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Polycab India Ltd
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Ladies and gentlemen, good day and welcome to Polycab India Limited Q2 FY 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Gandharv Tongia, Chief Financial Officer from Polycab India Limited. Thank you, and over to you, sir.
Thank you, operator, and good afternoon, everyone. I hope all of you are doing well. It is a pleasure to have you on the call. As the operator mentioned, my name is Gandharv Tongia and I am the CFO at Polycab India Limited. Thank you for joining us today to discuss our second quarter earnings.
During the call, we'll be referring to the presentation, financial results and condensed 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 QR code on Slide #10 of earnings presentation.
From our management team, we have with us our Chairman and Managing Director, Inder Jaisinghani. Let me now hand it over to him for his opening remarks.
Good afternoon, everyone. We continued with our strong business performance in Q2, posting highest-ever second quarter revenue in the current year. More importantly, we are also progressing well on our long-term strategic agenda focusing on sustainable value creation across B2B and B2C businesses. A strong domestic economy with structural reforms focused on the infrastructure development augurs well for most of our product categories. Given our i-Power value, I believe, we are ideally placed to take advantage of the market opportunity and grow steadily to achieve our FY '26 [ strategic ] goals.
And now request Gandharv to take you through our earnings presentation.
Thank you, Inder bhai. Before I take you through the financial numbers for the quarter, let me give you a flavor of the macro environment. The macro has been a bit of a mixed bag during the quarter. The economy is in choppy waters, facing twin shocks of a slowdown in economic growth accompanied by high level of inflation. The 3 major world economies: US, China and the Eurozone are facing growth of [ decapitation ], while emerging market economies are impacted by currency depreciation, [ reserve ] losses in foreign fund outflows, besides the ripple effects of global and domestic inflation.
Over the past 1 year, the global economy has gone through a fundamental shift from 1 of relatively credible economic environment with low interest rates and low inflation to a world with more [ rigidity ], greater uncertainty and geopolitical confrontation. Despite these global challenges, Indian economy is relatively stable with improvement in capacity utilization, buoyant formal job creation, significant bank credit expansion and government continued thrust on capital expenditure.
The central government spending on rural development, roads and railways has progressed at a relatively healthy pace. Capacity utilization of manufacturing sectors improved from 73% in Q4 to -- of fiscal '22 to 74.3% in Q1 FY '23, and is at the higher level it has been over the past 3 years. We believe that the domestic economy is likely to remain resilient in H2 with rural demand catching up and urban demand likely to improve further with the typical upturn seen in the second half of the year.
Moving on to the presentation, please refer to Slide #4. For the quarter ended September 2022, our consolidated revenue grew by 11% year-on-year. Please note here that this growth has been achieved on a high base of last year, whereby high commodity prices had helped the sector post good sales numbers. In comparison, the current quarter sales have been achieved in decreasing commodity prices and increasing inflationary environment, primarily on the back of a strong volume growth in cables and wires business.
EBITDA margin for the company improved by [ 307 ] basis points year-on-year and 149 basis points quarter-on-quarter to 12.8% on account of strong growth in exports and judicious pass-through of the benefit of decrease in commodity prices.
A detailed breakup of the other income and finance costs have been provided on Slide 14 of our earnings presentation.
PAT for the quarter increased by 37% year-on-year with PAT margin improving by 154 basis points year-on-year to 8.1%.
On Slide 5, we have presented the key numbers for the first half of the year. Our revenue in H1 FY '23 grew strongly by 25% year-on-year, EBITDA was up by 73% with 12.1% margin and PAT grew by 82% year-on-year. The growth percentages are seemingly higher on account of a weak base.
Moving on to segment-wise performance, please refer to Slide #6. Our wires and cables business continued its strong momentum with sales growing 13% year-on-year on a relatively healthy base, despite softness in commodity prices. Both domestic distribution, as well as institutional business posted healthy growth. The revenue growth was driven by volume share growth, which grew in double digits on a year-on-year basis. The highlight of the quarter was a strong momentum in the export business which executed a remarkable growth of 75% year-on-year on a healthy base, led by strong orders from U.S.A., Europe and Australia. Globally, we are seeing good demand from sectors like oil and gas, renewables and infrastructure. Overall, export business contributed to 13% of the consolidated revenue in Q2 FY '23, up from 6.7% last quarter. Our focus on achieving consistent double-digit contribution target over the medium-term for this business remains intact. EBIT margin for cable and wires segment increased by 304 basis points year-on-year to 11.7%, mainly driven by exports and judicious price revisions.
