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Polycab India Ltd
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Good morning, ladies and gentlemen. Welcome to the Polycab India Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gandharv Tongia. Thank you, and over to you, sir.
Thank you, operator. Good morning, everyone, and wish you a very Happy New Year. Thank you for your interest in Polycab. I am Gandharv Tongia, Deputy CFO at Polycab India Limited. On this call, we shall discuss the Q3 as well as 9 months results for the fiscal '20, which was approved by the Board of Directors yesterday. We will be referring to the presentation that is available on our website as well as on the stock exchanges.From our management team, we have with us our Chairman and Managing Director, Sri. Inder Jaisinghani; and our Director of Finance and CFO, Sri. S.L. Bajaj.Let me now hand it over to our Chairman, Inder [Foreign Language], for his comments.
Good morning, everybody. We have delivered yet another quarter of resilient growth. Our top line growth remains resilient across segments helped by our robust pan India distribution network, coupled with exports while profitability improved sequentially on the back of enhanced and evolving product mix and various strategic initiatives we implemented over the past few years. As we enter the new decade, we will continue to build our current strengths while acquiring new ones to stay competitive and drive profitable growth.I now request Gandharv to take you through our earnings presentation.
Thank you very much. Before we move into our presentation, let me share our perspective on the macro front. The domestic demand environment continued to remain challenging with tough liquidity conditions. Growth in electrical industry as a whole has remained sluggish since past 2 quarters. These headwinds were felt more in some of our product categories. Having said that, I'm very happy to state that our top line growth continues to remain healthy, driven by decent demand in our B2C business from nonmetros, improving momentum in exports, coupled with all the efforts and initiatives we have undertaken in over the year to build resilience during such tough times.Please note that our financial results, presentation and interim financial statements are available on the stock exchanges as well as Investor Relations page of our website. These can be also downloaded from the link or QR code on Slide #9.Now getting into presentation, coming to Slide #4. In the first 9 months ended December 2019, our consolidated revenue growth has been strong at 21% year-on-year, led by healthy performance across segments. EBITDA grew by 18% year-on-year, with 12.4% margin. While the margin may seen optically lower versus same period last year, I would like to point out to the fact that our current 9-month EBITDA margin is about 50 bps higher than what we had achieved in fiscal '19. Alluding to what I had suggested in the last quarter's call, our business needs to be relooked at, on a 12-month horizon. Our profit before tax grew by 32% year-on-year, driven by decreased finance costs, reflecting the lower borrowing compared to previous year. A detailed breakup of our other income and finance costs have been provided on Slide #13 of our earnings presentation. Our profit after tax at INR 5.5 billion has been robust, up by over 53% year-on-year, partly added by reduction in statutory tax rate. It is very delighting to note that our first 9 months of fiscal '20, we have already surpassed our last year's profit after tax -- our tax -- profit after tax.Moving on to the specifics of Q3 on Slide #5. Our revenue from operation at INR 25 billion has registered a growth of 24% year-on-year, led by healthy contribution from all business segments. EBITDA, excluding other income, was INR 3.4 billion, up 6% year-on-year. EBITDA margin at 13.5% was lower on year-on-year basis, but 150 bps higher versus Q2 and 160 bps higher compared to fiscal '19. We had an exceptionally strong EBITDA margin in Q3 of last year, which was driven by a confluence of favorable factors like pricing action, better product mix and better leverage on fixed costs. However, I would like to reemphasize that the correct way to analyze our operating profitability would be on annualized basis as several dynamics can be on quarterly margins. Historically, we have noted that our annualized sustainable margin in wire and cable business typically tends to hover in the range of 11% to 13%.Our staff costs in Q3 were lower by 16 bps year-on-year due to better leverage. Whereas -- however, it was offset by 75 -- 72 bps of higher A&P spend. We are now revisiting our marketing strategy with an objective to improvise our visibility evenly throughout the year. Our profit after tax is up by over 14% year-on-year, driven by decreased finance costs, reflecting the lower borrowing compared to previous year and partly aided by recent reduction in statutory income tax rates.Moving on to segments on Slide 6. Wires and cables, which is our largest business, grew 20% year-on-year, driven by healthy growth across categories. Growth in cable was largely driven by exports, which grew strongly on the back of a large order as well as increasing traction in -- seen in few developed geographies. Higher sales from optical fiber cable compared to previous year further contributed to the growth. Channel sales in Q3 was soft, impacted by ongoing slowdown and weak economic sentiments. Institutional cable sales in Q3 were down sharply, partly due to higher base. On the one hand -- on the other hand, wires, which is sold largely through our distribution network, witnessed strong double-digit growth during the quarter buoyed