Ladies and gentlemen, good day, and welcome to the Polycab India Limited Q2 FY twenty-five earnings conference call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gandharv Tongia, Executive Director and Chief Financial Officer, Polycab India Limited. Thank you, and over to you, sir.
Good afternoon, everyone, and thank you for joining us. I hope all of you are staying healthy and safe. I'm Gandharv Tongia, Executive Director and CFO at Polycab India Limited. On this call, we shall discuss the Q2 FY 2025 results, which were approved in the board meeting earlier today. We will be referring to the earnings presentation, financial results, and financial statement, which are available on the stock exchanges as well as on the investor relations page of our website. Joining me today from the management team, we have our Chairman and Managing Director, Mr. Inder T. Jaisinghani, and our Head, Investor Relations, Mr. Chirayu Upadhyaya. Let me now hand over the call to Inder T. Jaisinghani for his comments.
Good afternoon, everyone. Building on strong market demand, our business has achieved remarkable growth, setting new revenue records for the second quarter and first half of the year. This outstanding performance underscores our expectation, execution, capabilities, and the strength of our extensive distribution network. Our ability to adapt and respond swiftly in evolving market dynamics has further enhanced our growth trajectory. As is typical demand, it's a typical demand we expect it to pick up in the second half of the year, and we are fully prepared with the right team, capacity and operational expertise to capitalize on the opportunity with the INR 100 billion of revenue achieved in the first half. We are all set to achieve a projected goal of INR 200 billion revenue a year ahead of the targeted FY 2026 timeline. This, I would request Gandharv to give you the flavor of the macro environment.
Thank you, Inder Jaisinghani. India continues to shine on the global stage, as evidenced by recent projections from major international organizations. Moody's Ratings has revised India's GDP outlook upward to 7.2% for the current fiscal year, an increase from its previous estimate of 6.8%, and has also raised its FY 2026 forecast to 6.6% from 6.4%. Supporting this optimistic outlook, GST collections have shown a healthy run rate of over INR 1.8 lakh crore in current fiscal, and have remained above the INR 1 lakh crore mark for 31 consecutive months, indicating sustained domestic demand. Additionally, a higher than normal monsoon and an increase in kharif sowing suggest improved prospects for rural demand in the coming months, with festive demand expected to further bolster momentum.
The services and manufacturing sector PMI has consistently remained above the threshold of 50 since the last 38 months and 39 months, respectively, indicating an expansionary phase. Although the services PMI slightly slowed in September due to cost pressures and subdued international orders, major surveys report solid job creation and improved business confidence. Further, the recovery in rural demand, coupled with the acceleration of private consumption and a pickup in government expenditure, signals continued growth momentum during the remaining part of the year. The Reserve Bank of India, in its latest MPC meeting last week, shifted its stance on monetary policy from withdrawal of accommodation to neutral by unanimous vote, the first change since April 2022, and has also retained its FY 2025 inflation projection unchanged at 4.5%.
Further, RBI remains positive on the current country's growth outlook, maintaining its GDP projection at 7.2% for FY25. Expected interest rate cuts in the second half of the year by the RBI, in line with global counterparts, is expected to further boost the demand momentum. Overall, the combination of positive growth projections, supportive government policies, and improving demand dynamics positions India for sustained economic momentum moving forward. I would now hand over to Chirayu to take you through the financial performance for the quarter gone by.
Thank you, Gandharv. I would request everyone to refer to slide four of the earnings presentation. For the quarter ended thirtieth September twenty twenty-four, our consolidated revenue grew by 30% year on year, driven by strong performance across all the business sectors. EBITDA grew by 4% YOY, with EBITDA margin at 11.5% . The sequential decline in EBITDA margins of around 90 basis points was on account of three reasons. First, decline in FME segment margin due to increase in advertising and promotional spend relative to the first quarter. This is in line with industry and spend trend, where spends pick up gradually during the year, especially ahead of anticipated festival seasonal demand. Over and above that, increase in employee expenses as we added manpower to create separate vertical-wise sales teams also negatively impacted margin.
Secondly, within the retail wire business, we witnessed heightened competitive intensity as players looked to maximize volume growth during the heightened demand witnessed in the later part of the quarter, as copper rallied by 14% cumulatively, leading to margin compression. Third, the high growth in our lower margin institutional business relative to the channel business on account of continuous commodity price decline in July, further impacted margins for the quarter. On a year-on-year basis, the EBITDA margin decline was because of four reasons. Within the wire and cable segment, lower contribution from the higher margin international business, 6.1% this quarter versus 9.3% in Q2 of FY 2024, led the bulk of the contraction. As mentioned in the quarter-on-quarter review, margin compression in wire because of the sharp commodity uptrend added to the compression.
Higher losses in the FME business on account of higher organizational expenses was the third issue, and fourth, higher contribution from the lower margin EPC business also added to the decline. At the PAT level, our company achieved its highest ever quarterly PAT of INR 4,452 million, with a PAT margin of 8.1%. Finance cost for the quarter stood at INR 453 million, while other income totaled INR 762 million. A detailed breakdown of finance costs and other income is provided on slide 18 of our earnings presentation. Further, our net cash position improved to INR 24.3 billion compared to INR 16.4 billion in quarter one of the current fiscal.
