsidiary. As I alluded to earlier, we did not shy away from investing in brand building activities even during such challenging times. Accordingly, we continue to be an associate on air sponsors during India Premier League 2020, or IPL, for the fourth consecutive year. We also conducted various on-ground promotional activities for several FMEG categories, for example, [ PEN ], where we launched 40 new products and over 40 new SKUs in past 6 months. Moving on to slide -- financials from Slide 11 onwards. Our balance sheet grew stronger with nearly INR 6.3 billion of net cash position as of September 2020 versus INR 2 billion as of June 2020 and INR 3.4 billion as of September 2019. ROCE as well as ROE in Q2 stood at 26.6% and 21%, respectively. On the working capital side, while receivables have come down considerably, led by robust cash collection, inventory levels remained high, primarily due to purchase of raw materials in the last month, in anticipation of improving demand environment and were in transit as of September-end. Nevertheless, this is one of our key focus areas, and we are aggressively working towards inventory optimization. Our inventory automation program, which is named as Project Bandhan, is especially targeting this issue. If I were to dive deeper into its progress, that on the finished goods side, we are in the last leg. Our fill rate and DoT rates have improved across SKUs and regions with optimal level of inventory. So it is looking in a good shape now. On the raw materials side, we have identified the key enablers and are in the process of implementing it. My sense is that by end of this fiscal year, we should be on a better footing here. A key hurdle here is goods in transit. Since we procure a lot of copper [indiscernible] from abroad, the [indiscernible] in the sea for nearly 30 to 40 days, which is difficult to [ create ]. Even the current as higher inventory could be partly attributed to GIT or goods in transit. But on the whole, we are confident of seeing improvement in this area in subsequent quarters. On the distribution side, our retail outlet reach as of September 2020 increased to over 137,000 outlets with over 3,650 authorized dealers and distributors across geographies. Our key influencer connect program, that is Project Bandhan, now touches over 154,000 electricians and over 47,000 retailers. Lower-tier towns, semi-urban areas and rural homes, great potential for a well-established brand like ours. While affordability and awareness are increasing, availability is a key challenge, and we aim to address this issue by developing an active distributor network in towns below 5 lakh population for all our B2C products. The pilot project, I mentioned in the last quarter, is underway in 3 markets, and we are also seeking help of under a reputed strategy consultant on effective implementation and strategy. Talking further about strategy, I would also like to share another recent key developments, which is still in a very nascent stage, but is likely to be as a crucial strategic lever and hence, inflection point in Polycab growth journey. While Project Bandhan, the cost optimization program. It is the first leg of our transformation story, which primarily focus on the cost structure and organization capabilities, we have commenced early diagnostic work on this augmentation and road map for the medium term. Our vigor is to become a premium global player in wires and cable space and one of the top players in domestic FMEG space over the next 5 to 10 years. For this, we will maximize our core by adopting next-generation go-to-market strategies and add new muscles by expanding into emerging agencies as well as solution-oriented business model. Lastly, our culture, guided by simplicity, customer centricity, study execution and innovative efforts really resonates with our ability to deliver even during such challenging time. We will remain thoughtful in our decision-making and actions to deliver sustainable and profitable growth for all stakeholders. With this, I hand over the call to operator, and we can open the floor for question and answers.

[Operator]

[Operator Instructions] The first question is from the line of Atul Tiwari from Citigroup.

[Atul Tiwari, VP & Analyst]

And first of all, congrats on continuing a strong performance in an otherwise tough environment despite. So I have 2, 3 questions, if you can allow. The first is on the very strong margins that the company has been quoting. So the question is how much of this is sustainable? This quarter, obviously, your raw material costs are down as a percentage of sales shortly. So how much sustainability as far as margins are concerned factoring going ahead? And then I will ask a couple of more.

[Gandharv Tongia, Chief Financial Officer]

Thanks, Atul. Thanks a lot for kind words appreciating the performance. Atul, we have had this discussion several times in the last few quarters. The best way to analyze our performance is on annualized basis. Having said that, we have taken several steps in the last couple of quarters. If I talk about FMEG business to begin with, we have increased our focus on premiumization, whereby we are able to improve our contribution. And same is true for several other businesses within FMEG to give an example, safe pans, premium fans and all that. In the cable and wire business, the B2C business, which is a retail wire, is more profitable than a regular B2B cable business. And in the current quarter, B2C wire business has recorded a double-digit healthy growth, whereas the B2B cable and wire business has registered degrowth and which is also helping us in improving our overall margin. But I'll probably go back to the previous quarter when we discuss about the performance. I think for the purpose of remodeling, you can continue considering a range of 11% to 13% of EBITDA margin, which is sustainable. And if we follow that for your modeling costs, probably you will not have any negative surprises. Having said that, I think the cost initiatives which we have taken in recent past, including what we are doing in Project [indiscernible] is slightly getting reflected in our profitability. And I am hopeful that in the coming quarters, Project [indiscernible] and other cost-saving initiative would get reflected in our P&L, both at contribution level as well as in the A1 line.

