Ladies and gentlemen, good day and welcome to Polycab India Limited Q1 FY 2023 earnings conference call. As a reminder, all participant lines will be in the 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 telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gandharv Tongia, Chief Financial Officer, Polycab India Limited. Thank you, and over to you, sir.
Thank you, operator, and very good noon, everyone. I hope you all are doing well. It's a pleasure to have you on the call. As operator mentioned, my name is Gandharv Tongia, and I am the CFO at Polycab India Limited. Thanks for joining us today to discuss our Q1 FY 2023 earnings. During the call, we will be referring to the presentation, financial results and financial statements, which are available on the stock exchanges as well as investor relations web page of our website. It can also be downloaded through QR code on slide number eight of earnings presentation. From our management team, we have with us our Chairman and Managing Director, Mr. Inder T. Jaisinghani. Let me now hand it over to him for his opening comments.
Good afternoon, everyone. We have started the fiscal year 2023 on a solid footing with top line growth of 48%, fueled by strong performance across B2B and B2C categories, which underline our strategy to be agile, focused on robust execution and consistency, delivering the best quality of the product to our customer. Profitability was supported by the better operating leverage and various strategic initiatives implemented over the past few quarters. We will strive to continue the path of profitable and sustainable growth and contribute to success of all our stakeholders. I now request Gandharv Tongia to take you through our earnings presentation.
Thank you, Inder. Right. A revenue growth of 48% marks the beginning of FY 2023 on a promising note, as most of our businesses are now performing above pre-pandemic levels. The numbers might look upbeat due to low base, but we are seeing sustainable improvement in our underlying businesses. More importantly, we are progressing well on our strategic agenda, which will drive transformation over mid to long term. The current quarter breaks the rhythm of back-to-back impacted Q1 results, turning it to be the best Q1 in the history of the company in terms of revenue and margins. Before I take you through the presentation, let me give you a flavor of macro environment. Overall macro environment has been a bit of mixed bag during the quarter.
Global economy is going through an extremely uncertain period amidst the simultaneous interplay of various headwinds, lingering war and enduring COVID, the sharp volatility in energy and other commodity prices, strains in global supply chains and worsening food security. In several economies, inflation is ruling at levels not seen in recent generations. For advanced countries against an inflation target of 2% and emerging markets against an average target of about 3%-5%, two-thirds are witnessing inflation above 7%. The sharply tightening financial condition due to the ongoing monetary normalization on the one hand and the persisting geopolitical tensions on the other pose significant downside risk to near-term global economic prospects. The global economy is projected to decelerate significantly during 2022 by all multilateral agencies. The outlook is shrouded in high uncertainty.
A sliver of hope has been visible in the recent moderation in global commodity prices and especially food prices. Back home, the Indian economy has, however, shown some dynamism. Several indicators suggest that the Indian economy is making resilient progress in Q1 FY 2023, with, in spite of the drag from global slowdowns, elevated inflation and some flattening of external demand as geopolitical developments take their toll on world trade. The high-frequency indicators for first quarter are mixed. However, amidst a sea of red and yellow, greens are making their appearance. For example, GST collections for the first quarter stood at over INR 4.5 lakh crore, up 37% year-on-year, while other indicators such as services PMI, IIP, core sector all showed meaningful improvement.
India's foreign exchange reserves are approximately close to nearly 10 months of imports projected for the current fiscal, thereby providing a sufficient buffer against external shocks. However, on the contrary, consumer sentiments still remain below pre-pandemic levels, which was emphasized by RBI's Consumer Confidence Survey. It is expected that the consumer demand in the urban market remains resilient, while a pickup in monsoon will support the rural market, which has been showing a consumption strength. Besides, most of the commodity costs have been corrected in the last couple of months, offering some respite to the adverse macros. Thus, the glass seems half full, perfectly balancing ambiguity with some silver linings. Meanwhile, on our business, we remain agile through our portfolio and go-to-market strategies, which gives us confidence to drive industry-leading growth. Moving on to the presentation, slide number four.
For the quarter ended 30th June 2022, our consolidated revenue grew by 48% year-on-year. EBITDA more than doubled in the first quarter, while EBITDA margins improved by almost 420 basis points year-on-year to 11.3%, led by better operating leverages and calibrated price hikes. During the quarter, we launched several brand campaigns across TV, digital, and social media platforms. Seminars and influencers meet helped us to improve awareness among B2B customers, electricians and contractors, among others. Moving on, other expenses were broadly in line. Overall finance costs stood at INR 84 million and other income at INR 443 million. A detailed breakup of our other income and finance costs have been provided on slide 12 of our earnings presentation. Tax also tripled on year-on-year basis to INR 2.23 billion.