In addition, our working capital cycle improved to 44 days, facilitated by the clearance of finished goods inventory build-up in the wires and cables business at the end of the previous quarter, and improvement in trade pay days, supported by the increase in acceptance period. Furthermore, our CapEx for Quarter 2 FY 2025 stood at INR 2.9 billion, accumulating to INR 5.7 billion for the first half of the year, in line with our guidance of doing INR 10-11 billion of CapEx during the year. On a half yearly basis, I am immensely proud to share with you all that our H1 FY 2025 revenue, EBITDA and PAT are the highest ever in the history of the company for the half yearly period.
Our revenue grew strongly by 26% year on year, surpassing INR 100 billion milestone, setting us up to achieve the INR 200 billion revenue goal during the current year itself. EBITDA was up by 5% year on year, and EBITDA margin at 11.9%, and PAT margin grew by 2% year on year... Sorry, PAT grew by 2% year on year, with PAT margin at 8.3%. Moving on to slide number six. The wire and cable segment recorded a robust 23% year-on-year growth, with the domestic business registering a remarkable 28% year-on-year growth, supported by mid-teens volume growth. The domestic distribution driven business, while slow in the first couple of months, picked up pace during the end of the quarter. Institutional business continued its strong growth momentum on the back of robust demand.
For the first time in many quarters, wire growth has outpaced cable growth. Our efforts on increasing penetration in emerging markets, as well as expanding the product offerings, are now bearing fruits. Contribution of ranges launched over the past two to three years contributed almost half of the retail wire sales during the year. Geographically, growth in wire was driven by the western and southern regions, with substantial contribution from the states of Maharashtra, Telangana, Karnataka, and Tamil Nadu. Looking at the broader economic landscape, the demand environment remains robust across key sectors. Government spending and infrastructure investment has picked up following the General Assembly election, providing positive momentum. The government is expected to increase its spending over the remaining months of the fiscal year to meet budget targets, which will serve as a significant tailwind for growth.
The real estate market also remains on strong, solid footing, driven by low inventory levels, rising prices and healthy project launches. H1 of FY 2025 recorded the highest number of half yearly new project launches and sales in last decade. This ongoing project will continue to drive demand for wire over the next few years, contributing to accelerated industry growth. Expected interest rate cuts over the next few quarters will further boost real estate uptake. The international business registered a 36% quarter on quarter increase, resulting into improvement in its contribution to the company's top line to 6.1% in this quarter, compared to 5.3% in the previous one. Order booking countries, including the U.S., remains healthy, with significant new demand getting generated across countries and sectors.
We expect the second half of the year to show improvement in international business sales compared to the first half. On the margin front, we discussed the reasons for the decline in wire PAT. It is pertinent to note that in spite of the contraction, the wire and cable business continued to generate margin within the guided EBITDA range of 12%-14%. Generally, second half of the year is always margin accretive, and we expect a similar trend this year as well. Moving on to slide 8 for an update of the FME business. The FME business recorded robust growth of 18% year-on-year, despite being a traditionally weak quarter. This growth was driven by success of complete initiatives on channel expansion, product architecture enhancement, and implementation of the influencer management program. The brand business registered robust, robust growth year-on-year, albeit on a lower stage.
Our focus on premiumization within this segment is progressing well, with premium brand contribution in high twenties to the overall brand sales during the year. And initially, in the same direction, we're driving sales through e-commerce, which has seen decent uptake during the year. The switchgear segment continued to register healthy growth, supported by strong real estate demand. The lights and luminaires segment recorded healthy volume growth, driven by the introduction of 60+ new SKUs, an addition of almost 100 distributors and over 4,000 retailers during the year. However, sales value registered a decline due to ongoing price erosion. Pricing in bulb segments remained almost stagnant during the quarter. Pricing in non-LED ceiling downlights witnessed 5%-10% correction during the quarter. Taking a near-to-midterm view, we believe FME demand should pick up next year, fueled by robust real estate growth.
Margin contraction in the segment is something we discussed in the initial comment. Moving on to slide number 10. This slide provides an update on our other businesses, which primarily comprises of our strategic EPC business. We achieved revenues of INR 5,488 million in quarter two, marking a 241% year-on-year growth. Profitability increased by 263% year-on-year, with segment margin registering a growth of 80 basis points quarter-on-quarter to 11.8%. The overall growth within this business was driven by strong execution of the RDSS order book. Looking ahead, we expect similar quarterly run rate over the next two years as we execute our RDSS orders. The business contribution to the company's consolidated top line is expected to be in mid-to-high single digit range.
The annual sustainable operating margin for this business is expected to remain in the high single digits over the medium to long term. So that was the update for the quarter. To summarize the key takeaways, we expect the demand momentum to remain strong in wires and cables business, with second half to be better than the first half. Margins, too, are expected to improve in the second half of the year to be within the guided range of 12%-14% at EBITDA level. The company is confident of achieving the INR 200 billion top line goal in the current year itself, and are working on its next five-year goal, which we intend to disclose by the end of the current financial year. Thank you, and we are now open for questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ravi Swaminathan from Avendus Spark. Please go ahead.
Hi, sir. Thanks for taking my question. My questions, many of them are, related to, the breakup or mix, in the cables and wires business. First is if you can give a breakup of the cable and wires, categories, how it is in the first half of this quarter, and how it has changed compared to the earlier quarter or the, previous quarter, the earlier year. And, within the cable segment, you had mentioned three categories. So one is government, private, real estate. Any broad mix, as to how this is, within the cable space? And, within government, if you can give further breakup, railways, road, power, T&D, airports, even if you include data centers, how it is?