[Atul Tiwari, VP & Analyst]

In this SME margin of 8%, which is obviously quite good on your small base still, is it repeated sustainably because it went sharply?

[Gandharv Tongia, Chief Financial Officer]

Yes. So as I mentioned in my opening remarks, in the third quarter, we were expect to charge because of IPL, which will probably will give us benefit in the subsequent quarters as well. But from the accounting point of view, we will have to book that cost in the next quarter. But by and large, if you remember, until last quarter or until March of '20, we were generally talking about 100% to 150% EBIT growth every year. On the basis of whatever initiatives we have taken in last almost 100 days, I now pleased that we would be easily achieve a number which is better than 100, 150 bps. I think we should wait until end of this year to pump up this guidance. But at this stage, I feel that to a great extent, whatever we have recorded in this quarter, would remain sustainable, barring couple of percentage points because of IPL spend and change in mix of sales because one of the large business is spent, which is slightly seasonal in nature.

[Atul Tiwari, VP & Analyst]

Okay. That is helpful. And sir, the second one is on the -- on your comment about growth in October. So you did mention, I think, in passing, that in the month of October, across your business segments, you are seeing year-on-year growth. So I mean, any color on what kind of growth you're talking about? It's more like 5% or 10%, 15% or 20%? I mean, any rough indication, low single digits, high single digits, low double digits?

[Gandharv Tongia, Chief Financial Officer]

Yes. Atul, a couple of things. One is probably 24 months a day in the quarter are not necessarily reflective of the performance. We will also have a Diwali break coming in, in this particular quarter, in the month of November, which could have a bearing. But as of now, if I just slice and dice the number on the base of first 23, 24 days revenue, the FMEG business is in healthy double-digit growth, followed by B2C wire. And after that, it is a B2B cable. Institutional business is still a challenge. There is a significant amount of progress, if I talk about from a Q1 to Q2 perspective. If you remember Q1, our institutional business did grow almost by 70% to 80%, whereas in Q2, it has de-grown at mix by around 30% to 40%. So that business is still a bit of a challenge, which is -- which is only a part business of cable and wire. You know, we are a distribution company. But overall, the B2C business is a lifting of good growth in double digit, followed by B2B business and institutional business, I think, is in red.

[Atul Tiwari, VP & Analyst]

Okay. And sir, my last one is on the order. How much of it is left to be executed?

[Gandharv Tongia, Chief Financial Officer]

I think we have to do around about INR 150 crores rounded off between October and by December. In last 25 days, we would have supplied almost INR 40 crores in the month of October. So we need to do around INR 100 crores or thereabout. But the good thing is, Atul, Dangote has given us a follow-up order of almost $10 million. And this is in addition to what we were talking about in the last quarter, that we are focusing now on distribution-led export growth. So whatever growth we have registered in this current quarter, if I exclude Dangote, both from the current quarter as well as in the base quarter, export has increased almost by 5x. And if you remember, I was talking about in the last quarter that we would like to have at least 10% of revenue coming from exports, which we have achieved in this quarter itself. So we would like to make it sustainable. And the follow-up order we have received is required to be supplied in next couple of quarters.

[Atul Tiwari, VP & Analyst]

So this INR 10 billion of follow-up orders will also be supplied fully by March '21?

[Gandharv Tongia, Chief Financial Officer]

Yes, yes, USD 10 million.

[Atul Tiwari, VP & Analyst]

USD 10 million, sorry. I though it's.

[Gandharv Tongia, Chief Financial Officer]

Yes, in the follow-up order.

[Operator]

The next question is from the line of Aditya Bagul from Axis Capital.