On segmental results, the current quarter is yet another example of how the diversity of our growth levers come into play. Moving now on to slide number 5, wires and cables, which is our largest business, saw a strong top line growth of 48% year-on-year, led by healthy channel sales, while institutional business also witnessed growth traction. On the geographical front, the growth was broad-based, with the highest contribution from West, followed by South, North and East regions. During the quarter, wire business was slightly impacted by high volatility in metal prices. Consequently, the inventory levels and trade were slightly below normal and overall cash cycle also slowed. Despite these challenges, it is pleasing to note that the blended wire and cable volume grew on year-on-year basis and is also higher than pre-pandemic levels.
Export business contributed 6.7% to consolidated revenue and reported a healthy revenue growth of 62%. We have put in considered effort over the last few years in terms of new product development, getting approvals and penetrating new geographies. This is now materializing as we are seeing many repeat orders from large customers globally. Our focus on achieving double-digit contribution target over the medium term for this business remains intact. On slide number 6, our FMEG business grew by 59% year-on-year to INR 305 crores. April month saw robust momentum, however, June was impacted by weaker trade and consumer sentiment arising out of elevated inflation. The growth is quite structural, supported by strategic initiatives and distribution expansion.
Segmental operating profit increased to INR 62 million, with a 2% margin largely on account of pricing action, cost saving initiatives and premiumization, which have been partly offset by input cost pressures. While lighting, switchgear and pumps continued their strong growth momentum, fans, conduit pipes and solar businesses posted healthy growth. However, switches saw a decline due to supply challenges. On slide seven, other segments which are largely comprised of our EPC business, witnessed a 31% year-on-year increase in revenue to INR 75 crore. Our debt-to-equity ratio is strong at 0.02x and we are at net cash of around INR 590 crores. On the working capital side, there are a couple of things to highlight. One, receivable days are at comfortable levels. We will continue to optimize this progressively with the help of non-recourse channel financing.
Second, inventory levels are higher than normal because we were anticipating better demand in the month of June. However, as I highlighted a while back, the trade sentiments went negative or went down a bit due to high volatility in metal prices and dealers and retailers reduced their stock levels in the month of June. On payables, due to change in the procurement pattern from international to local vendors, the payment terms underwent a change from advance to LC, and that has resulted into reduction of liability. We expect this to normalize in one or two quarters. Now let's talk about our key projects, Project LEAP. In the first quarter of the fiscal 2022-23, we primarily worked on four key areas.
One, customer centricity, second, go-to-market excellence, third, winning with new products, and last is set up of organization and digital enablers. Starting with customer centricity, under this initiative, we have successfully integrated GTM or go-to-market for cable and wire B2B segment. This will materially improve our customer servicing capability as well as create one single route for our B2B customers. We have improved our understanding of the customer and his preference by using various tools and appointment of dedicated KAM or key account managers, which helps us to better serve our customers. We are also implementing pilot projects focusing on deepening reach and engagement with ISV and allied influencers. Second area is go-to-market excellence. We are putting lots of effort on enhancing our presence. During this quarter, our B2B cable and wire reach expanded to additional 27 new districts.
For FMEG, we have added around 100 new distributors, while also strengthening our presence in modern trade and e-commerce channels. Next, we are building a winning portfolio of our products which are innovative and resolve consumer needs. During the first quarter, we have already launched 15 and 32 new products, mainly focused on premium and underserved segments in fans and lights respectively. Our premiumization journey is progressing well, with premium products now contribute almost 12% to our consumer business, which was just 8% in fiscal 2022 and 4% in fiscal 2021. Fourth area is set up of organization and digital enablers. Wherein this, the major initiative was setting up the right organization structure and fill critical capability gaps across the department and businesses.
Majority of talent acquisition for critical roles was completed across business and functions, while performance measures and reward recognition were aligned to the growth strategy. We also successfully instituted end-to-end digitalization of front-end sales across businesses. That was broadly on Q1 FY 2023. Going ahead, we have pinned down some key focus areas for the next few months. One is enabling customer centricity in B2B business, through which we are driving our sales team towards better customer and customer understanding and expanding our customer view to include all relevant information in customer life cycle. Secondly, expanding our reach and distribution across businesses, which includes expanding coverage to 200+ districts for B2B, and a scale up of Emerging India in the identified priority states. Third, winning in the new products in B2C businesses.