This is my first question, largely related to breakup of the mar--. Even broad, ballpark numbers are fine. Broad numbers are fine.
Sure, Ravi, thank you. As far as the cables and wires business are concerned, as I mentioned, this quarter, the growth for wires was better compared to cables. The growth was, growth in wire segment was almost two X of that in cable segment. But of course, because of the lower base on wires, the percentage improvement in mix is, roughly about a percentage point. So that is the general mix. During the previous quarter or the Q2 of last year, generally, the mix for us in terms of cables and wires is in the handle of twelve to thirty. Of course, it keeps on moving, couple of hundred basis points here and there based on quarterly basis. So this time around, the gain in wire mix will be about a hundred basis points.
As far as the second question is concerned on the demand from various end segments, see, the demand is very strong across different sectors, and we have presence across, irrespective of whatever sector you name, be it railways or roadways, highways, power distribution, manufacturing, and so on and so forth. As you're aware, almost 90% of our sales are generally done through distributors, and they are the ones who generally end up taking the orders from the end customer. So in that sense, so we wouldn't have an exact breakup of what sector is generating what form of demand. But we do know that, on a relative basis for us, manufacturing and real estate are the worst sectors wherein for us the exposure is higher.
Sectors related to energy, transmission, generation, distribution, as well as oil and gas and mining, are something wherein the exposure is relatively lower. But irrespective of the exposure, we have sales which are done to across all the different sectors, and we are seeing traction across all of them. Of course, quarter one was something when wherein the government was a bit slow in terms of ordering more investments, but I think that has picked up pace in quarter two. And as I mentioned in the initial comments, we expect the government investments to improve in the second half of the year. Over and above that, the private investments are again something that we expect will pick up pace going ahead. We see a lot of stars aligning in that direction.
Interest rate cuts have already started happening globally, and probably in the second half of the current year, we should see that in India as well. As interest rate goes down and borrowing rate for, private companies goes up, as well as the consumption improves, as inflation is under control, the private CapEx should again start improving. And that is again something that should be very well, or help us in good stead. Because as I mentioned, for us, the most of the sales are through distributors. Manufacturing and real estate are something wherein the end customer, they prefer to buy from distributors, and that is where we end, we have lower competition. Most of our other peers, they are more institutional in nature.
So as and when over the next leg of the infrastructure cycle, when the private investments pick up, it is going to be much more beneficial for Polycab because we have much more exposure over there. So, to summarize, I mean, we are very, very bullish on the demand environment of power and cables going forward, and it's across the different types of sectors, be it government or private sector.
Okay. Specifically, power T&D, you can bifurcate it both as transmission and distribution. That, then renewables, that is solar, and data center. These four subcategories, any sense on the exposure that you would be having from the cables and wire side?
For the power side, we will have relatively lower exposure on the transmission side because, largely, the extra high voltage cables are the ones which are utilized over there. Of course, a couple of years down the line, when our new facility will be up and running, we will have incremental exposure, going ahead, but as of now, the exposure is lower, but we are very well present on the distribution side. As you already know, even we have a lot of orders on the EPC side, within the RDSS group, wherein we are supplying a lot of cables for the power distribution infrastructure getting set up, so distribution is something wherein we have a very good exposure.
Of the other sectors which you mentioned, data center is again something wherein we have a lot of approvals, and we are supplying incremental cables, too. But of course, if you look at the overall cables side, data centers are growing at a very fast pace, is a very small part of the overall mix. So maybe five years, 10 years down the line, we can talk a bit more in detail as far as what it is that we expect from that space. But as of now, it's just a very, very small part of the overall cables side, and all the other larger sides, we are growing at a very rapid pace.
Understood. And distribution, when we say we have a good exposure, it will be like a high single digit as a percentage of overall revenue. I'm just pushing for numbers, so please bear with me. So will that be a sense? And any schemes that are there in the pipeline which can further drive this growth?
So our exposure as a percentage of our overall cables and wires business will be in double digits, as distribution, energy distribution part is concerned. And of course, the RDSS scheme is something wherein we are very positive on and are applying for it, and that is where our exposure at least for the next two to three years seems to be quite good.
Okay. Next question is with respect to CapEx next this year, FY 2025 and 2026, what kind of CapEx that we are building in? And my last question is with respect to the optic fiber business that you had talked about in the TV, fifty thousand crores of orders that we are bidding. Is it something completely new or already we have a certain proportion of our cable and wire business from optic fiber? And if you can give some more clarity as to how much business we are already doing there, and how much it can grow into.
Sure. So on your first question, for the CapEx for the year, we will do somewhere between INR 10-12 billion of CapEx for the year. Most of it will be for the cables and wires business. A similar runway is something that we will have next year as well. And again, largely more upon the cables and wires business, but it will spread across the different types of cables that we have. So the domestic cables, which are demanding very good demand, the cables that we export, the special purpose cables, as well, and the EHV facility which we are setting up. So the runway for this year, next year, and probably the year after that, will be pretty much in the similar range of INR 10-11 billion each year.
As far as the second question is concerned, on the BharatNet project, yes, we've applied for tenders in the phase three tenders, which were opened in August. We've applied for the entire sixteen tenders of the different states. While of course, winning it or not is something that we'll have to see, probably when the results come out, but as of now, we do have optical fiber manufacturing capacity at our plant. Its contribution to the overall top line of the company is as of now very low single digits, but if we do get some sizable order from the BharatNet project, then over the course of next two to three years, that can be a much more meaningful number than what it is right now.