[Aditya Bagul, Assistant Vice President of Midcaps]

I hope I'm audible. First of all, Gandharv bhai and the entire team at Polycab, heartiest congratulations, really good set of numbers amid really challenging times. So my questions, I have 3 questions. I think all of them are on the FMEG segment. The first question that I wanted to understand from you is whenever you've reached a sizable base of INR 802,000 crores annually in terms of FMEG. So with this base and the growth in margins that you are confident about, can you help us understand that split the margin performance into how much comes essentially because of premiumization? How much would come through cost control initiatives? Some color on how the EBIT margins would improve? And what is the color on that? That is question number one.Question number two is again on FMEG. If I understand correctly, I think 18% to 20% of distributors are common between FMEG and cables and wires. So I wanted to understand whether that number is likely to improve meaningfully? Or how do we think about that sort of a metric? And the third question is far more long term. One of our peer has sort of multiple sub-brands within it own umbrella. That makes it a very, very, competitive player, especially within the FMEG segment. With [indiscernible] in, do we have some thoughts on sort of expanding our product baskets into multiple brands as well? So those are the 3 questions.

[Gandharv Tongia, Chief Financial Officer]

Thank you for your kind words. Let me go in the same order. FMEG, you are aware that we started this journey almost 5 years back. And the focus was to establish a business. And we launched almost all the products in a period of 12 to 18 months. Today, probably, we are the fastest-growing FMEG brand in the country, with a positive EBIT and acceptable level of working capital. I had mentioned it in the last quarter call that within FMEG, now we are trying to review our performances into broad 2 categories. One, where the business is slightly large when compared to others. For example, Trends, Light and Switchgear, where the focus is on both, improving the top line as well as the profitability. And the other smaller businesses, though profitability remains a priority, the most important there is increase our top line. For example, agriculture pump which is a small business, but has registered almost 100% growth in this particular quarter. So the focus there is to ensure that the existing businesses, we continue to improve our profitability and which is getting reflected in our second quarter performance. I mentioned about a few new products, which we are going to launch in around a month or so, which would be next-generation products, IoT base. And those products would be probably placed around premium category. And that would help us in improving our profitability as well as stage Polycab as an aspirational brand. Within the existing businesses, for example, fan, do we have [indiscernible] label products or slightly product which can be fitted into economic category, like from Zoom or all that? We are making a specific focus effort to improve penetration of premium fan and that is true also for the other product categories. So both in the existing businesses, we want to increase the premium component, wherever it is possible and improve the profitability of the core FMEG business as well by taking pricing actions. The second part is introduction of new products, new-generation products, IoT and all that. So all these put together would help us in improving the FMEG margin. As a response to the previous question, I mentioned that generally, we used to give guidance of around 100 to 150 bps improvement in EBIT margin every year. On the basis of whatever work we have done in the last 90 to 100 days, I have reasons to believe that we would be easily be able to beat that guidance. But I think it's appropriate for us to wait until year-end before we revise that guidance. But I am now more hopeful than what I was last quarter in terms of improving margins of last FMEG. The last thing before I come to the next question is on the working capital. In the current quarter, we have taken several steps to increase and -- not increase to augment the working capital levels of FMEG business. To give you an example, the inventory levels, we have been able to reduce significantly. This channel financing percentage receivable has improved, and it is now in high teens, which used to be in low teens. And this activity will continue on a sustainable basis in the coming quarters as well. And this will also be reflected in the performance of FMEG P&L in the quarter to come. You mentioned about the dealers and distributors. And you are right that there are common dealers and distributors. But I think I'm more excited about the recent initiative, which we have taken, wherein we want to work on identified 3 states and ensure that we are available in all the key markets within those 3 identified estates and provide all the Polycab products, whether it's FMEG or wires. And I think between now and the year-end, we would have the results of this pilot, which we are working on. And depending on the learnings from this pilot, we will probably replicate it across the country. And that will probably take us to each and every corner of the country. However, having said that, it is a long-term project, I don't expect that we would be able to cover the entire country in a few quarters. But directionally, we believe that is the only way to ensure that we are available across the country. The third thing is a very important one, this is about brand. This is a question which internally also we are grappling with. I think we have these to a stage where we can finalize our position, what we need to do as far as brand is concerned, but I'll probably defer it to the next quarter of the year-end and come back to you in terms of final thought process on that. And I'm sure between now and the year-end, we would be able to update you on that.

[Operator]

The next question is from the line of Chintan Sheth from Sameeksha Capital.

[Chintan Sheth, Equity Research Analyst]

Gandharv, congrats for a very good set of numbers, to the entire team as well. Gandharv, on your -- on other expenses, if you can pull out any large items, which is resetting a strong savings this quarter? Because if I look at the numbers, sequentially, other expenses that significantly?