by healthy demand from nonmetro cities. Green wire campaign, which was launched across over 40 national and regional TV channels in Q3, has garnered good response from customers, while improving overall brand awareness across geographies. The EBIT margin in the segment was lower on year-on basis -- year-on-year basis due to higher base as well as higher brand investment in Q3.On Slide 7, FMEG segment, which we forayed into about 5 years back, continued its healthy momentum, growing at over 34% and 46% year-on-year in Q3 and 9 months fiscal '20, respectively. This segment contribute almost 10% to our overall top line in 9 months fiscal '20. Fans, lighting and luminaries continue to grow at healthy pace despite challenging market conditions, led by our distribution strength in our manufacturing ability and improving portfolio mix. Growth in switches and switchgears remain soft. Benefits from increased operating leverage were offset by higher ad spend, which dragged profitability in Q3 against Q2. Going ahead, we expect the FMEG business to sustain healthy momentum, helped by new launches in segments like home automation, fans, switchgears.On Slide 8, other segment, which is largely our strategic EPC business, witnessed healthy growth in revenue and profitability, led by execution of profitable projects. Having said that, we expect margins in this business to remain in high single digit on an annualized basis, which we believe is sustainable.Moving on to financials. Our return ratios continue to improve directionally. ROCE for 9 months FY '20 stood at 26%, up 53 bps year-on-year, led by improving underlying profitability. Our balance sheet has strengthened further with over INR 6.4 billion of net cash position as of December 2019, and debt-to-equity ratio is at a mere 0.03x. Our working capital on closing basis has improved in Q3, led by lower inventory levels. We continue to work on several initiatives, like increasing channel financing, inventory rationalization to improvise and optimize our working capital. We are also undertaking several strategic programs, which will boost our supply chain operations and our data analytics capability and increase automation to push us forward in the journey of digitalization.Lastly, we continue to augment our distribution backbone with direct reach of over 3,450 authorized dealers and distributors across geographies indirectly serving over 125,000 retail outlets as of December 2019. Project Bandhan, which is our flagship CRM program, now has over 115,000 electricians and over 38,000 retailers on board.To end my presentation, I would like to say that we will continue to build on our strength and leverage opportunities to deliver consistent and profitable growth. While the demand may continue to remain soft for next 1 to 2 quarters, the structural drivers like favorable demographies, formalization of economies, government trust on infrastructure investment reinforces our confidence of healthy growth over medium to long term.Before I hand over the session to the operator, I would like to mention that in case we are unable to attend any specific question or if you wish to have a separate discussion with us, please feel free to reach out to us at investors.relations@polycab.com.Now we will be happy to take any questions. Over to you, operator.
[Operator Instructions] The first question is from the line of Vishal Biraia from Aviva Life Insurance.
Just 2, 3 things. Could you guide us as to how has the working capital moved for you this quarter separately in wires and cables and separately for FMEG?
So the improvement in working capital across in both the business segment, in wire and cable as well as FMEG, the consolidated numbers which are presented on Slide #13 are reflective of both. And proportionately, the growth is coming or the improvement is coming in both the businesses equally.
Okay. And if I -- if we exclude the exports number for this quarter, what would have been the growth in wire and cables?
Let me give you a complete breakup because I'm sure that would be a point of interest for others as well. The cable and wire -- let's split cable in 2 parts, one is domestic and second is export. If I take third quarter as a base, our domestic has increased from a base quarter of INR 86 crores to INR 430 crores. That INR 430 crores are broadly coming from Dangote, which is a large order, which we are executing, plus our recent entry to few large economies where we want to get into distribution business.If I talk about the domestic business in cable, there are 2 categories, broadly speaking. One is channel and second is institutional. In the case of institutional, there is a significant de-growth because of primarily 2 reasons. One is we were sitting on a large order or large base as well as this slowdown, which all of us are witnessing and liquidity challenges as well as the deployment of the project, is impacting the institutional sales, and it has reduced quite significantly in the 9 months -- in the quarter period.Coming to wires, it has registered growth in double digit, healthy teens, across all the geographies. The top contributor is generally West and South, followed by north and east. And these patterns are broadly in line with what is -- what we have witnessed for the 9-month period as well.
Okay. And what kind of growth are you targeting for the whole year, for wires and cables for FY '20 and '21 and for FMEG?
We are the market leader, cost leader and price leader. Our market position is as such that we as market leader #1 is equivalent to #2, #3 and a part of #4. We -- as a company, we don't give guidance, but we would be pleased if we are able to beat the industry growth rate over the medium to long term.