...Understood. But can we assume a 20% strike rate, in terms of these orders getting converted into, I mean, the entire pie getting converted into order book?
That'll be very difficult to say. It's upon the government whom they give out the order to, so we'll probably have to wait out and see who will get what amount of work.
Understood. Yeah. Thanks a lot.
Thank you. The next question is from the line of Girish from Morgan Stanley. Please go ahead.
Yeah, sorry if I missed this, comment. Can I get the growth in wire segment, this quarter versus cable segment, volume growth?
As far as the volume growth is concerned, in wires, it was north of 20%, between 20% and 25%, and within cables it was in early teens.
Sorry, inaudible.
For wires, it was close to 40%, whereas in cables it was about 21%.
Okay. Just on the interview, you, the management team mentioned that the competitive intensity was on the wire side. I noticed the copper prices started going up, I think, in the last two, three weeks of the September quarter. So wanted to understand, like, what really happened there in terms of... Because that also is a reason on margins being a slightly weaker on a year-on-year basis. So wanted to understand, normally, you know, you guys take price hikes every 15 days in wire segment, and, I mean, if the prices are going up, then why did the competition resort suddenly to price cuts in an increasing price environment, input cost environment? That was the second question.
So Girish, generally, the price variation that we take are more on a monthly basis, and that's generally the followed method for us. As far as the price hikes are passing on is concerned, see, in cables, where we have a very good market share, and we are way ahead of the second or third largest competitor. For wires, while we are the leader, the second, third largest competitor are pretty much close as far as the price is concerned. And all of them have pretty a specific part of the country, where they have very good stronghold on. So over there, it's very difficult for us to control the prices. We have to be in alignment with what the industry is following.
In the last part of the quarter, specifically in September, when the prices went up by almost 10%-12%, the distributors, obviously, they wanted to cash in on this benefit, because they wouldn't want to wait until October when the price pass on would happen. Seeing the kind of demand that was generated, as you are aware, within the wire industry, there is no capacity constraint. Everybody is sitting on additional capacity. So everybody wanted to optimize on their volume growth, and that is where they try, everybody tried to gain on as much market share as possible. Since we wanted to protect our market share, we also did as much of sales as possible, and that is where the margin compression has happened.
But, as I had mentioned in the initial comments, hopefully this kind of high volatility or increase or decrease trend is something that we should not see. If a bit more stable fluctuation happens in copper or copper prices, which has generally been the case historically, you wouldn't see any such material compression, et cetera, in margins. It's just that over the past three to four months, the fluctuations in commodity prices have been way higher, and because of this, you have seen a different kind of margin trend for the industry this time around.
So I, just to follow up on that, so I believe Gandharv also mentioned that above $500 is a lot more volatile to pass on, on the wire side, given the capacity that exists. And cables, that is not a problem today, I appreciate that point. But, would it be fair to say that, you know, with more cable capacity coming through, and if there is such volatility, maybe you could have a similar situation in cables also, if the volatility persists at these levels? Because we can't forecast the price of copper or aluminum, right? So I'm just trying to understand that the pricing discipline that exists today for cables, and it got deviated for wire, can it happen in cables few quarters down the road?
See, Girish, the scenario on cables is completely different than in wire. In wire, all the peers or the entire industry is sitting on additional capacity. So if in a particular quarter or a particular month, there is a way higher demand, everybody can actually utilize their capacity and start cashing in and do more sales. But that is not the scenario in the cables sector. Plus, with the kind of demand momentum or demand which is expected of going ahead, we genuinely believe that even the capacities which are being put up right now, those will fall short. So we don't anticipate such a scenario in which a similar thing plays out in cables, which has played out in wire in this quarter.
And just last question, I believe you guys have participated in BharatNet tenders worth INR 50,000 crore thus far. Obviously, this is subject to review and tenders actually getting awarded. And you also mentioned that margins will be similar to domestic cable and wire. Just from an accounting perspective, will this be more classified in the cable and wire domestic revenues whenever you win such tenders, or will it be more EPC tenders? And what is the profile like, timeline you're on a slightly more longer term basis, if you can comment on that.
So, Girish, there will be a cable supply component of the contract, and there will be an EPC part of the contract. The cable supply component will be classified within the cables and wires, in the segmental variation, and the EPC part of it will be under EPC. It's pretty much similar to the RDSS project that we are executing right now, wherein the cable supply gets accounted in the cables and wires segment, whereas the EPC part is done using the other segment.
Roughly, like a ballpark INR 1,000 crore project here could be how much cable versus EPC, roughly, if you are to win a INR 1,000 crore project?
It actually varies depending on which tender, which state tender you are winning.
But will it be like 20%, 30% cable, or?
If it is awarded to us, probably we'll be in a better position to answer that question.
Okay, thank you.
Thank you. The next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
So my questions, what Girish have already asked, so I don't have any further questions. Thank you.
Thank you.
Thank you. The next question is from the line of Arjun Lohiya from Nuvama. Please go ahead.
Yeah, good afternoon. Thank you for the opportunity. My first question is, you know, pertaining to the industry. You mentioned that the capacity that is getting added in cable, you know, going to be short of what is required.
Yeah,
Is it better?
Yeah, it's better now.