We have a strong NPD pipeline to strengthen and build differentiated portfolio in FMEG businesses. Fourth, driving the digital agenda and creating a digital first organization, under which we are strengthening our digital infrastructure across sales force, distributors, retailers and influencers. Lastly, emphasis on governance, where we have bottom up and granular target setting approach deployed with linkages to scorecards across levels of business and functional teams. That's about it on Leap. We will continue to share periodic updates and are excited to see how rest of the year pans out. Thank you. With that, I hand it over to operators for Q&A.
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 touch-tone 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. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Atul Tiwari from Citigroup. Please go ahead.
Hi, sir. Thanks a lot for the opportunity, and congrats on good set of numbers. Just a couple of questions on cables and wire business. We have seen a very sharp commodity price crash over past 45 days or so. Have you passed all of that in your end product pricing? And how it should impact your margins over next two-three quarters? That is one question, first question. The second one is, now that there is a widespread expectation that prices of the cables and wire product will be reduced, are you seeing reduced demand from channel? And how long that is likely to continue?
Thanks, Atul. Thanks a lot for your kind words. I think your first question was around margin, and whether we have passed on all the benefits to the end consumer or customer. You know this business, Atul, historically, we have maintained EBITDA margins of 11%-13% in cable and wire. We believe in the quarter and years to come, we should be able to maintain the same range. In the current quarter also it was 11%. Almost 87% of our business comes from dealers and distributors, and where we revise our prices at least on monthly basis. When we revise these prices, we consider two factors predominantly. One is changes in copper and aluminum LME, and second is change in usual INR exchange rate.
This is what we have done even in the current quarters, and we will continue to do that in the subsequent quarters as well. To answer your question, we expect to maintain a margin of 11%-13%. Second, on demand, you know, generally in the falling commodity prices, we have observed that dealers and distributors, they generally optimize the inventory at their end, and this is what we witnessed in the month of June. Expectation broadly is that we should have some stability in commodity prices in a month or so. After that, I would not expect a significant correction in the inventory levels of our dealers and distributors. It is expected that the second half of the year would be better than the first half of the current fiscal.
Okay, sir. Thanks. Thanks a lot.
Thank you, Atul.
Thank you. The next question is from the line of Naval from Emkay Global. Please go ahead.
Yeah. Thank you for the opportunity. I have two, three questions, Gandharv. First, as you stated, volumes have seen growth over pre-pandemic levels also. Can you give out any number on that? That is first question. Second, on Project LEAP, because when we gave our Project LEAP guidance of INR 20,000 crore revenue by 2026, copper prices were kind of 22% higher than the current levels. If copper prices or the other commodities are going to stay where they are right now, will there be any change in timeline or number on this INR 20,000 crore?
Third question is on the unorganized players, where last year we have seen unorganized players facing difficulties because of you know spike in commodity prices. Do you think that they will come back in this year as things are now falling in place with commodity cooling off?
Great. Thanks, Naval. I'll go in the same order. I think your first question was around the volume growth. You rightly observed that we have registered a fair amount of volume plus value growth. If I were to give you a broad color on the current quarter growth of 48%, it is safe to assume that most of it, almost two-thirds is coming from volume, and balance is because of the pricing action which we have taken.
I think your second question was around the top line target of INR 20,000 crore by fiscal 2026. When we were working on this top line target as part of initial thoughts in the Project LEAP around a year back, we considered you know, last five years' movement in copper and aluminum as well as in USD and exchange rate. Of course, we factored in some management estimates. At this stage, considering some mid to long-term view, I don't think we need to revise the top line of INR 20,000 crore. We will continue to keep you updated. At this stage, I as well as the larger management team is confident of touching INR 20,000 crore of top line by fiscal 2026. Third is on the unorganized.
My sense is, like other industries, this industry will continue to move towards more organized market players irrespective of what happens to the commodity prices. I would be surprised if unorganized market share increases in the quarters to come or years to come.
Sure. Just a follow-up on the first question of volumes. Can you state number on pre-pandemic level on volume growth? As you stated in initial your opening remarks that there was volume growth on pre-pandemic levels as well.