We will move on to the next question, that is from the line of Bhalchandra Shinde from Max Life Insurance.
Sir, regarding Dangote order, would like to know how much, according to you, means like, is it complete? Or means after that, any big new orders we are expecting on wires and cables?
This is an interesting one. I'm sure a few of other investors would be interested in knowing this as well. So we have partially executed this order, almost 40%, 45%, in the current 9 months. We expect that this order, we would be able to get the complete deliveries done by the first quarter of the next fiscal, which is June of '20. Though it appears to be one-off, we are trying our level best to see if we can get repeat orders or similar orders, not necessarily of the same magnitude, from other customers. Having said that, the another way of optimizing the overall top line is to see if we can get growth from the developed economies by way of exports. And with that objective, we have started venturing into developed economies. This is a small baby step, which we have taken. Over the next few quarters and years, we would be able to see whether it's contributing to the growth of the company or not. If we talk about the current 9 months, we have recorded almost INR 70 crores of such sales in the export market, and we will continue to monitor it very closely on a quarterly basis.
So the -- in PPT, as -- we are showing that our exports have improved from 5% to 9%. It is largely because of this order?
That's right. That's right. Dangote, as a number point, is almost INR 319 crores in the current quarter and almost INR 435 crores in the current 9 months, which was not there in the previous comparable period.
Okay. Okay. But then it will be very difficult for us to repeat such kind of orders in export side, please?
That is where we are trying to foray into the other markets, and the objective is to get into something what is called distribution-led business rather than order-led business. If you analyze our performance for last 5 years, we have slowly and gradually reduced our dependence in India over the institutional business, and we are a pure distribution play by and large. And that's the same thing which we would like to replicate in geographies outside India.
[Operator Instructions] The next question is from the line of Atul Tiwari from Citigroup.
Sir, congratulations on a very good set of numbers in a very tough environment. Sir, just 1 question. What was the acceptances numbers on the balance sheet as of the quarter end?
Atul, I was expecting that question from you. So before I answer that question, for the benefit of other participants, we get the company's set of financial statements reviewed by the statutory auditors unlike other large companies, and we get these accounts uploaded on our website as well as on the website of the stock exchanges. These are the -- practically the complete annual financial statements. You'll get all the data there. Coming back to Atul's specific question on the acceptances, we have around INR 640 crores of acceptances as of December '19.
Okay, great. And sir, my question -- my second question is on the FMEG business. So the growth there continues, and you continue to break even at the EBITDA level. But any guidance or color, when we can see that margin, which is like close to 1% now, going to somewhat industry comparable levels or at least 2%, 3%.? So where are we on that journey, the journey of increasing the margins in the FMEG business?
So we have advantage in our FMEG business, Atul, as you already know about our business model. We get several economies of scale benefits because the raw material which we use in FMEG is more or less in line with what we use in cable and wire. And we have the distribution advantage in addition to management bandwidth and in-house manufacturing. Directionally, we believe that every year, we should be able to improve our EBIT margin by almost 100 bps or thereabout. But these are challenging times. We will continue to ensure that we are able to improve EBIT margins, but we'll have to have a closer look at the improvement in profitability on quarterly basis.
The next question is from the line of Aditya Bagul from Axis Capital.
First off, congratulations on a good performance in really challenging times. Gandharv, just wanted to know your thoughts a little more on the export business, right? We talked about getting into new geographies. Just wanted to understand how easy or difficult is it to set up a distribution franchise there. Are we tying up with distributors? So what are we doing exactly in the new geographies that we are entering? That's point number one. And is it the same product profile that we are using for exports?
Thanks, Aditya. That's an interesting question. I am sure others would also be keenly interested in this particular element. I mentioned a while back, in India also, this is what we started almost 5, 7 years back when we started moving away from traditional dealers and distribution base. Same model is what we want to replicate outside the country. And as far as easy or difficult, I think doing business whether in India or overseas is equally difficult. I don't think anyone can say that it is easy. But at the same time, I as well as all of us are very confident and comfortable on the quality of the management bandwidth we have. We are pretty comfortable that we would be able to do it. Coming to the specific question on the project -- products, broadly, products are similar, but the way in India we have certain quality norms to follow, in several geographies, we have different quality norms to follow. So that is the only thing which would involve a bit of tweaking in the products. But generally speaking, product categories are similar, not -- but not necessarily same.
Fair. Fair enough. I think I'll wait for a few more quarters to get more granularity on this as this business scales up. My second question is actually a...
Sorry to interrupt, Mr. Bagul.
This is just a follow-up question. Can I...
Let him continue, ma'am, please. Let him continue, please. Yes. Please, Aditya, please go ahead.