[Gandharv Tongia, Chief Financial Officer]

Chintan, thank you for your appreciation and kind words. The other expenses have slightly changed, if I call out -- if I could call out 1 or 2 items. One is the exchange difference, which was sitting in the base quarter as a loss, which is not there in this quarter. The second one is because of Ryker acquisition, the last quarter, Ryker caused to fit in subcontracting expenses. But since now it's a wholly owned subsidiary, it is getting reflected in natural line item, for example, power and fuel. And that is also giving us some sort of benefit. Overall, if you see our power and fuel has slightly optimized. But other than that, I don't expect there are any major items, which can be highlighted to you at this stage. If you wish, you may go through the entire set of financial statement, which has a complete list of other expenses as posted on our website and happy to give you inputs if you want to understand any particular line item in the other expenses.

[Chintan Sheth, Equity Research Analyst]

Sure. Sure. And on the export, you mentioned $10 million of -- bandwidth orders. So we must have received advance this quarter or it will come in third quarter?

[Gandharv Tongia, Chief Financial Officer]

No. This is a recent development. So there is no advance which is getting reflected as of 30th of April 2020 or as of the end [indiscernible].

[Chintan Sheth, Equity Research Analyst]

But we will receive some advance from that, right? I see, like in the earlier contracts, we received -- we had some 40% of the project early on before the price started.

[Gandharv Tongia, Chief Financial Officer]

Yes. So it's a combination of both. But Dangote is an existing customer now, and that is where we have additional level of comfort. But yes, you are right, it would have competition of both advance as well as security against [indiscernible].

[Chintan Sheth, Equity Research Analyst]

Right. And any number you want to point out on the IPL cost, which will likely to accrue in the coming quarter? The run rate, if you can just -- how the percentage of sales will look likely, if not the absolute number?

[Gandharv Tongia, Chief Financial Officer]

I think we have incurred almost 1/5 of IPL spend in the September quarter and 4/5 or which is 80% would be accrued in the next quarter.

[Operator]

The next question is from the line of Garima Mishra from Kotak Securities.

[Garima Mishra, Vice President]

Congrats on a good set of. 2 questions from me. First, have you talked about expanding your presence more across e-commerce? And what's the portion of your sales currently go through that channel?

[Gandharv Tongia, Chief Financial Officer]

Thanks, Garima, for your kind words. You already know that 50% of our business comes from distribution. 75% of the 80% comes from dealer portal, wherein our dealers key in their orders and then those supplies are made without any significant human intervention. So on the distribution side, we have already implemented it, and this 75% will only improve in the subsequent quarters. On the B2C side, we don't have such a facility as of today. But probably in a few months from now, we would have a facility -- a typical e-commerce facility to provide our B2C products.

[Garima Mishra, Vice President]

Okay. Understood. And second, my question is also on demand. Do you think this quarter -- I mean, the second quarter, you had any element of tender demands because a lot of products, when not available in the first quarter and customers may have picked up some purchases? And a related question to that, how sustainable do you think these current demand trends are? Because if you see from a very top-down perspective, we are talking of negative GDP and income getting loss. So how does that time with the very strong demand trends that you are seeing across your product categories?

[Gandharv Tongia, Chief Financial Officer]

Yes. I think that's an interesting one, Garima, thanks for asking. I don't think there is any significant element of pent-up demand in Q2. There was some to the extent of Q1 in the month of June or slightly partially in July, but not considerable amount in the second quarter. When I talk about GDP degrowth, I think the maximum component of degrowth is coming from this first quarter, which is behind us. And I don't expect that by and large, companies are going to witness the same amount of degrowth, which was there in the first quarter, in the coming quarters. It could vary from industry-to-industry and company-to-company, but I would be really surprised if any company goes back and declares performance, which is more or less in line with what we experienced in the first quarter. And that is why we believe that the second half should be better than the first half. But as I called out in my opening remarks, there are some challenges, which are outside big players of the company due to COVID environment. And that is where I think we should remain slightly cautious. But overall, I think the second half is going to be better than first half.

[Operator]

The next question is from the line of Manoj Joshi, individual investor. As there is no response from the current participant, I have muted the line. We'll take the next question from the line of [ Devansh Ji from SIMPL ].

[Unknown Analyst]

Congratulations on a very good set of numbers. Sir, my question was predominantly relating to the benefits, which have come from the Ryker acquisition. Sir, correct me if my numbers are right. I think we are seeing 3.5% savings in contract expense per quarter. And I think that translates to INR 50 crores, INR 60 crores. I think we did a INR 200 crore acquisition for Ryker. So if you could just reclarify on those numbers again?