Yeah, sorry. So, you know, my question pertains to the industry. You did mention that the capacity addition in cables will probably be short of the demand of what is, what you're seeing at the industry level. Is it possible to get some sense, you know, where are we in terms of, A, the capacity, in terms of, volume or, value? And what kind of capacity addition are we seeing? And this is for cable segment.
As we have guided, we will be doing INR 10-11 billion of CapEx each year for the next three years. Majority part, roughly, let's say about 70-odd% of the entire CapEx will be towards the cable and wire business. The capacity addition for us will be something which will continue to happen in phases. Of course, a part of that entire CapEx is going towards the EHV plant, which will be something that will become operational by the end of the financial year. For everything else, it is something wherein the capacity will be coming up in phases. As of now, anyway, for us, capacity utilization is not a constraint. We are having additional capacity in place. For us, it's not something that derails our growth rate.
But of course, looking at the future demand expectations, it's very important that you put up those CapEx ahead of time, so that you are not in a scenario where there is demand, but you are not able to supply. So that is why we are doing the kind of CapEx that we are going to be doing over the next three years.
Correct. You know, Chirayu, I'm trying to understand more from the industry perspective, what kind of, you know, capacity addition are you seeing? You know, is it 40, 50, 70%, or it's just 20-25% you are seeing, which is giving you comfort or conviction that the demand will outpace the capacity addition?
So Arjun, the kind of calculations which we've done is based on the announcements which other listed players and other larger non-listed players have made. We believe that going ahead, the growth rate in cables at an industry level will be somewhere closer to the growth of real GDP number. Which gives us a rough estimate of the kind of incremental demand which can be coming up, which will be coming up over the course of next, let's say, three to five years.
If you look at the kind of capacities and inflation rates of the larger players which are currently there, and the announcements that's made in terms of the newer CapEx that they're putting up for cable capacity, you roughly are around that arrive at the conclusion that this is gonna be lesser than what kind of demand it is estimated to be coming in. Over and above that, exports or international business is something which is a very, very big opportunity, and obviously most of the larger players in the country are looking to take advantage of that. Again, you have to have additional capacity for that as well.
So keeping looking at both the variables, one largely arrives to the conclusion that there will be a requirement for much more capacity. And I believe over the course of next two to three years, we will actually continue to hear much more capacity addition announcements from the industry.
Understood. Any color you can provide with respect to, you know, the demand momentum in the exports market? Are you seeing any sign of weakness, struggles out there, or it is as robust as it was in the past years?
See, demand momentum across different geographies will vary, depending on whatever is the scenario in the local country at that point of time. But being at the level that we or any other Indian player is, we are as of now quite small as far as the overall export or demand opportunity is concerned. So largely any weakness or so in a particular geography shouldn't get affect the kind of growth numbers that we should be able to exhibit.
Of course, there can be some internal things related to each company and how they are operating, which might affect, for example, scenarios wherein the trade costs are much higher and certain trade routes are closed, then that can derail our exports to a particular geography. But in general, we believe that the export is a way bigger opportunity than what we have currently been able to tap into. And the growth rate within export international business, if you take a three- to five-year view, that growth rates will be much higher, or higher than, as compared to the domestic cables growth rate, that we'll be able to see.
Great. And just one last question, if I may. You know, you did make a comment with respect to the wires, the competitive intensity was much higher, you know, in the September month. Is it fair to say that the impact of that on the margins, on the wires margin, which is probably the second highest segment for us in terms of margin hierarchy, the impact could be 3-4 percentage points, and that's why the margin impact on the aggregate cables and wires as well?
See, if you take a quarter sequential view, our margins in the cables and wires have only compressed by 30 basis points. So to that extent, it won't be as high as the percentage that you mentioned, but of course, it is the bigger part of the reason because of this there is compression.
Right, but QOQ, the exports also picked up, right? I mean, the scale is better, the, so operating leverage, apart from the mix also, right? So the-
Yeah.
I'm just trying to figure out if this is... Yeah.
Yeah. So two parts over there. One, definitely, as you rightly mentioned, the international business is better quarter on quarter, and that would have helped in terms of margin. But the second point, which again, you mentioned, was the operating leverage. So if you recall, in quarter one, we had mentioned that we were operating at 10%-75% of our capacity utilization. This quarter, the utilization rates are somewhere between 60% and 70%, because on a part of newer investment, the CapEx that we did, the capacity came up for us. Plus, the second thing was, if you recall, by the end of the previous quarter, we had a lot of inventory, finished goods inventory on our books, which we couldn't sell because the demand kind of moved out during the end of the quarter.
We were able to liquidate that during the course of this quarter, and hence we were not required to manufacture or utilize much more of our capacities compared to what it was in Q1. So operating leverage to that extent would have been impacting negatively. So, all these three to four variables could have impacted the entire margin differential between Q1 and Q2.
Understood. This is very helpful. I'll fall back in the queue for further questions. Thank you so much, Chirayu.
Thank you.
Thank you. The next question is from the line of Amit Mahawar from UBS. Please go ahead.
Thank you. Hi, Dhawal. So I have two quick questions. I understand the copper and the inventory part very well, you know, understandable, but one of the biggest segments for us is underground cables and RDSS, where we are by far, you know, having a higher market share possibly than the general cable and wire sector. When you export our cables, generally, are these interchangeable? So my point is, if supposing temporarily there's a slowdown in underground cables and eventually it picks up, you know, can you divert towards higher export? Just to understand. I know probably capacities are fairly fungible, but export market is a qualification this market, so I just wanted to understand that point. That's first.