Please refer to Slide 7 for an update on FMEG business. The quarter was soft for FMEG business as it de-grew 12% year-on-year on account of subdued demand environment due to high inflation, especially from rural markets. This was further accelerated for us as we are in the midst of realignment of our distribution strategy, which I had explained during the last quarter's earning call. This solution is a multi-quarter journey, which is expected to be completed by the end of the current fiscal. So one should consider FY '23 as a base year for FMEG business and expect the business to post decent growth from FY '24 onwards. During the quarter, the fan business, which has been our largest revenue generator in FMEG product portfolio, was additionally affected on account of an off-season. The switch business, which was affected due to supply side challenges, regained its growth momentum in the second quarter as we started production in our own manufacturing plant, posting 123% quarter-on-quarter growth. We expect strong sales momentum to continue in H2 FY '23 as well.
Lastly, we took a strategic decision to merge the HDC and LDC verticals. We have started to realize the benefits of this merger in the form of operational efficiencies and cross-sellings. With similar thought, we have taken 2 very important strategic decisions during the quarter of merging the fans vertical with lights and luminaries vertical and merging the retail wires vertical with switches and switchgears vertical. We found significant overlap between the distribution channels of these verticals, which we can optimize by merging them, as well as generate higher business through cross-sell, winning larger share of the customers' wallet. Team optimization will also help in faster rolling out of GTM initiatives at a leaner cost base. We can also streamline the marketing and influencer management platform to increase efficacy.
Moving on to Slide 8, which gives us an update on our other businesses, which largely comprises of our strategic EPC business [ witnessed ] revenue of INR 826 million in Q2, a growth of 4% year-on-year. Segmental margins for the same stood at 17%. Annual sustainable operating margin in this business is expected to be in high single-digit over mid- to long-term. Overall, our financial position continues to remain healthy with debt-to-equity ratio of 0.02x and net debt of around INR [ 1,650 ] crores. Our efforts to optimize working capital is also taking shape, as well as we are seeing good optimization receivable and inventory.
Slide 9 is a new slide, wherein we have given a breakup of our sales mix between B2B and B2C, as well as through dealers and distributors versus institutional versus export. During our recent NDR to London and Singapore, we found a lot of confusion in minds of the investors on what can be classified as B2C. A lot of them confuse B2C with dealer and distributor-generated sales. So we thought we should explain the difference between the 2. A B2B or a B2C sale is based on the product end user. If the end user of the product is an individual consumer, it is classified as B2C. And if it is used by a business, then it is a B2B.
So on the FMEG side, our entire product portfolio [Technical difficulty] and on the wires and cables side, housing wire business are included in B2C. The remaining products with HDC, LDC and other cables and EPC businesses are categorized as B2B. Polycab has been historically a B2B-driven business. And since fiscal '14, when we introduced the FMEG business, we have been implementing the shifting to a B2C-driven business.
As can be seen from the chart, contribution of sales from B2C medium has increased to 38% in fiscal '22 from 34% in fiscal '19. A completely separate classification of business can be through the means of sales, which is either through dealers and distributors directly to institutions or via exports. A strong distribution channel has always been our strong point, where the contribution in generating sales having increased to 84% of the total sales in fiscal '22.
Now, let us dwell deep into the key updates of the transformation of Project Leap. To recap for everyone, under Project Leap, we are working on 4 key strategic themes, namely customer-centricity, go-to-market excellence, winning with new products and setup of organization and digital enablers. Under our customer-centricity approach, as I referred earlier, we had merged the HDC and LDC segment in this fiscal '22 with a view to redesign the operating model of the B2B business and making it more customer-centric. We have started to realize the benefits to this merger in the form of incremental cross-selling revenues within H1 FY '23 itself and which will scale up in the future. Also, under the customer-centric operating model, we have now been able to match 39% of primary sales to end customers. This has helped us to have deeper insights into customer dynamics, enabling us to generate 1.1x secondary sales from these customers via repeat orders.
Under the agenda of improving our go-to-market strategy, we have been focusing on expanding reach to white spaces, that is regions, where we have no presence or marginal revenue generation. In H1 FY '23, we have penetrated 120 new cities, generating INR 112 crore of incremental revenues from these districts. Geography-wise, the penetration has been quite broad-based with the breakup of new cities being 30% from South, 26% from North, 15% each from West and Central and 13% from East. We have also added 115 new distributors in retail wires business and 187 new distributors in FMEG business in the current year.
As part of winning with new product strategy, we have identified gaps, as well as opportunities, and have created a product portfolio roadmap of 300-plus new products to be launched in the coming future across large B2C businesses. Most of these new products will be in the fans and lighting verticals, which will leverage the merged operational efficiencies of common distribution network to increase cross-sales.
Another important strategy under the theme has been to increase our presence across price points to cater to complete set of customers' demand. Under this, we have been focusing on premiumization of our offerings, especially in the FMEG category. I'm very happy to inform you that during the first half of the year, contribution of premium products in the fans and light segment have increased to high-teens of the total revenue generated through channel distribution. Etira wires, an economically priced wire segment that was launched in the fiscal '22 has also been very well received, and the product contributing almost 11% of our overall sales of retail wires in the current 9 months of the calendar '22.