[Gandharv Tongia, Chief Financial Officer]

Sure. Thanks a lot for asking. Let me just give you a background about Ryker before I specifically deal with your particular question on ceilings. Ryker is a result of our thought [indiscernible], having backward integration in place. For us, copper is the most important raw material, and Ryker convert a form of copper into another form, technically it is called copper, which are generally procured by us from countries like Japan. And Ryker then converts that form of copper, which is [indiscernible], and then these are used for the manufacturing of cable and wire. What we are saying is not necessarily the correct way of comparing because till last year, this particular entity was a joint venture. And as per the accounting standard, any expenses paid to a joint venture used to disclosed as subcontracting expenses depending on nature of the item. Whereas now, it's a wholly owned subsidiary from May of this year and because of consolidation principles, the amount -- any paid to -- by Polycab to Ryker is required to be knocked off. But overall, there are savings on account of 2 reasons. One is we get economies of scale advantage. And second is the overall quality of our purchase is under our supervision, right, from procurement to consumption, and that is where we get operational advantage. Ryker is going to help us in the overall improving the profitability, but I don't think the magnitude would be to the extent of what you had mentioned a while back.

[Unknown Analyst]

Okay. And another question was relating to exports. So probably, we used to do around INR 50 crores to INR 100 crores run rate. And I think it's around INR 190 crores, INR 200 crores this quarter. So if you can just throw some more light on the soft points on the way we are trying to build up this export business? And since we are a challenger in this export distribution-led business that we are trying to create, so if you can just throw some more light on that?

[Gandharv Tongia, Chief Financial Officer]

Yes. So in the current quarter, we did almost INR 225 crores of exports as again, the base quarter where we did almost INR 153 crores. But this export journey actually started almost 2.5 or 3 years back when the Chairman and Managing Director and other team members decided to ensure that we have all the required approvals in place. In India, you would have seen or heard come like ISI approval. Similarly, in domestic countries, there are approvals required. To give you an example, UL approval in the case of U.S. and that we started almost 2.5, 3 years back. And now we have almost all the approvals in place. There are a few, which we are still working on. But that is the first time which we took almost 2, 2.5 years back, and that is getting reflected in the export top line now. The second thing, which we have done in almost last around 500 days or so in addition is to the Dangote sale orders, which we secured, we have started penetrating the markets in the identified geographies. For example, Australia and U.S. Now we have only owned subsidiaries in the U.S. as well as the Australia. And the objective is twofold. One is to have a local distribution presence in these developed economies and this is what precisely we did even in India. Until 2010, 2012, we were a typical B2B business. And slowly and gradually, we started moving away from B2B to our distribution-led business. And today, we are only a distribution play. The same thing is what we want to replicate in the export arena as well. The second thing when we are talking about export, in addition to distribution, is there are identified sectors where we want to ensure to be present, to give you an example, say, oil and gas. So we want to ensure that in the identified sector, the few select major players within those sectors should be our clients. And that is where we are making efforts. It's a long way to go but on the basis of whatever work we have done in last 2, 2.5 years, and the numbers, which we have been able to report our export revenue in the recent quarters, I think we have done a decent work there and the direction and pace is in line with what we initially contemplated.

[Unknown Analyst]

Okay. Okay. Sir, just a bookkeeping question. So this is regarding the travel and convenience, which is -- which obviously now will be at a very low level. When do you expect this number to normalize? Because almost there is a INR 5 crore, INR 6 crore delta this quarter, and -- which is one. And also in rental cost, I mean, I think it's around -- normally around INR 5 crores, INR 6 crores. Over there, we have booked around INR 1 core, INR 1.5 crore. So we have INR 3 crores or INR 4 crores delta over there as well. So if you can just reclarify on these 2 numbers.

[Gandharv Tongia, Chief Financial Officer]

So I think couple of things. COVID has changed is the entire world is functioning, and we are no exception. The good thing is since last around couple of years, we started making investment in technology. The entire sales force is now on sales force automation tools, and now they are not required to come to their physical offices. From their respective homes, they can directly go to the market, and we get reports with the help of technology, which we have implemented in like things like their [indiscernible], the number of retailers attended by them and so on and so forth. So we are leveraging on technology, and that is where we feel that the traveling cost not necessarily would be a significant cost. But the export business may require some work of travel, and that is where it could almost like a comp or an adjustment. But directionally, the use of technology will increase. And as a matter of fact, has already increased in the last couple of quarters. That's on this. On the rental one, I think one thing which I thought you would have already know, There is a new accounting standard by the name of Ind AS 116, and rent expenses in general are routed to depletion line item unless there is a particular line item or particular lease cannot be covered under 116. And that is what is getting reflected in rent. But overall, rent expense is not significant in our case. And it is quite possible that rent expense on the offices would reduce in the coming quarters. I hope I've answered your question?

[Unknown Analyst]

Yes. Yes, sir, that was quite elaborate.