Yeah. This is true that we have been able to register fair amount of growth, but it would be slightly incorrect on my part to give you that number because in our business, a kilometer length of copper cable would be different in terms of value and volume when I compare with the aluminum. I think safe to assume that we are ahead of the curve as far as the industry growth is concerned. If I were to give you only specific reference to this particular quarter with June 2021, I think most of it is coming because of volume and a part is because of revenue.
Sure. If I may, one last question on commodity prices again. Have you started? You stated that H2 will be better than H1, but do you think that last year volumes were impacted because of a significant increase in commodity prices? Have you started to see some green shoots of demand coming back or some demand which might have got postponed last year will come back this year?
Theoretically, yes, that's possible. As of now, when we speak, I have not seen any significant or dramatic change in demand. As a matter of fact, June was slightly softer. It appears that there will be some impact of the softer commodity prices even in the second quarter. Broadly from third quarter onwards, we should see some uptick in demand, and second half of the year should be significantly better than the first half of the year.
Sure. Thank you so much and all the best.
Thank you so much, Rahul.
Thank you. The next question is from the line of Achal Lohade from JM Financial. Go ahead.
Yeah. Hi, good afternoon. Thank you for the opportunity. You know, my question was, if you could help us understand the FMEG part. First, you know, in terms of the revenue mix, if you could break it into key products. You did point out to, you know, a drop in switches. If you could, you know, give some sense as to what exactly is the issue out there and, what, you know, how do you see it going forward?
Sure. We have broadly 5 or 6 sub-product categories within fan, within FMEG. One is fan, second is lights & luminaires, switches & switchgears, conduit pipe, bit of solar and bit of agro pumps. Fan contributes almost 30%-35% to our top line of FMEG, and lights & luminaires is also a number closer to the same range, and other businesses are slightly smaller. Fan got impacted in this quarter. If you remember in the previous quarter, we had mentioned that we are doing realignment exercise in fan business because we believe to achieve a significantly larger top line within fan business, we need to revisit our GTM and dealer distributors and all that. There is some impact on fan business.
On a consistent basis, we would expect fan and light & lube both put together should contribute almost 65%-70% to our FMEG business, followed by other smaller business. As far as switches are concerned, switch any which way is a smaller business for us. This is the only product where we were dependent on third-party suppliers, and we had some supply side issues on that. Parallelly we have started, you know, our process of setting up our own factory for switches. It is expected to be up and running in the current fiscal as well. Once that factory is operational, we should not face any significant issue on supply side of switches.
you think you will have all the approvals with respect to, because I recall for another company, it took a lot of time to get the approvals, the government approvals, required to launch the switches and switchgears.
I think we have a very good handle on the approvals on switches as well as on the other businesses' approvals. I don't expect any significant challenges in launching our own switches in the current fiscal, Achal.
Got it. If you could help us, what is the CapEx you are incurring and what's the capacity and the revenue potential of this?
Sure. Historically we have incurred between INR 300-350 crore every year. This year as well we are anticipating a number close to INR 300-400 crore. When we were working on Project LEAP, you know, there were several priorities. What we decided that in the year two of Project LEAP, we will start exploring adjacent categories and see whether we have to enter into these categories, either through admitted route or otherwise through our own facilities. If we decide to get into additional product categories, that number of INR 300-400 crore will probably undergo a change, but that's a work which is in progress. I think during the course of the year, I should be able to give you additional color on this.
Against the INR 300-INR 400 crore target of the current year CapEx, we have incurred almost INR 100 crore in the first quarter.
Specifically on this facility, for the switches facility, what is the CapEx and the volume and the revenue potential for the asset term?
FMEG business is generally a lighter business in terms of capital intensity. We should be able to get anywhere between 6 x to 8x of the CapEx spend. Once the facility is up and running, we will come back to you with additional color and data on the switches business.
Got it. Just one more question I had, if I may ask. You know, with respect to the distribution, you had talked about the overlap, and you have pointed out in the slide it's about 25% is a common distribution. What I wanted to check, you know, this classification is based on the retail mix or the dealer stock distributor mix. How have you worked out this mix?
Yeah. The data that you have talked about is the dealers and distributors. The classification is on the basis of type of product they procure from our company. If they're procuring cable and wire, then they are cable and wire dealer and distributors. If they're procuring FMEG products, then they are FMEG distributors. Almost a 45% of the dealers and distributors are procuring both the products, and that is the number that you are referring to.