As far as setup of digital enablers is concerned, we are now moving to completely transform our company into a digital-first organization. We have segregated our IT into 2 sections. First, the current IT team, which will continue to look after the back-end technology requirement within the company. And second, we have now created a separate digital vertical, which will be focused on advancing our business initiatives by focusing on end-to-end digitalization of front-end sales, enhancing customer experience, and enabling access to relevant data to perform deep analytics to better understand customer demand. To drive this initiative, we have recently hired our Chief Digital Officer, Ritesh Arora, from one of the large Indian organizations.
So that was the update on Project Leap for the first half of the year. We will continue to share periodic updates on the progress we make and are excited to see how rest of the year pans out.
Thank you. And with that, I hand it over to operator for Q&A.
[Operator Instructions] We have our first question from the line of Ravi Swaminathan from Spark Capital.
Congrats on a good set of numbers. My first question is with respect to the kind of volume growth that would have been seen in the wires and cables business. Given the fact that second quarter copper prices have dropped by 16%, 17% year-on-year, was our volume growth more than 20%, 25% kind of growth in wires and cables segment?
Yes, thank you, Ravi, for your kind words. You are right, whatever revenue growth we are seeing in value terms by and large is driven by the volume growth and this mainly is coming from the cable and wire business, HDC and LDC vertical. It would differ from product category to product category, but generally I would believe that the growth is between mid- to high-teens across product categories.
The second reason of the growth is exports, which I was alluding to in the opening remarks. Exports on the first half basis is almost 10% of our top line. And there also, there is a broad-based recovery of growth. We have traction from geographies like U.S. and Australia and countries like Spain and EU. So it's a combination of both, export as well as domestic. And domestic would be generally between mid- to high-teens, depends on the product category.
Got it, sir. And our working capital has come off a lot. So basically from 63-odd days it has come down to 44 days. Any reason behind that?
Yes. So, Ravi, when we spoke last -- I was trying to explain you how we are trying to optimize the working capital, and there are 2 or 3 elements of that particular thought process. One is on the receivables, the objective is to improve the channel financing penetration. In the cable and wire business, it is almost 75%. In FMEG business, it varies from product category to product category but it would be generally between 60% to 70% now. And that has helped us in improving the number of days of receivables, is hovering around 25, 26 days now.
The second part is on inventory and trade payables, one is, we want to optimize the inventory, which is currently now around 90 days, which is sustainable. And second is, we want to broadly map or marry our number of days of papers with inventory with a gap of 10, 15 days. And that is how you can see the number of days of working capital is around 44, 45, which is nothing but 25 days of receivables and 20 days of delta between papers and inventory. I would believe 45 to 50 days is a sustainable number for at least few quarters from now.
We have our next question from the line of Atul Tiwari from Citi.
Congratulations on good set of numbers. Gandharv, just 1 question on FMEG business. So could you like flesh out in a little bit of a more detail what exactly is being changed in the distribution channel and how has it -- I mean -- and why has it impacted the sales so much? Because one would have thought that pre-festive season, despite this kind of interruption, probably, FMEG revenues should have been a little higher.
And second question from that is that, once you are done with all these changes this year, so in FY '24 and FY '25, what kind of revenue growth can one expect in FMEG business on this year's base?
Sure. Thank you, Atul, for your kind words. So let's pick up the first question first. We forayed into this FMEG business almost 7 years back, and we took several decisions which were relevant and apt for the first phase of FMEG growth. Today, we are a INR 1,250 crore top line business, with complete -- almost all in-house manufacturing facilities, almost 2,000 dealers and distributors, in-house team. But if we want to further scale this business, we have to make some changes. To give you one example, few of the dealers and distributors who helped us in journey of our Phase 1 of FMEG, not necessarily would be able to help us in scaling this business to, say, 5x from now in few years. And that is where we have done a very scientific analysis of our current dealers and distribution network. We have picked up few areas where we believe we need to probably up our game. In few of the cases, we had to replace the existing dealers and distributors, or in few of the cases we had to help them in accelerating the pace of the growth. And that is what is getting reflected in current quarter's numbers. My sense is, this will continue for at least till March of the next year. And from next year onwards, we should be able to get to a regular routine growth trajectory.
I won't be able to give you a specific guidance on the number for the next few year at this stage, but safe to assume that FMEG would play a very significant role in achieving INR 20,000 crore of top line by fiscal '26.
Okay, that's fair. And my second question is on cables and wires. So, I mean, if I remember correctly, in the last quarter the volume growth was impacted because of channel destocking. So would you attribute some of this mid- to high-teen growth to channel filling and what is the level of inventory? Has it normalized or is the channel filling is still continuing?
Give and take few percentage points, I would believe the inventory in the channel is by and large comparable between second quarter and first quarter. And I'll tell you why, because we believe that our channel partners, they need not to carry more than optimum level of inventory. We are any which ways carrying inventory for them. We have strengthened our SCM over the period, and now we have ability to supply goods immediately or within 1 or 2 days. And that is why I would believe that whatever inventory levels we have today in the channels are optimum, it should continue in the quarters to come.