Just a bookkeeping question. I wanted to understand, we've got INR 640 crores of cash, net cash on the balance sheet. Just wanted to understand what are the CapEx plans, et cetera. That's it from my end.
In the last quarter, we -- until last quarter, we had guided around INR 250 crores of CapEx. This was before we had factored in the reduction in tax rate -- income tax rate. And I'm sure you would have seen that, that income tax rate reduction is helping our profitability. We feel that a INR 300 crore number is a decent number to target in the current year CapEx. This will be used for further strengthening our backward integration in the current fiscal, a bit of a debottlenecking investment in few of the FMEG facilities, like, for example, fan. And for the next year CapEx, we'll probably come back to you during the year-end analyst call. If we analyze our last 5, 6 years of CapEx, generally speaking, we have been incurring CapEx in the range of INR 250 crores to INR 300 crores. And Aditya, you know that in those days, our top line used to be around INR 5,000 crores, INR 6,000 crores INR 7,000 crores. Today, when we are doing on 9-month basis INR 6,700 crores; our CapEx spend is more or less the similar amount. So the CapEx intensity is going down certainly, but we will continue to monitor it very regularly to ensure that capital allocation is just and fair.
The next question is from the line of Shreyas Bhukhanwala from Canara Robeco Asset Management.
Two questions. One is on the EPC business. So was there any write-offs, which led to higher margins? And secondly, how much was the contribution from the optic fiber segment?
So there is no write-off in EPC business. In fact, as a matter of fact, EPC business has improved its profitability, mainly due to execution of few profitable projects which we are executing. Coming back to the second part of your question, in the case of optical fiber, we have done almost INR 150 crores of top line in the current 9 months as far as sale of optical fiber cable is concerned, INR 150 crores in 9 months.
And how much was for this quarter?
Close to INR 50 crores rounded off.
The next question is from the line of Ravi Swaminathan from Spark Capital.
Congrats on a good set of numbers. Just wanted to know what would have been the overall industry growth for cables and wires, probably this quarter or 9 months? Was it...
Thanks, Ravi. Yes. Sure, sure. Please go ahead.
Yes, yes. Was it mid-single digit, high single digit? Or was it flattish? Or what was it, the entire industry growth?
If we analyze business by business, I think there are mixed signals which we are getting. And Ravi, I'm sure you're tracking the performance of a large company, which I just state. In the cable, it looks like that there is a bit of a contraction which is there in the cable industry. Wires, it looks like there is some growth, but not necessarily very impressive growth. But industry size, apparently, I think is better to analyze on 12 monthly rates. I think once we have numbers of FY '20, we should analyze what is the industry size. I think 9 months is not necessarily reflective of the overall industry movement. And you know the fact that there is a bit of a challenge in overall growth in all the sectors of the economy and which has a bearing on this particular sector as well.
Okay. And is there assessment that the brands would have grown at a -- or rather the larger brands would have grown at a faster pace that unorganized to organized shift is actually happening in the industry, 9 months...
So directionally you're right, Ravi. That is what we have seen in last 5, 6 years. Almost 5 years back, as you know, unorganized sector was almost 39% of the total industry. And last year, it was almost 34%. And as per one independent study, it appears that it would be close to 26% by '23. Whatever we are seeing, I think, generally speaking, the movement is in that direction. Probably rate could vary, but directionally formulized sector or the organized sector growth rate is significantly better than the unorganized sector.
Got it. And the mix between cable...
Sorry to interrupt, Mr. Swaminathan.
This is my last question. So mix between cables and wires, how was it this 9 months or 3 months vis-à-vis last year, corresponding quarter last year?
Ravi, we are not disclosing this number, generally speaking, to the outside world, and that is where we are not tracking it. But directionally, if we analyze last few quarters, the breakup is generally 55% cable and 45% wire. In this particular period since wire has registered a growth rate which is better than cable, it's quite possible there are a few bps change in favor of wires.
The next question is from the line of Ashish Poddar from Anand Rathi.
Sir, my question is on your backward integration. I believe that you have started the plant recently. So what is the progress there? And what kind of benefits you expect in coming quarters? On the EPC side, we have seen large fluctuations in terms of revenue -- incremental revenue and on the margin. So what is there in coming quarters? Will it continue like that? Or -- because my assumption was that you would not like to cross the revenue -- EPC revenue from INR 400 crores to INR 500 crores type. But looking at the run rate, I think it will be way much higher than that. So your comments on that, sir.