[Operator]

[Operator Instructions] The next question is from the line of Mayank Bhandari from BNK Securities.

[Mayank Bhandari, Research Analyst]

Yes. Sir, I have a question particular to your sub-contracting expense only. In FY '22, we had about INR 199 crores of subcontracting expense in the other expense, which was about INR 66 crores in FY '18. Sir, overall, what does this comprises of? Is it related to only your EPC business? Or it also as component from the cycle plant? Can you just break it down in terms of?

[Gandharv Tongia, Chief Financial Officer]

So this is the cost, which is paid to our contract employees and whatever work we get it done by third-party vendor as job work.

[Mayank Bhandari, Research Analyst]

Sir, gone down significantly in this quarter. Any guidance for FY '21?

[Gandharv Tongia, Chief Financial Officer]

This has gone down because till last year, the such cost used to be reflected in the P&L because it was a payment to Ryker, which used to be a JV entity. Now as a wholly owned subsidiary, it is required to be eliminated and is not required to be reflected. As a contrary to that, whatever expenses are being incurred by Ryker, say, for example, store consumption, power and fuel and all that, those have been added on line-by-line addition basis in accordance with the accounting principles as per India.

[Mayank Bhandari, Research Analyst]

Sir, secondly, we have seen that we have done pretty good in terms of receivables in last 2, 3 years, the receivable days have improved. And we are continuously focusing on channel financing in FMEG also. Sir, any -- next 2, 3 years, would you give any guidance for receivable like after the channel financing has increased in FMEG as well a level of, let's say, wire and cables, what you have? What would it look like overall in receivable space? Any guidance you have?

[Gandharv Tongia, Chief Financial Officer]

Yes. Mayank, we, as a company, generally, don't give guidance, but I can certainly add a few thoughts here. In the case of cable and wire, the channel financing percentage, our penetration is almost 60%, 65%, whereas in the case of FMEG business, it is in high teens. And that is where we have significant amount of improvement scope. In the coming quarters, our expectation as well effort would be to increase the channel financing percentage within FMEG business. I don't think it is quite possible to get to 100% channel financing. It's impossible. But even if we are able to achieve a channel sizing percentage, what is there in cable and wire in the FMEG business, this will significantly reduce the receivable because the contribution of B2C business is slowly and gradually increasing. If I talk about FMEG business, it's almost 10% of our top line. And if I talk about the [indiscernible] business, it's almost 40% of our top line. So in the years and quarters to come, I would expect this number to further improve.

[Operator]

[Operator Instructions] The next question is from the line of Manish Agarwall from Edelweiss.

[Manish Agarwall, Analyst]

Congratulations on a great set of numbers. Sir, firstly, on the FMEG part. So we are seeing great advertisements. Very catchy [indiscernible] actually doing this IPL season on our arena of lighting parts and cable [indiscernible] as well. So on FMEG business, big picture question, like are you seeing some traction? I know it's very short-term to answer but is it leading to some traction? Is there some way we do measure the consumer demand or the consumer pull that comes around? And the second question, sir, on the cable and wire segment, sir. So sir, what is your view on the extra high-voltage segment? I mean, how big are we there? Or is it a big niche market? Some color on that part, sir.

[Gandharv Tongia, Chief Financial Officer]

Thanks, Manish. Thanks for noticing our advertisement, and thank you for your kind words, appreciating our advertisement. I think if I'm not wrong, what you're trying to understand is whether the advertisement will result into any short-term benefits in the top line. And if that's correct, answer is yes. The time frame is unknown. But we, as a company, we believe that we have to make and continue to make investment in strengthening our brand. We have achieved a fair amount of success in last 5 years. If I'm not wrong, 6, 7 years where you used to spend only INR 10 crores as an advertisement of probably INR 5 crores, last year, we would have invested almost INR 100 crore. So that is where we are cautious that for a B2C-oriented business, we have no option but to invest in A&P, and we will continue to do that. And this will only increase in terms of absolute amount in the coming years because the B2C revenue will increase. And that is where it's going to help us in over augmenting the top line of the B2C business. This also has a rub-off effect on the B2B business. So overall, it's going to be a positive for the top line growth of the organization. The second thing, I think you were trying to understand our overall plan of action on extra high voltage. EHV typically has done in EPC arrangement. And for EPC, the company should have [ pre-q ] or prequalification in place. As of now, we don't have any such prequalification or pre-q for ESP business. However, since last few years, we have been working on EPC business, and we have obtained a few prequalifications, not in ESP. But over the period, we have strengthened our pre-q qualification in EPC but if we would be able to venture into ESP only when we have ESP qualification, which presently we don't insure.