The another thing is and which I'm sure you would be able to relate is, if they carry higher level of inventory, advancing [ date ] I am referring to channel, they are exposed to price fluctuations, which is an unwarranted risk. Whereas if we are carrying, we have established hedging framework and we know how do we mitigate that risk. And that is also the reason why we are persuading our dealers and distributors to optimize the inventory level, work on better returns, work on higher turnover or higher turns and get more returns from the business.
We have our next question from the line of Sonali Salgaonkar from Jefferies India.
Congratulations on a great set of numbers, especially the margin expansion given the copper volatility. Sir, my first question is regarding the current demand scenario. Sir, any updates you would like to give on the current demand, especially the feelers you are getting from the festive demand?
Yes. Thank you, Sonali, for your kind words. You know this already, India is a consumption powerhouse and from one or the other pocket, you would always have good traction on the demand side. As of now, we are seeing fair amount of traction on the private CapEx and that is where our institutional business has also registered growth in the second quarter. Having said that, generally speaking, second half of the year for our industry, as well as for our company is better than the first half. And I would expect in the third quarter and fourth quarter to have better performance than what we have already achieved in the first and second quarters.
Sir, and could you help quantify the price revisions that you have been talking about in both cables and wires and FMEG?
So I would -- I think broadly it would be in the mid-teens. There is a delta ranging between 1% and 2% between the increase -- between the decrease in input costs at the product basket level vis-a-vis the changes which we have made in our selling price, both would be in mid-teens. And the price reduction is slightly lower than the benefit which we have received on the procurement side.
Sir, and one bookkeeping question. Our other non-operating income this quarter has come out to be negative. So, any thoughts on that?
So other income has 2 elements. One is sustainable income, which we are getting on the deployment of surplus cash, either in fixed deposits or mutual fund. And that is in line with the expectation and trend. The other part is mark-to-market accounting, which we have to do as per IFRS and which was accounted for, which again is a mark-to-market, there is no cash implication. But it is in compliance with the accounting requirements.
Sir, and last question from my side. Sir, your cash position has almost doubled on a year-on-year basis. Any thoughts on the utilization of cash, or are you revising your CapEx guidance at all?
You are right, we have been able to improve our cash balance to almost INR 1,600 crore, INR 1,700 crore now, because of 2 reasons. One is the business itself is generating fair amount of cash. And second is, we are slightly more focused than what we were earlier on the working capital, and you can see the working capital has reduced to almost 44, 45 days now. Having said that, I think there are 2 or 3 opportunities for us for deployment of this cash. One is CapEx. We have been doing around INR 400 crore of CapEx every year and we expect that we'll continue to incur something similar in years to come. Having said that, we are in discussion internally, as well as with the BCG team and we are in the process of identification of additional opportunities, where we can make more investments to get better returns.
The second is M&A opportunities. You are aware, Sonali, we did a very small projection last year in the form of Silvan, which was acquired in June of last year, is 100% subsidiary. And coincidently, Board has also approved merger or amalgamation of that subsidiary with the holding co. So we will continue to scout for opportunities and up our game on M&A side.
The third is dividend payout ratio. Since the time we got listed 3.5 years back, every year we have increased the dividend payout ratio and we expect that we gave adequate returns to our shareholders as part of a dividend payout. And whatever is then left as part -- after retaining something for war chest, we would like to then give it back to shareholders.
[Operator Instructions] We have our next question from the line of Aditya Bhartia from Investec.
My first question is on the changes that you've made on the FMEG business. Just want to understand it a little better. Are these changes being made largely at the dealer end or at the end of the sales team?
It's across. The idea is to get closer to the customer. So if you think from the Polycab end, the sales teams are being merged. Earlier we used to have separate teams, right from the BU head to the TSI. And we are now trying to merge that at our end. So if you visualize a particular geography, you will have a particular person who is catering the requirement of both the businesses, lighting as well as fans. And similarly, it is true for [Technical difficulty].
On the distribution side, the way we have started doing cross-selling of HDC and the LDC dealers, we will continue to do something similar in these merged businesses of fan and lighting, as well as retail wire, switches and switchgears. So it's both, integration of teams at our end, sales teams, plus integration of cross-sell at the dealer end.
Sure. And why is this leading to this kind of a disruption? Is it that channel inventory is going down? Or we are taking away certain dealers without being able to appoint new dealers and distributors in the same area at the same time? Where exactly is the challenge?
I don't think there is any challenge, these are strategic decisions which we have taken and we are implementing it. And that is where whenever you do a bit of a course correction, you will witness some softness in the numbers.