Yes, sir. So yes, the capacities are fungible between the different types of cables. So if there is a slowdown in a particular type of cable demand, you can use that capacities for other avenues.
Into the exports.
Fair, fair. Second question is more about last three years, there was a very strong, unprecedented demand in both domestic and export market, and maybe Polycab was the only player which could see it coming, very, very clearly. Can we say in next three years, especially in cables, the competition is far better ready, and keen than it was in last three years, and it could have some impact on sector profitability in general? Is that statement correct?
Amit, the kind of profitability that we have been able to register over the past two to three years, or rather the improvement, it's not just because we were the only player who had the capacity. There are a lot of variables that went into the play over there. We have been able to improve our sales through channels, which is a better medium in terms of profitability. We have been able to change the mix of the kind of cables that we've been selling domestically. There is the improvement in the contribution of exports. All of this have contributed towards the improvement in margin. So it is not correct to say that even if you are going ahead, there are capacities coming up for our peers, we'll see any form of slowdown or compression in margin.
But as I mentioned a while back, we do believe the kind of demand which is expected over the next three to five years is way ahead of what the capacities which are coming up within the industry. And so to that extent, as of now, sitting on this particular day, we don't believe there should be any form of again, margin compression because of whatever incremental capacities are coming up.
Yeah. Thanks, Chirayu. And maybe third quick one is, next three years, where will be our export volumes or maybe in value terms, what is that we're targeting in exports? Thank you.
Sure. So, I mean, the guidance on exports is something that will be a part of our next five-year guidance, which we are working on right now. Where we are trying to come up or release that guidance during the course of this financial year, and that will give you a very clear idea of what it is that you can expect in terms of contribution from international business, as well as the domestic growth rate, et cetera, and so on and so forth.
Thank you. The next question is from the line of Shrinidhi Karlekar from HSBC. Please go ahead.
Yeah, hi. Thank you for the opportunity. So a couple of questions on the RDSS business that you do. May I ask the current order backlog that you have in this part of the business? And second thing is, how is the whole order prospect pipeline looking like in this?
Sure, Shrinidhi. So as of now, at the end of September, the open order book of the RDSS team for us was roughly about INR 48 billion. This is something that we have to execute over the course of next 2-3 years. So probably, and that is why we gave a comment that over the course of next 2-3 years, we will see probably similar run rate from the EPC or the other business contribution to the overall on the quarter we can do. As far as the incremental opportunities concerned, there are still a lot of orders which are yet to be coming. We've applied for many of them.
Of course, as of now, it will be very difficult to say what it is that we'll be able to get, because again, it's similar that we're in the government, which is kind of avoiding it. But probably as and when, during the course of this year, we get those incremental orders, we'll update those, the open order book, and that should give you an idea of what to expect on that.
Great. And the second question is on the whole EBITDA margin that you generate, both what you book in your cable business and what you book in the EPC part of it. May I ask, what are the blended margins that you get, or some color on what are the margins versus your portfolio margins?
The cable business, margin or the cable supply component margin is similar to, pretty much similar to what it is that we make when we do a normal cable sales in any other sector. And all of that gets through, in the financials, you'll see that within the cable and wire segmental margins. And the EPC margins are something which gets accrued in the EPC component. Overall, on the EPC part of the order, we generally you make somewhere in mid to high single digits, then adding up the cables component, it gets increases it.
Great. And last, if I may, I missed your comment on the export bit. I think you said... Did you say that H2 export is looking higher than the H1, and you're also seeing some recovery in the U.S. market?
Yes, the second half of the year, we expect the international business to do better compared to the first half of the year.
Okay. Thank you for answering my questions, and all the best.
Thank you.
Thank you.
The next question is from the line of Hardik Rawat from IIFL Securities. Please go ahead.
Thanks for the opportunity. Probably all my questions have been answered. One question was with regards to switchgear. You pointed out that switchgear has registered some strong growth in this quarter. Could you please help explain how is the market looking like for switchgears? Has there been you know a broader decline in margins from a business perspective? And where is our position with respect to other players in the market, and what are our aspirations with regards to the same?
So, Hardik, switchgear is one of the areas within the FME business wherein we are very much or very highly focused on. It is a component wherein we want to increase the contribution of that particular product to the overall FME. That's because the margins which we make with the switchgear segment is way higher compared to what we make on the fans and lights. We've had very good run rate of growth within the switchgear segment over the past almost two to three years now. And that's largely because of the demand which gets generated for switchgears from the real estate, which is coming up in India. In switchgear, we are just present in the B2C segment. We are not there in the B2B. We don't do make or manufacture industrial switchgears.
We are into the MCB manufacturing, RCCB manufacturing, and so on. For us, within that segment, we are, as of now, a relatively smaller player. So it will be somewhere between top five to top ten, as far as our market positioning is concerned. But we are witnessing good growth rate in the switchgear segment, and as I mentioned, it is something which we are very much focused on. For us, definitely, see, whenever we target a particular business, the target is to be among the top three players within that business, and that is something that we are targeting even in the switchgear business.
It might take us a bit of time, but probably over the course of next five years, that is something that we definitely will have it to be one among the top three players. As far as the margins are concerned, for us, the gross margins in the switchgear business are, as of now, north of 40%. We still believe there is a bit more of improvement that we can have on the switchgear margin front, and that is something that we'll be targeting over the course of next few quarters. Just the previous year, we've actually expanded our switchgear manufacturing capacity. As of now, the utilization rates are relatively lower.