Yes. So we, as a company, we firmly believe in in-house manufacturing. Over the last few years, we have carried out several steps to ensure that we have adequate backward integration in place. One of the large material, which is used for manufacturing of cable and wire is copper. With the help of this particular plant, which you were referring, it's a joint venture plant with the name of the company, Ryker Base, we procure cathode predominantly from the overseas market, which is best-in-class across the globe and convert the cathode into rods.The mindset and the thought process of the company is to ensure that we get the best quality, and that is why we have done that. Of course, when you are working on best quality and procuring the best quality raw material and converting it in-house, it gives you operational advantage as well as help you in improving your overall raw material big. But the way we see it and the way promoters and founders see it is the quality, and that is the reason we are doing it. We expect that this will continue to help in improving overall quality for which our brand is known for last several decades.Coming to the second part of your question on the EPC, when we are analyzing EPC in our consolidated segment results, it includes EPC as well as some other small contribution which is coming from the other small subsidiaries. Roughly speaking, 80% of others is EPC in our segment, which is broadly around 5%, 6% of our top line. Directionally, we believe that we have to continue to operate in a range which is less than 5% or 6% of our top line. We know for sure that we are not an EPC company, and we don't want to operate as such.The only thing is we get operational advantage and leverage when we get into EPC for our main cable and wire business. For example, if there is a optical fiber cable contract, which involves supplying as well as laying off cable. If it is healthy from the overall return ratios point of view, we will probably venture into that contract -- such contract, which will help us both ways. One is it will help us in improving our cable and wire supply as well as it will also help us in getting some revenue under the EPC. So that's the reason why we are into EPC. The fluctuations which you were referring to in terms of revenue and the bottom line, we believe EPC business can continue to have single digit -- high single digit or just low double-digit EBIT or EBITDA margins. Whatever we are seeing now is slightly better than these estimates, predominantly because we are executing few contracts, which are comparatively better in profitability in general than the others.
So 8% to 10% kind of margin is sustainable according to you?
That's right.
The next question is from the line of Tarang Bhanushali from Yes Securities.
Sir, my question again is on the OFC contract. So now what portion of the BharatNet project we have already executed and what is left with us?
So Tarang, there are several revenue streams within optical fiber cable. The contract, which you're referring to is being executed with the help of a JV partner. A part of it has been executed already till December. We expect by June, we should be able to execute almost everything. Broadly speaking, I think 60% to 70% is what we have executed so far.
Okay. Okay. And sir, on the cables front, so we have seen a sharp decline this quarter. So how is the current market scenario going into Q4?
Tarang, we don't comment on the quarterly performance. Directionally, as I mentioned a while back, these are challenging times. We have to find ways to improve our overall top line growth, find avenues either through geography or through new product categories and strengthening our distribution market to ensure that our core continues to grow. But these are challenging times.
So, sir, since you mentioned on the new products, so last year, we had OFC with us. So what new products are we looking at to introduce this year?
It's a long cycle because it requires development. We are working on a few things, which are generally, for example, called import substitutes. If we can get some products under the import substitute category, that could help us in improving our top line by opening another revenue stream. But the -- all these things are time consuming. It will take a while. OFC itself is a good business. I know it's dependent on several other factors, including what's happening in telecom in terms of connectivity, WiFi, IoT and all those things. But that is one thing which will -- which could have some bearing on our overall top line growth. Coming to consumer, this entire automation, WiFi, IoT, all these things could also help us in improving our overall product specification and thereby improvement in top line of FMEG.
The next question is from the line of [ Tanuj Mehta ] from Dalal And Broacha Stock Broking Private Limited.
The EPC business [indiscernible] talking, was it a private project or it's a government project?
The large projects which we are talking about are either government projects or funded by government and being executed by special agencies.
Okay. That would be around more than 15% of EPC business?
Much more than that.
Okay. And sir, your forward-looking guidance, not basically guidance, but any view on the EBIT margins of FMEG business? Because they've been quite volatile for the time, like in the last quarter, we had better margins than this quarter. We often come down to 1%. So any view on that?
So 2, 3 things. When we are talking about volatility, there are underlying elements which underwent a change. For example, if you take December '18 as a base, the EBIT margin is slightly different than the entire year or 6 months of that particular fix -- fiscal, primarily because we implemented a new SOP scheme. We have a very high talented management pool to adequately attract such pool as well as the reward them implemented SOP and that resulted in charge. If we compare that FY '19 EBIT margin of almost 1.2%., in the current 9 months, we are hovering around 2.5%, 2.6%.And as a response to one of the earlier question, I had mentioned that, generally speaking, we would like to improve EBIT margin every year by almost 100 bps. So directionally is -- that's the thought process. In the current quarter particularly, there was some increase in our advertisement spend. We launched a particular advertisement for LED light featuring Ayushmann Khurrana. And the overall thought process at the company level as well as at the consumer business level is to ensure that we are able to maintain our visibility throughout the year, which is slightly different than the last year.And if you see our advertisement spend on quarterly or 9-month basis, there is a bit of a change there. So that's the overall thought process. We believe that 100 bps improvement in FMEG business is what every year we should work for. Having said that, these are challenging times, and no one can predict the overall profitability. All of us are trying our level best to ensure that we continue to have sustainable profitable growth.