The another factor is, external environment on the FMEG side is slightly softer. For example, fan which contributes almost 35%, 40% to our top line, is slightly a non-season quarter for that particular business vertical, and that is why it got impacted. And as I was explaining to Atul a while back that as part of our GTM revamp, we have identified few dealers and distributors where we believe we need to either replace or support them, and that exercise is taking some time. And in such exercise you would expect some slowdown during the implementation phase. I would expect from the next fiscal we would be back to our regular growth trajectory.
And Gandharv, secondly on exports...
I request you to come back in the queue, sir.
We have our next question from the line of Nitin Arora from Axis Mutual Fund.
Gandharv, just want your commentary on the export side, because this quarter also exports have been very strong. So if you remove the exports and look at like-to-like on our domestic, there is almost like just about 6% value growth. And I think you highlighted that mid-teen volume growth, assuming 15%, 16% copper price decline. Is this number sustainable in export? Because generally you talk about order books when export comes in, so -- which we saw, let's say, in case of Dangote and all. So can you highlight that this number looks sustainable, you have that visibility in order book for the exports? That's my first question.
Sure. So even if we exclude exports, [ prices in ] domestic business would have registered almost like a double-digit growth after adjusting for volume and value. As far as exports is concerned, I was alluding to this in the last call, we are not looking for one-off orders. What we are trying to do is, have sustainable distribution presence in identified geographies. And this is what we did in India [ NE aspect ]. Between 2011 to 2016, our focus was to have distribution-led business rather than institutional-led business. Today, almost 85% of our business is coming through distributors and something similar is what we are trying to do in overseas market. It will take a while, but we believe that's more sustainable. We have fair amount of presence now in countries like U.S. and Australia. This quarter, we got some traction from Africa, as well as Spain and EU. The objective is to get into additional geographies, ensure that we have all the relevant approvals in place, and slowly and gradually set up own distribution channels in the key geographies.
That's helpful. Gandharv, from the domestic side, the question was more that 8%, 10% volume growth was also used to happen pre-COVID, right? We generally used to do 10%, 12% growth company. The question here is, despite you said the levers, like private CapEx, institutional business is firing, is doing good. We are doing the same volume growth, so which is good, but I'm asking from a perspective that where is that weakness which you are seeing because of the inflation or general slowness in the economy, which you highlighted in the starting, that would be helpful.
So one is the traditional growth numbers you mentioned are not comparable with the current period numbers. Current period numbers are mid-teens to high-teens. And to that extent, there is a delta between the numbers you mentioned vis-a-vis what actually we have delivered. Second is, I don't think we should take a view on half-yearly basis, we should wait for this year to pan out. And after that we should ascertain the actual growth because generally speaking, H1 is only 45% of the annual revenue, and H2 would be almost 55%. So we have to wait till the fourth quarter and then see what type of volume growth we are able to achieve.
We have our next question from the line of Shrinidhi from HSBC.
Just couple of questions from my end. So, Gandharv, it's a very impressive ramp-up of Etira brand with almost double-digit contribution of retail wire business. Just wondering, in your view, large part of this business that comes under this brand is an incremental business, or it could be cannibalizing some of Polycab brand's revenue as well?
So there is some amount of cannibalization which is there, but by and large is incremental.
Okay, great. And just one more question Gandharv here is, export business, some of the competition does talk about export business being a much lesser profitable business given the lot of trade costs involved in the distribution and all. So just wondering, in case of Polycab, if there's an incremental export opportunity that company is targeting, is it broadly a similar margin business that you have in domestic market?
Yes. Similar margin business, but with slightly better working capital.
We have our next question from the line of Achal Lohade from JM Financial.
Just 2 of them. One is, can you help us understand what is the capacity utilization for both the segments?
So cable and wire is between 65% to 70%. As far as FMEG is concerned, because this quarter was soft, there is slightly lower utilization. But if I were to give a historic view, Roorkee facility is optimally being utilized and the new facility like switches and switchgears is being ramped up to meet the current requirement.
Got it. And you're saying you plan to incur INR 400 crores to INR 500 crores of CapEx towards the cable and wire business. Is it in a particular sub-segment or it's across-the-board?
So, out of the INR 400 crore, around 2/3 will go to cable and wire and 1/3 to FMEG. Within cable and wire, it would be broad-based. Some facilities which are required for export businesses, bit of backward integration, as well as some amount of maintenance CapEx. And on FMEG, it is primarily for adding new capacities, for example, switches or switchgear and maintenance.
And just second question, there was one media article about the litigation with Atomberg. Can you help us understand this particular issue? And what is the outcome and implication for us in terms of impact on the numbers?
Yes. So there was a particular model of fan which contributes immaterial value to our top line, both at the fan vertical, as well as the company vertical. One of the peer companies opted for a litigation alleging that their model is similar to ours. We believe that we have a fair case. The matter is currently sub judice. There was an interim order which was passed by the Hon'ble Court and the hearing is now scheduled, I think, next month and that is when we will be able to present our side and our fact pattern and then we'll get guided by the court order. We are confident of our position. Having said that, the contribution of that particular SKU is immaterial to both fan business, as well as to the company.