Since we are able to scale up that business at a good rate, quarter on quarter basis, we expect operating leverage to start kicking in, again, margins to again improve. In fact, switchgears is one such business on the FME wherein we are already EBITDA positive. We've been EBITDA positive for a while now. As and when the contribution of switchgear continues to increase going ahead, I mean, that will obviously add up to the segment profitability.
Okay, that's it. One question with regards to how has, with our entry into switchgear and the kind of focus that we have in this space, are we seeing aggression from the current market players, you know, on price, for example? How is the competition dealing with our, you know, foray in this segment in a big manner?
Are you referring to RR or someone else, sorry, I didn't get that part?
No. So since Polycab is now so focused on this segment, how are the existing players, you know, responding to this? Are they, you know, there's higher competition on price, or, you know, are they responding in some manner?
I think, as far as switchgear for us is concerned, we've actually been able to leverage a lot of our synergies within the existing wire business. If you realize, the demand for switchgears from the end real estate gets generated at pretty much similar time when the wire demand is generated. We anyway have distributors who are distributing wires. We have the end customers, real estate players, whom we are supplying wires. So we are able to cross-sell our switchgears along with wires, and that is how we are able to scale it up in a good way. More and above that, the quality of our switchgear is something which has been appreciated in the market.
We are also quite confident on its quality, and as a result of that, we actually provide seven-year warranty on our switchgear, compared to the normal five-year warranty which the other competitors provide. So largely, we have a lot of levers available to us, through which we are able to grow the switchgear business. And since the end industry itself is growing at a good pace, we haven't actually seen any form of heightened competitive intensity from the existing peers. We've been able to grow that business at a good pace, and it's been almost two to two and a half years now that we have that business, doing very well for us.
All right. That is, helpful. Thank you so much.
Thank you. The next question is from the line of Natasha Jain from Nirmal Bang. Please go ahead.
Yeah, thank you for the opportunity. I have two questions. The first one on your gross margins. Now, for FMEG, I understand there's a lot of channel incentives, promotional expenses, but ideally, that would be a part of your OpEx. Coming to wires and cables, EPC, I get it, but a 350 basis compression does not come from a 10% margin business, 10% contribution business. So now coming specifically to wires and cables, both use copper and aluminum, and because you, you know, you make that commentary, you've been making that commentary throughout that we do a lot of derivative hedging. So ideally, if you hedge your contracts, you should not be impacted, right? In terms of volatility of your raw material. So can you please explain again what happened this quarter, and why, what did we lose out on the hedging part?
First question is that.
Sure, Natasha. So if you do understand the hedging part well, you realize that you actually price your product, price your raw materials post you receive the order. For us, that translates into us not getting affected because of volatility. But you also have to take into account the competitors when you are looking at a product like wires, right? Over there, if there is a player or competitors who are looking to gain on market share and are willing to sacrifice on pricing just to gain on market share when the demand is very high, if as a player you want to protect your market share, you have to compete at on pricing part as well.
That is the reason why, especially on the wire side, we had compression. But the three hundred basis point compression that you are mentioning is more on year-on-year basis, not on sequential basis. On year-on-year basis, the margin compression is not selectively just because of wires degrowth, it is a small part of the overall 3% degrowth. The major part is because of the international business. Year-on-year, the international business contribution is also much lower to the overall topline, plus the margins have also been affected in international because of the hiking trade cost. That's the larger reason on year-on-year decline in EBITDA margin on the wires and cables.
The wires margin compression effect that happens is more of a sequential compression, and that is just a handful of 30 basis points.
Understood. Just one more question, and if Gandharv can answer this. See, on your exports, last year, your export contribution within your exports was close to 40%. This year, the way exports is moving, especially your U.S. contribution, I think that you guys probably will land somewhere below 10%. Now, in the offing with all the, you know, the . elections, it's a very macro-level question at this point. You know, given both the candidates have equal chance of winning, one of the candidates do not focus so much on renewables. Now, I understand that renewables, oil and gas is the kind of cables that we export to the U.S.
So at a very broader level, have you worked out the strategy if whichever, you know, whichever way the election goes, does that further give pain to our export cables in U.S. and especially renewable cables? So that's my second question. Thank you.
Natasha, what we have actually done over the course of last five to seven years is that we've worked out or gotten approvals for various different types of cables. So solar cables are not the only type of cables that we export to U.S. So we have diversification in that manner as well. So irrespective of which candidate comes and what is the focus on, specifically on renewables, there is a lot of investment happening in the other sectors as well. So for example, the power transmission, distribution, and the infra for the U.S. is getting upgraded after almost a century, and that requires all the types of cables, the low voltage cables, medium voltage cables, et cetera. And that is where we already have approval, and we will supply whenever the demand arises.
So specific to U.S., yes, I mean, we'll have to see who comes to power and what are their policies, but it doesn't really impact our international growth rate. Because if you look at international business, we have seventy-nine, eighty countries now wherein we export. U.S. is not the only one. During the course of this year, we've actually seen that we've been able to do a lot of exports to other countries as well. Middle East is something wherein a lot of opportunities are coming up. Australia is something wherein we've been able to do a lot of exports. Europe is opening up, opening up in a big way.