[Operator]

[Operator Instructions] We'll take the next question from the line of Ankur from HDFC Life Insurance.

[Unknown Analyst]

And congratulations on the good set of numbers. I have 2 questions. One, if you could talk about the overall industry. Obviously the regrowth you see on the cable side and domestic business, and the kind of growth the industrial that's seen on the wire. As you mean, just like you saw this good growth on the buyer business, the industry would also have. So that's one, if you could comment on that.

[Gandharv Tongia, Chief Financial Officer]

Yes. Thanks and the overall industry, let's split the industry into 2 parts, one is organized, and second is an unorganized. In the first quarter of whatever we were able to get there, we believe that there was a significant amount of degrowth in unorganized sector. But in the second quarter, there are some signs of revival in unorganized because a few of them have been able to manage debt capital issues, working capital issues and [indiscernible] of labor issues. So there, I think there's a bit of a rebound within the unorganized sector. But overall, the unorganized sector has decreased over the period, including between last year and this year. On the organized sector, I don't think we should take a view on a 6-month basis. Because overall, the private CapEx spend has not increased in the first 6 months. First quarter was necessarily -- not necessarily was very impressive. Directionally, the private CapEx has improved in the second quarter on a sequential basis. So I think we should wait until end of this year before we take our view on the organized wire and cable market.

[Unknown Analyst]

That's fair. And sir, overall -- I was asking about the overall industry degrowth in cable, if you have a number in Q2? And similarly, any numbers you can share on the overall industry growth on the wire side would be...

[Gandharv Tongia, Chief Financial Officer]

You have to wait for the results of the other large players before we take our view on the overall industry level. But it seems that large players would have increased their overall top line in the B2C wire category.

[Operator]

The next question is from the line of Bhoomika Nair from IDFC Securities.

[Bhoomika Nair, Security Analyst]

Yes. Congratulations on a good set of numbers. Sir, just wanted to understand a little more on the B2B cable segment. As you mentioned, October has seen a growth across all categories. Now would it be fair to say that from March onwards, given that there has been almost a stalled work in terms of institutional projects, that will kind of start picking up? And for the next 6, 9 months, they should logically be a strong growth for B2B cables? Or is that something, which will come actually more back-ended and will still remain sluggish for the next one of the quarter? And second is on the FMEG margin profile that we saw at a very strong level of 8%. If I remember correctly, we were talking about 100 to 200 basis point margin improvement on an annual basis on an -- each year. So does this change that guidance or that kind of an outlook in any manner?

[Gandharv Tongia, Chief Financial Officer]

Yes. Bhoomika, when we are trying to study the pattern in B2B, we'll have to understand the overall CapEx or government level as well as private CapEx. The private CapEx has certainly improved between first quarter and second quarter. But I think it can further be improved. And government has increased spend, which is visible, but it can again be further improved. But I think the worst is behind us. I don't think there is any 2 view about it. It will only improve from here. It could take a quarter or 2 to overall get to the position where all of us would like to. But significantly, I feel that overall, H2 should be competitively better than H1 on B2B. As a B2C is concerned, I think that is already visible. Whatever we have witnessed in second quarter as well as whatever witnessed in the first 20, 25 days to 1 month, so I think B2C is given. But the B2B, I think, directionally should improve, but we should just be cautious and monitor it at a regular interval. On FMEG profile, Bhoomika...

[Unknown Analyst]

Sorry, sir, just one thing on the -- in month of October, like you said, 2Q saw about a 20%, 30% decline for us in terms of B2B cable, that frame would have continued in terms of a decline into October as well? Or is there an improvement?

[Gandharv Tongia, Chief Financial Officer]

I think in the case of B2B business, we should not take up be only be 20, 25 days because in our experience, we have seen at times, the supplies are done in the second fortnight into B2B business, and that is where 45 days sales is not necessarily be reflective. So I think we should park it for quarter and take a view on that. But directionally, what I'm trying to allude to is, it looks like that B2B is now bouncing back. And in the coming quarter, we should be able get a comparatively better number what we have seen in H1. Coming to FMEG profile, Bhoomika, I don't know whether you were able to capture my earlier comment. What I was trying to highlight is, we have taken several initiatives. One is increase in the top line as well as profitability of the larger businesses within FMEG. Second is the smaller businesses where we want to increase our top line while maintaining their profitability. Third is we want to launch a new project -- products, which are next-generation IoT-enabler product. And the fourth is focus on the working capital, where we have already reduced the inventories to a fair extent, and -- but we can further improve there as well as increase the China percentage. So all these things put together, we feel we would be able to improve the overall FMEG profitability. I note that we used to give a guidance of 100 to 150 bps improvement every year. But it seems on the basis of whatever work we have done in the last 90, 100 days that, that can be further revised upwards or on the higher side. But probably, we'll wait for a quarter or 2 before we finally call out on the guidance. I'm pretty confident on whatever work we have done so far and hopeful that FMEG profitability will continue to improve from here onwards. The only thing which I would like to call out at this stage is the spend on IPL, which will be accounted for in the third quarter. Because the accounting standard requires us to account for it now, which from a business standpoint, probably would agree as more or like an investment. So that could slightly impact the profitability in third quarter. But overall, directionally, profitability of FMEG should improve from here onwards.