Sorry to interrupt, [ Mr. Mehta ]. We are not able to hear you. Yes, sir. Your voice is not audible.
We are audible, please go ahead.
Yes, so which part of India you see there is maximum growth coming from in terms of cables and wires and in terms of FMEG?
So in our businesses, if we analyze cable and wire first, predominantly in wires, growth is coming from west and south, followed by north and east. And cable has 2 elements. One is distribution and second is institutional. Institutional is not necessarily -- can be analyzed on a geographical basis, so there is a significant de-growth there. And on distribution, there is softer numbers in north. And for other geographies, there are flattish or mid-digit -- mid-single-digit growth rate.
The next question is from the line of Ashish Poddar from Anand Rathi.
Sir, can you quantify the ad spend for the quarter and for the 9 months vis-à-vis the same period last year? And will it continue in Q4 and Q1 next year also? Your comments there.
Ashish, we need to incur advertisement spend only for our B2C business. By one way of analyzing our top line could be that 35% of our top line is B2C and 65% is B2B. This is a broad ballpark number I'm talking about. Generally speaking, between 3.5% to 4.5%, 4.75% of B2C, is what we generally spend for advertisement. The only change which we have done in the current fiscal is instead of incurring such expenses once in a while, we have decided that we are going to ensure that there is visibility throughout the year, and that is a change. I don't expect that there will be a material change on the overall thought process which we have on the advertisement spend on annualized basis.Before I comment on the numbers, we -- I mentioned a while back as a response to Atul's comment, we have also uploaded the detailed financial statements on our website, which have been reviewed by the statutory auditor. These are pretty much like annual financial statement. This is what we are doing from the first quarter immediately after listing. This has all the data points. Your question was on advertisement. So we have incurred almost INR 90 crores in the current 9 months as against INR 60 crores in the last 9 months.
And for the quarter, sir?
It's almost INR 38 crores for the third quarter, and the corresponding base quarter was almost INR 16 crores.
So you're saying that this kind of run rate will continue as you want to increase your focus?
Yes, that's right. To improve the B2C business, we'll have to continue to invest anywhere between 3.5% to 4%, 4.5%, 5% of -- for B2C business in advertisement.
And you are factoring this while commenting that 100 bps kind of margin expansion will be there every year. So you're factoring in all these things?
Yes.
We'll move on to the next question. That is from the line of from Rita Tahilramani from Invesco Mutual Fund.
Sir, my -- I needed more in terms of understanding of the CapEx plan of almost INR 300 crores. And in extension to that, what is the current capacity utilization, which we are running across our multiple segments?
Thanks, Rita. Generally speaking, we are hovering around 70%, 75% of capacity utilization in our cable and wire business, where we have almost everything getting manufactured in-house. In FMEG, it ranges between 60% to 80%. For example, in the fan factory, the utilization is comparatively higher because that's the largest contributor to our consumer business. So that's the overall purposes. The expense which we are going to incur by way of CapEx is 2/3 for the cable and wire business and 1/3 for the consumer business, wherein the 2/3, a part will be used for further strengthening the backward integration, part of debottlenecking and addition of capacities, including capacities which are required for meeting the export market requirements. And in consumer business, it would be predominantly in the product categories where we have higher capacity utilization, for example, fan.
Okay. So we will not do incremental CapEx towards new products, but it will be more towards our existing products? Strengthening existing products, if I understand right?
A part of it will be incurred for addressing the requirements either through the geographies or the new product categories. For example, for the export market, we'll have to invest some amount to ensure that we have the required machineries in place to meet the requirements of those geographies. And there are a few small product categories where we'll have to invest some CapEx, which are comparatively new. But these are not necessarily very significant on the overall scheme of things.
The next question is from the line of [ Ravindra Naik ] from Sunidhi Securities.
Sir, can you just give some specifics about the export strategy, whether we are going for entire product spectrum of Polycab or...
Sorry to interrupt, [ Mr. Naik ]. Sir, there's a lot of disturbance from your line.
Yes. It is now okay?
No, sir. The disturbance is still there.