But at this point in time, have we done any recall of the products or it's still status quo?
So we are in complete compliance of the court order. We have not done any new transaction on this particular SKU.
We have our next question from the line of Amit Bhinde from Morgan Stanley.
Amit from Morgan Stanley. I had 2 questions. First is that, I wanted to understand that the FVTPL adjustment in other income, is that related to the commodity hedges that we do on the copper purchase side or is it something else? That is one.
And second is -- yes. Sorry.
Sorry, I think you were trying to understand on FVTPL accounting. This is not hedging, this is for the ineffective portion and which is required to be done M2M and which is what we have done. This has no cash implication, this is only an accounting entry which is required to be recorded as of the quarter end.
Right. And it is not related to the commodity hedges that we are doing in the wires -- for the cable -- for copper purchases, right? This is not related to that?
It's not related to copper purchase. There's an element of ineffectiveness which is required to be accounted for like this, and that is what we did.
Right. Okay. And other thing I just wanted to understand is that, we have mentioned that FMEG business partly was affected also by the rural demand slowdown. So how much is the contribution of rural in our FMEG business right now? And apart from Etira, what are the other plans to, I mean, boost the rural presence?
So we are working on both rural, as well as urban markets. We have started appointing our dealers and distributors in the rural market. And Etira is an offering, which will help us in further penetrate the rural market.
As far as contribution of rural business to FMEG is concerned, it's not very meaningful at this stage. But I think we have initiatives which we have undertaken in the recent past would help us in gaining some momentum, as well as market share in the quarters to come.
We have our next question from the line of Akhilesh Bhandari from ICICI Prudential AMC.
Sir, my question is on the FMEG margin. So if you look at your revenue, it's broadly flat quarter-on-quarter but segment margin is negative and your A&P spend has also come down -- come off sequentially, which coupled with whatever changes you're doing for merging the team, if anything that should reduce the slack which is there in terms of OpEx. So what explains the reduction in margin, is it only the additional cost for the new switchgears -- switches facility or there is something else as well, which is impacting the margin?
Yes. I would just like to clarify, this merger which I had mentioned a while back, is effective October. So the September numbers are any which ways after considering the actual expenses which were incurred on these 2 separate verticals. Broadly, the loss or slight negative EBIT number is because of reduction in top line. The gross margin is, by and large, comparable between first and second quarter. And at the organizational level, the expenses have not gone up. So it's just because we are not getting leverage, because reduction in top line by 10% to 15%, which is why the EBIT is negative.
Sir, I'm comparing quarter-on-quarter. Quarter-on-quarter your revenue is same, but your -- and your A&P spend is down. So why would your EBIT from INR 6 crores positive move to negative in the FMEG segment? That's my question. I understand on a Y-o-Y basis...
Yes, please complete.
I understand the movement in a Y-o-Y business, I'm just comparing quarter-on-quarter.
You're absolutely right that if you compare first quarter with second quarter there is a slight movement, but if you actually see that exact number, you are talking about mid-single-digit type [ exact rupee crore ] number, which in a large business is possible. I had mentioned about some hiring which we have done, which is getting reflected, and there are some investment which we have done from the IT and digital. But I would like to emphasize that there is no contraction in the contribution margin, which is one of the important parameters in our FMEG business. There is only organizational cost which is reflecting into the slight negative EBIT margin. And as I was explaining to another participant a while back, we are confident of getting 10% of EBITDA margin by fiscal '26 in this particular business.
Okay. So if you were to look at the broad pricing level of your products in FMEG segment that would be flat quarter-on-quarter, or you have passed on some of the benefits to the consumers?
It would vary from product to product, but it would have a combination of both of these factors. And that is why I'm saying there is no negative [ contraction ] in contribution margin, contribution margin impact, as a matter of fact, in few of the product categories is better in second quarter than the first quarter.
Any broad range which you can mention of the price change which has happened on a sequential basis?
So net impact would be in low single-digit or between 0% to 3% type of the change in the input costs vis-a-vis the change in selling price.
We have our next question from the line of Abhijit Akella from Kotak Securities.
Congratulations on a good quarter. Just 2 from my side. One was, I just wanted to clarify the mid- to high-teens volume growth number that you shared. Was that for the second quarter or for the first half? And if it's for the quarter, if you could please share the comparable number for the first half as well?
Thanks, Abhijit, for your kind words. This was for the second quarter. I would not have the first half numbers handy. But to that extent, even the first quarter was not comparable because in the base first quarter there was a COVID impact which impacted the business.
And the other thing I just had was on the A&P spending line. Once we start to see some pickup in the FMEG top line starting fiscal '24, should we expect significantly higher investment in A&P next year? And if so, is there a ballpark number you could guide us to?