[Operator]

The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

[Prashant Kutty, Research Analyst]

Pardon me, the questions were asked before as I joined the call today. Just one big, firstly, remember our comp, -- correct me if I'm wrong, when you have highlighted around the last quarter, and also in a couple of conferences that we were tracking at a positive sales growth around August or so, July, August or so, we ended the quarter with a negative growth rate in the full year or in the 2 quarters. Anything that is deviated from that last 1.5 months or so, sir, if you could share your thoughts on that?

[Gandharv Tongia, Chief Financial Officer]

Yes. So probably, Prashant, we'll have to go to the context in which we were having discussion. But on an average, if I see within the quarter on different periods a month 2 or 3, generally, the B2C business has record growth. The B2B business [indiscernible] because of institutional sluggishness, there is a bit of a degrowth, which has been in. So I'm not able to recollect what was the context when we had the last discussion. But broadly, the trend as of the end of the quarter is in line with what we really experienced throughout this quarter.

[Prashant Kutty, Research Analyst]

And just a clarification, is that October is now almost seeing a recovery in almost all businesses. I mean, a positive traction in almost [indiscernible]. Is that a fair...

[Gandharv Tongia, Chief Financial Officer]

Yes. That's true. The only thing is -- and this is what, again, I would like to call out, which I mentioned a while back. 20, 25 days is not necessarily reflective of the month on quarter performance. And second is including [indiscernible].

[Prashant Kutty, Research Analyst]

Good. Understood. Second question is on the margin part. So just wanting to understand over here. If you look at it on the FMEG margins business, we far more looking at a more sustainable number, I think, reported about an 8% margin at an EBIT level. What do you think -- is this clear of operations to be a sustainable EBIT margin level? I do understand your comments. You said that you will look to increase in your guidance is actually, you might even look to increase that as well. But looking at the scale of operation, and the kind of growth you're doing, I mean, even after considering, let's say, expensive IP and so on and so forth. Let's say, a normalized basis, is 8% a sustainable number in, let's say, maybe from 1 year or 2 perspective?

[Gandharv Tongia, Chief Financial Officer]

Yes. So Prashant, over the medium term, we would like to get to the industry benchmark of margins. What I was mentioning to Bhoomika a while back that I think probably we'll wait till the end of this year and come back to you with a revised guidance. But whatever work we have done in the last 90, 100 days gives us a lot of confidence and conviction that our margins would improve here onward. But just bear with us till end of this year before we come back to you with the revised guidance on the EBIT margins of FMEG business if, at all, we need to make any upward revision.

[Prashant Kutty, Research Analyst]

And the last bit, sorry, is the pricing increase you have seen [indiscernible]. If you could highlight that, what you -- for the quarter? I'm sorry if you could highlight them.

[Gandharv Tongia, Chief Financial Officer]

Prashant, could you please just repeat? There was some disturbance on the line. I couldn't completely follow what you mentioned.

[Prashant Kutty, Research Analyst]

Sorry. I was asking what was the pricing increase taken in wires business for this quarter?

[Gandharv Tongia, Chief Financial Officer]

Prashant, our business, in our case, it's a simple pass-through generally speaking. So whatever is the increase in copper, copper LME side as well as change in the foreign exchange rate in USD/INR, it generally falls on a monthly basis. And that is what we have followed in this quarter as well. There is no exception there.

[Operator]

Thank you. Ladies and gentlemen, due to time constraint, we will take that as a last question. I would now like to hand the conference over to Mr. Gandharv Tongia for closing comments.

[Gandharv Tongia, Chief Financial Officer]

Thank you all for taking out time for this call. In case you wish to know more about us, feel free to reach out to me or you can write to [e-mail]. Lastly, let me be -- be the first amongst the first few to make sure very Happy Dusshera and Diwali, in advance. I hope you all have a great festive season ahead, filled with lots of happiness. Thanks a lot. Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Polycab India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.