Okay. So just a -- only thing is that whether the export strategy be completely related to entire product system or only for the cables and wires?
Predominately cables, to start with. We are, at the same time, exploring opportunities for wire and a part of consumer products, but predominantly, it is cable.
The next question is from the line of Kunal Shah from Carnelian Capital. [Operator Instructions] We'll move onto the next participant, that is from the line of Vishal Biraia from Aviva Life Insurance.
Sir, in the exports market, generally, how are the payment terms structured? And as we've executed a large order in this quarter on export side, have you received the payment as well?
The large orders, which you are referring to, is slightly different than the usual export order. In this particular large order, we receive 40% as advance. And in fact, as a matter of fact, we received that advance in the last fiscal and we started supplies only in the second quarter. So that was a bit of a benefit which we enjoyed. Having said that, generally speaking, exports is done on the basis of LC, unless and until you are very comfortable with the party, where you -- if that's the case, you can give some credit, but it doesn't involve extended credit period.
Okay. Okay, okay. And could you specify some factors that could lead to an improvement in margin in working -- in wires and cables in the coming 2 quarters?
We have been operating broadly between 11% to 13% of EBITDA margin in cable and wire, and then we believe that the sustainable EBITDA margin is 11% to 13%. It's quite possible we are slightly sitting on the higher side as of now, but the sustainable margin is 11% to 13%. The overall margin at the company level could improve if our FMEG business start generating EBITDA or EBIT margin higher than what it is generating today. But it's overall a small business, even now it's only 10% of our top line.
Okay. And one last thing. Could you split the FMEG revenue into how much you get from fans, lighting, switches, switchgears and others?
We are not generally disclosing these numbers in our financial statement. And as a [ concern ], I won't be able to give you a detailed breakup. But broad thoughts, if I were to share, on annualized basis, our fan would contribute to almost 40%, 45% of our top line, followed by 2 large product categories, one is light and luminar and switchgear. These 2 put together would be almost next 30%, 40%, and the balance is all small product categories.
The next question is from the line of Bhavin Shah from Sameeksha Capital.
Chintan here, Gandharv. On FMEG side, any improvement on water heater this quarter? Or how does that product category because of the winter has been very strong across the country?
Thanks, Chintan. We commissioned a new water heater factory in the current fiscal at Nashik, and after that, we have started getting good response in water heater. This business is comparatively small, but the growth rate because the base is quite low is significantly better. We believe that this business will continue to give us the momentum both in top line and bottom line.
And on the Trafigura, we -- recently, there are 4 countries that got ADD on the import side. Are we impacted on it? Or we get benefit because our Ryker plant has commissioned, and that plant is sufficient for our requirement for copper rods?
Yes, Trafigura plant is sufficient for our requirement. In fact, as a matter of fact, it's slightly more than sufficient.
So we'll get benefit because the ADD will cost now -- the other parties who are importing will have a higher cost base?
See, benefit is dependent on how other domestic players are going to respond, and that is what we have to wait and watch. But the fact is we have backward integration. It helps us in improving overall cost of production.
But cathode rod doesn't attract any ADD, right?
That's right.
Okay. Okay. And lastly, on the inventories, which we have seen a sharp improvement this quarter, is it a seasonal factor? And we can expect some buildup by Q4 end?
Chintan [Foreign Language], if you remember, a couple of quarters back, we had mentioned that we are working with one of the external consultant to overall optimize the inventory level. We have started implementing few of these recommendations. Having said that, this project will take at least 2 or 3 quarters to completely review the everything and come up with these suggestions. In the interim, we will continue to optimize. I don't expect any significant change in inventory level, but we have to wait and watch for the completion of this particular exercise, which we -- on which we are working on.
So it's maintainable, at least for next quarter. Then next year, we'll need to get back to you.
Yes. I think we'll have a clearer picture once we conclude this exercise of inventory optimization, which will probably take 3 quarters from now.
The next question is from the line of Shrinidhi Karlekar from HSBC.
Congratulations on good set of numbers. Sir, I have a couple of questions, first on the FMEG business. Sir, I missed your comment on distribution reach in this business. Can you just repeat what reach you have currently in the FMEG business? And what part of addressable market you think you have reached in, like lighting and the fans part of the business, in terms of distribution reach?
We are very small player in FMEG even now, though we did almost INR 650 crores of top line in last fiscal and the current 9 months also, our top line is almost INR 650 crores. But the industry size is almost INR 60,000 crores, INR 65,000 crores. So we are only 1%, 1.5% of the overall industry size. Having said that, there are 2 reasons which are contributing to overall sales predominantly. One is South and second is West, then third is East and the followed by North. That's the overall pattern. I think the new products which we are adding to our portfolio, for example, a particular participant was inquiring about water heater and new product specification which we are adding, for example, in the case of fans, we are thinking of automation and all that, that's helping us. This is also being supported by our initiatives to penetrate the Tier 2 or Tier 3 cities, and that has held in the current quarter as well. We have a long way to go.