Absolutely. In fact, we have already started working in that direction. We believe as a B2C company we need to invest on A&P. We have already onboarded A&P consultants like Interbrand and Ogilvy. As of now, we are discussing with them our roadmap and execution which will start pretty soon. We believe anywhere between 3% to 5% of B2C revenue is what we need to invest. And this will be done gradually over the period.
We have our next question from the line of Gopal Nawandhar from SBI Life Insurance.
I have 2 questions. One, can you just explain this M2M element which you have referred in the other income? What kind of hedges we are taking here?
Yes. So this is in compliance with Ind AS accounting requirements. As far as hedging framework is concerned, this is being done in a particular structured manner. When we procure our commodity, we get an option to price it at a date subsequent to the procurement date. And that is how we manage commodity. In few cases when we get back-to-back orders, we have an option to also go to the bank and take back-to-back position.
On the sales side, we revised our list price on a monthly rate for cable and wire and that is how it becomes a pass-through. Whatever accounting you are seeing is on because of M2M accounting of the ineffective portion, which is in compliance with the Ind AS requirement, because it's not a cash item, it's a non-cash adjustment.
What is the amount for this quarter?
For the first half -- for the second quarter it will be almost INR 15 crore, INR 20 crore negative, and for the first quarter it would be around INR 25 crores.
Okay. And the second question was on this BEE-rating changes, how well we are prepared and how are the inventories for us in the system for the older rating fans?
Yes. So we are fully prepared. In fact, when we acquired Silvan last year, the objective was to be ahead of the curve. Slowly and gradually we have our product portfolio in place. We have everything in place for BEE as well. We have in-house motor, we have other product offerings. Few of the products have already been launched. And as far as non-compliant BEE inventory is concerned, there is nothing material which is there. Whatever is balance is being offered to our customers or dealers and distributors presently.
And same will be the case for system -- for other players, or others might have higher inventory?
No, I don't have a view at the industry level at this stage, but certainly I can assert that at our company level we don't have any sizeable non-compliant BEE inventory as of now.
And should one expect any pre-buying ahead of these rating changes?
Yes. Any of these transformative changes would have one or the other implication. We believe changes like these would be positive because it will drive the sector to better compliances, better quality of product and at a company level, it would help us in getting into energy conservation. In the interim, it is quite possible a few of the smaller players face some difficulty, but I think for a large player like us we believe is a positive.
Okay. And lastly on FMEG side, this decline in commodity prices and all, should one expect better margins in H2?
I could probably take you back to our Leap guidance which is for FY '26, we believe by then we should be able to get to 10% of EBITDA margin in FMEG space. I would not like to give you a particular guidance for the second half, but you can practically assume from next year onwards, every year there will be some improvement in EBITDA margin.
We have our next question from the line of Pritesh Chheda from Lucky Investment Managers.
Yes, sir, my question is linked to your initial comments, where bulk of the growth has actually come from exports for our company in the quarter, and the domestic growth felt is very low. I don't know how your calculation showed 6%, but it's lower than that. It doesn't coincide with -- then your commentary for domestic outlook, if you could just shed some more light there? And does this export growth have any impact, extra or positive impact on the margin side?
Yes. So, I mean, of course, we can do the math, I'm happy to have an offline chat with you. But broadly, just to give you perspective, the copper LME, alumina LME and USD/INR exchange rate were significantly higher -- blend of all of these things were significantly higher in the base quarter vis-a-vis what is in the current quarter. And that is where whatever growth you are seeing is by and large coming only from volume.
As far as exports is concerned, exports margins are generally comparable. At times because of mix and at times because of better realization, we are able to get better profitability. But I would not like to single out only exports as a reason for better contribution margin, it is combination of everything including exports.
Okay. And my last question is, sir, this BEE rating products, now is the notification done and dusted and there is a deadline beyond which the non-BEE will not be sold or it's still ambiguous?
As of now, the way it has been notified by the government is done and dusted, but if there is a revision by the government, then [ there's an opportunity ].
And what is the deadline now?
1st of January.
We have our next question from the line of Aniruddha Joshi from ICICI Securities.
Okay, I will still go ahead. Sir, any update on Etira brand apart from wires, have we introduced the product or the brand in any other segment? And what would be total distribution reach of Etira? That is one question.
And secondly, in case of cables and wires, do we have any different pricing as far as B2B and B2C is concerned there? Most of the portfolio goes to the same distribution channel. So is there any difference in the pricing policy, as well as the margins of those products?
Yes. So Etira, quarter-over-quarter is getting more traction, it would have generated almost 100% revenue CAGR between Q4 of last year to Q1 or Q2 of this year. In fact, Q2 is slightly better than Q1. That's on Etira. This is a focused effort. And as I was explaining earlier, this will help us in further penetrating the rural market or the cost-conscious category of our customers.
And sorry, I forgot, what was the second part of your question?