So there are various different geographies wherein we have the opportunity to supply to, and irrespective of what happens in a particular single geography like U.S., it shouldn't delay the growth rate of small players or small international export players like us. So we are not very much worried on that.
Understood. Just a small follow-up on that, Chirayu. So sequentially, when you say that you've grown close to 40% in your export revenues, can you please call out specifically which geographies did we expand or newer geographies that we took in? That's it.
During the course of this quarter, we supplied a lot of cables, largely to the Middle East and to Australia. We've also added a couple of new countries as well. I wouldn't want to name those countries, but that is of importance for the competitors as well. But largely, we've been adding countries on a quarterly basis. We also have a couple of other countries to be added in the pipeline over the course of the remaining year as well. But largely, I would say we have a plan started out. We have identified the geographies where there is good amount of demand, and as of now, we don't have a route.
We even identified the geographies where we have a foothold, but very limited type of cables, and we will want to expand across all those different type of geographies. The diversification strategy is in place. We have a very strong international business team, which is working day and night, and they have to get approvals from various different geographies, and we don't foresee any challenge in us growing our international business, even if there is a slowdown in a particular set of geographies.
So all geographies would command similar export margins in terms of cables?
It varies. It varies geography-wise, it varies the product-wise, and depending on the what type of cables you're supplying, in which quarter or which year to which geography, your margins will vary. But irrespective of that, as of now, the margin profile for international business is higher as compared to domestic. So irrespective of where it is that we will be exporting which geography, we will be able to make better margins.
Understood. Thank you, and all the best.
Thank you.
Thank you.
Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants, please limit your questions to two per participant. If you have a follow-up question, I would request you to rejoin the queue. The next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah, thanks, sir. Thanks for the opportunity. Now, in terms of the margins, we have seen our margins, which used to be in the range of 8%-9%. Now, they have reached as high as almost 14% now. So, do you believe that probably the margins have kind of peaked out at around 14-odd % level? And, on a structural basis, do you see further triggers to see expansion in the margins and anywhere means maximum the potential in terms of margins, what that can be? That is question one. Secondly, now the competitive intensity is likely to remain higher because one company is starting the new plant and one company is doing QIP, so probably they may also expand the facility.
What if the competitive intensity remains higher in H2 and FY 2026, so what will be Polycab's strategy, whether it will be market share first or it will be margins first? Yeah, that's it from my side. Thank you.
Sure, Aniruddha. So as far as your question on margin is concerned, we already have a guidance in place. In cables and wires business, we believe 12%-14% EBITDA margins is something that we'll be able to deliver. Depending on the kind of demand momentum that we see in a particular quarter or which type of product which we are able to achieve, we'll be between that guidance. But as of now, we believe 12%-14% EBITDA margins is something that we should be able to deliver. Probably, maybe in future, depending on whatever scene variables change, we might revise the guidance, but as of now, this guidance holds.
As far as the competitive intensity is concerned, I'd like to make it clear again, one time, that in Q2, the competitive intensity increase that we are referring to was specifically in wires, and that was for a specific reason, that the copper prices shot up on a very deeply in a very short frame of time. On the cable side, we don't see any increased competitive intensity. The comment that you mentioned that there are new capacities coming up is kind of more relevant for the cable side, and that is again, where I kind of made a comment that we expect the demand momentum to be very strong, and the capacity draw within the industry to be just enough or fall short of being able to service that demand.
So we don't expect any pressure on margins. So as of now, we don't need to take a call of whether we need to go for top line or bottom line. At least on the cable side, we are quite confident that we will be able to achieve both.
Okay. Sure, sir. This is very helpful. Thank you.
Thank you.
Thank you.
The next question is from the line of Aman Mehta from Kotak Securities. Please go ahead.
Yeah, thank you for the opportunity. So most of my questions are answered. Just want to get clarification. You mentioned that institutional business did better than distribution, and you also mentioned that wires did better than cables. Does it imply that you have done wires sales to real estate projects this quarter?
I'm sorry, Aman, your question towards the end was not clear. I believe you, you asked, institutional was better than, channel, and wires was better than cables. And what was the last part of the question?
This doesn't connect, right? You typically expect the distribution, domestic distribution to do better when your wire sales are outpacing cables. Is there a difference in understanding, here?
No, one, you'll have to take into account the base, right? For our institutional versus channel. Institutional is 10%, and channel is 90%, while cables and wires the mix is 70/30. Right? Now, wires has grown ahead of cables, but its mix is only 30% of the overall, so it will have to grow over 2x of cables if for it to be for the growth rate of channels to be higher than the institution. This is not the case. Institution has still grown ahead of the channel base. But on the cable side, it's more relevant, wherein institutional sales continue to happen. Whereas in the first month of this quarter, because the copper correction was there in the range of 12% to 15%, the channel sales were almost non-existent.
So those are the two reasons, more institutional sales on the cable side, and while wires were seen growing higher than cables because of its mix being much lower as compared to cables, it doesn't really impact at the overall per mix point.
Thank you. Thank you very much.
We will take that as the last question. I would now like to hand the conference over to Mr. Gandharv Tongia for closing comments.
Thank you so much for joining us for this call. In case if you have any follow-up questions, please feel free to write to us at investor.relations@polycab.com. We also take this opportunity to wish you and everyone at your home, as well as your team, a very happy Diwali and a joyous New Year. Thank you. Take care. Bye-bye.