Okay. But would you have some, like, touch points or retailers you have in, say, fans business and lighting, would you be having those numbers and [indiscernible]?
We have almost 125,000 retailers that cater into our B2C business, which includes the consumer business, which is FMEG as well as wire business, and this number is increasing quarter after quarter. These 125,000 retailers are getting supported by dealers and distributors. We have around 3,450 dealers and distributors. Our objective is to ensure that we are present in almost all the important markets in India, and this will take a while. The -- all these numbers are improving year after year, but at the same time, it's a long way to go to ensure that you are present in each and every corner of the country.
Okay. And sir, last one, if I may...
Sorry to interrupt, Mr. Karlekar. The next question is from the line of Hiren Trivedi from Axis Securities.
Congrats on the good set of numbers. Coming to your FMEG segment. You said that EBIT margins were a bit lower as compared to earlier, mainly due to A&P spends. I just wanted to ask whether you're witnessing any pricing pressure in any of the segments like lighting or switchgear, and how does it look going forward.
Generally speaking, there's a bit of a pressure particularly in the lighting business. Almost all the participants are witnessing that. It is the choice which each and every company has to make, whether they want to be a party to a particular price bar or not. The way we look at it is we want to improve the overall product mix to ensure that overall profitability is maintained, and we have few products where we are able to improve the profitability.
The next question is from the line of Kaushal Shah from Dhanki Securities Private Limited.
Sir, my questions have been answered.
The next question is from the line of Rahul Jain from Credence Wealth.
Sir, just to understand this number because somewhere, I think, I must have missed the right number. In terms of export, sir, we had about INR 200 crores of exports in first half of the current year, and did we hear that for 9 months the total exports is INR 430 crores?
That's right.
And the Dangote order out of this INR 430 crores is INR 319 crores, executive?
Yes, for the quarter.
For the quarter. So then, sir, our total exports should be around INR 500 crores plus?
9 months number is INR 610 crores. The 3 months...
9 months is INR 610 crores.
The number is INR 610 crores. The third quarter number is around INR 430 crores.
That's right. That's right. So I think I missed it, right? Secondly sir, our FMEG segment, of course, we have been exceptionally well on overall numbers put together and also in FMCG -- FMEG. But when I look at the growth on year-on-year basis, we had almost about 62% growth in quarter 1, 42% growth in quarter 2 year-on-year, and quarter 3 has come down to 34%. Is it because our base is becoming larger, the growth is somewhere slowing down to around 30%, 35%? Or is this just one quarter phenomenon? Or overall basis, we can still look at around 40%, 45% growth?
If we analyze our consumer business, almost 40% of thereabout comes from fan business. And fan, as we know, is a bit of a cyclical business because there are few months in the year where there is no -- or no significant [indiscernible]. So that is also one of the factors, which is optically giving us a feel that the growth rate is slightly lower income to other quarters.
The next question is from the line of Anurag Patil from Roha AMC.
Sir, in the FMEG segment, 5 years down the line, what can be the revenue contribution from this segment we are expecting?
What I can certainly talk about is directionally what is our thought process. The founders and the promoters, they started this business 5 -- almost 50 years back, and they were of the view that we have to be a market leader. It took us some time, but we are market leader in cable, we are market leader in the wire, and we are market leader in cable and wire both put together. Directionally, our thought process is, if we are in a particular business, we have to be a leader, we could be top -- in top 3 or we could be #1. But that's our thought process. I won't be able to give you comment on -- specifically on what is the overall thought process for 5 years down the line, but the management philosophy is, if we are in a business, we have to be a leader.
The next question is from the line of Manoj Gori from Equirus Securities.
So most of the questions have been answered. But on one part, like on channel financing, can you throw some like what percentage of our channel partners would be covered under channel financing for wires and cables and if any in FMEG?
Thanks, Manoj. If we analyze cable and wire channel sale, almost 65% to 70% of channel sale is generally covered through channel financing. In FMEG, this number varies from high single digit to early -- to mid-teens. We believe directionally, we should be able to further penetrate the channel financing in FMEG business.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.
Thank you, everyone, for your time. We look forward to have interaction with all of you. Please feel free to get in touch in case if we have not answered your question adequately. And we'll come back to you with the year-end results sometime after the year-end. Thank you very much.
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. Thank you.