Is Etira launched in other segments, too, apart from wires?
It's just in wires and fans [Technical difficulty] are being done now, which was a very recent development.
Okay. Sure, sir. And in terms of the pricing in B2B and B2C cables and wires, as well as realization policy?
Yes. So let's split this into product categories, let's pick up wires first. Wires is generally done only through distribution. There is no B2B or institutional business for wires, and wires are generally more profitable than traditional core cable businesses. At EBITDA level, the margin difference could be as high as 3%, 4%, 5%. On the cable side, institutional business is slightly inferior in terms of margin profile than the distribution business.
We have our next question from the line of [ Arshia Khosla ] from [ ES Securities ].
Sir, congratulations on a good set of numbers. Sir, my question is with respect to Etira. Just wanted to understand, how is it placed versus the unorganized brands in terms of pricing? I mean, what kind of premium are you charging?
The difference is not very significant. It would be at max mid- to high single-digit, but it is competitively better quality of specification products. And the another important thing which is helping us is availability. Our products are available wherever we want them to be available and that is also helping us in getting some traction from other customers in the market.
We have our next question from the line of Akshay Kothari from Envision Capital.
Sir, I wanted to know regarding the CWIP aging schedule which you have given in the annual report, what are the...
Sorry, I can't hear you. Can you be a bit louder, please?
Sir, I wanted to know about the CWIP aging schedule, which you have given in your annual report. The other projects, what are they pertaining to?
These are back-end civil projects where some delays were there, but I expect all of them to be completed in next 9 to 12 months.
Okay. And can you touch upon the backward integration projects? So how are they expected to give us benefits, synergies, if you can touch upon it?
Yes. Philosophically we believe that if we have a complete control of the entire value chain, we can get better quality, and which is what is getting reflected in customer confidence in our products over the period. And that is also one of the reason why we have achieved #1 position in cable and wire business. We practically have 24%, 25% market share today in organized cable and wire business or industry. Whatever backward integration we are doing either for copper or steel or on a familiar side for other components is expected to give us more confidence on the positive side. As a byproduct, it's quite possible. We get better margins, but the objective is not cost-led, objective is quality-led.
And sir, who owns the rest 25% in steel metrics?
So there are [Technical difficulty]. I hope I'm audible. So what we're seeing is a local promoter family who is involved and they have business interests in this particular sector and very good expertise. And that is why they have decided to partner with them. And this early project has not been initiative, too.
We have our next question from the line of Nikunj Gala from Sundaram AMC.
Gandharv, I have just 2 question. Firstly in the wires and cable revenue, if I just look at a Y-o-Y, there is a 11% growth. And I think as you mentioned, the pricing revision is to the tune of mid-teens. Then in the volume growth also, it's in the tune of mid-teens, then 11% growth I am not able to reconcile. Can you just help me with that?
So when I was talking about mid-teens, I was talking about Q1 to Q2. And I think what we're trying to consider volume growth is from base quarter to this quarter and that is where the disconnect. You have to demystify, this is first quarter to second quarter, the changes in the prices have been passed on to the end customer while retaining a part of it and that is where you can see improvement in contribution margin by few basis points. As far as volume growth is concerned, between last base quarter to this quarter in cable and wire is ranges between mid-teens to high-teens.
Okay. But even on a Y-o-Y basis, the copper prices are down by 17%, 18%. So the same pricing division would be on a Y-o-Y, right, in our end product?
Yes, you are right. But then there is a difference between the price which you are taking because there's a price at the retail level of copper whereas what we get is the best price because we procure it from the largest suppliers worldwide. So our [ lender ] price is significantly different from what we [indiscernible].
Okay, sure. And just secondly, when we -- how big would be the retail wire contribution in our total revenue?
So retail wire would be around 30-odd percent now. And all businesses put together, FMEG plus retail wire both put together would be around 40%.
Okay. So when we are -- so just wanted to understand from the accounting of revenue perspective, this retail wire till date was residing in cable and wire business, right?
Yes. And even today also.
Yes. So I'm saying, when we mentioned we will merge retail wire with the switch business, so there won't be any accounting of revenue change from the...
No, no changes. See, the reportable segment continues to be cable and wire and FMEG. And that is how we'll continue to report. There is no revision in the reporting segment.
Yes, only route to market, we have done this merging of 2 business, right?
Absolutely, that's the correct understanding.
I would now like to hand the conference over to Mr. Gandharv Tongia for closing comments. Over to you, sir.
Thank you so much for your time. In case if you have any follow-up questions, please feel free to get in touch with us. You can write to investor.relations@polycab.com and we would be happy to assist you. I don't know whether I'll get another opportunity to interact with you before Diwali and here I am wishing all of you, your team members and everyone at home, a very Happy Diwali from me, as well as everyone from Polycab. Have a great time ahead. Thank you so much. Bye-bye.
On behalf of Polycab India, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.