Sorry, that number is 45 or 25? Because I saw it is, the 25.
25% are the dealers who are procuring both the products, cable and wire-
In effect you are saying there is 75% of our dealer distributors of wires, they are not actually buying FMEG. Is that understanding right?
Other way around. There are 75% dealers and distributors who are either doing only cable and wire or only doing FMEG.
Understood. Just one clarification on the slide. You know, if I see the map of the location, manufacturing locations, I see three places. You have written 23 units of manufacturing. So just wanted to get that, clarity.
Yes. There are multiple manufacturing locations in these geographical locations. If you go to Halol, there are manufacturing facilities for different type of cables and wires, and these numbers of locations are as per the regulatory approvals which we have received.
Got it. This is very helpful. I'll come back in the queue for follow-up questions. Thank you so much.
You are welcome.
Thank you. The next question is from the line of Uttham Kumar from Spark Capital. Please go ahead.
Good morning, sir. Thank you for the opportunity. I think all the questions have already been answered. I would like to have a question on the demand trend. Currently, how do you see, I mean, the current demand panning out over the next one-two years, considering that now we are witnessing a scenario where the interest rates are on the higher side, and are we really seeing the interest rate gaining traction or is mainly certain pockets which are kind of driving the volume growth for us coming in?
Yeah. You know, voice was cracking in between. I think you are talking about the demand outlook. Is that the correct?
Yes, yes.
Yeah.
Yes, sir.
You know, as I briefly mentioned in my opening remarks, the June month got impacted because of significant softening of commodity prices. The expectation is that the commodity prices will get stabilized in a month or so, and after that we should not have any significant challenge as far as demand is concerned. Ours is a business which is a distribution play. Almost 87% of our top line comes from dealers and distributors. Whenever there is a significant softening of prices, generally dealers and distributors they optimize their inventory level. As you could imagine, this is only a near-term or immediate term impact. It doesn't impact us on a midterm or long term. As far as demand environment is concerned, macros are positive. You know the country already.
Ours is a consumption story as well as manufacturing story. You know, when I think of China, I can think of only manufacturing. When I think of U.S., I can think of only consumption. Whereas, in the case of our country, it has benefits of both. We can produce as well as we can consume, and that is where I don't see any challenge in terms of demand over mid to long term.
All right, sir. Secondly, with regards to the raw materials, I mean, the company had divested Ryker Base recently to Hindalco. Just want to understand in terms of the copper procurement. All right? In this case, I mean, is there any kind of like you could just give us more clarity on what kind of terms we have in terms of procurement of copper from them. Is there any kind of advantage that the company enjoys in terms of maybe receiving the raw materials at a lower price or at a discount? Or is there any other third party also would be supplying copper to you?
Is it only from Hindalco, to whom we'll be continuously sourcing the entire raw material?
Sure. The transaction which you're referring to was consummated in December of last year. Ryker was a subsidiary which was supplying or converting one form of copper into another form. We used to procure, and even now also procure copper in cathode form from overseas suppliers as well as few of the local suppliers. Ryker used to convert those cathodes into rods and that is where the rods were used by our manufacturing facilities to manufacture cables and wires.
Mm-hmm.
This transition doesn't impact the procurement philosophy or procurement strengths which company enjoys. It was only a converter. As you would probably be able to recollect, when we did this transition, simultaneously we entered into a multi-year job conversion or subcontract arrangement with Ryker Base, which is now part of Hindalco. We continue to get the same benefit which we were enjoying earlier. Why we decided to divest Ryker Base? Because Ryker Base was not being utilized at 100% capacity. Our utilization was barely 30%-40%. It was not making sense from ROCE perspective to continue with that particular legal entity within our group. This arrangement helps us both in top-line as well as in bottom-line.
Now, your question on the strength which we have or the benefits which we have on copper procurement, before I simply deal with that, let me demystify the copper procurement for you. Most of the commodities worldwide generally are created with embedded derivative, which means that on the date of procurement, you need not to decide the final price which you need to pay to your vendor. You can decide it a month or two months or three months down the line. Generally, in that time frame, you are able to convert the raw material into finished goods, and you have visibility on the selling price. That is where you decide and firm up the procurement price. This is how the changes in raw material prices becomes a pass-through for us.
That is where it doesn't impact the profitability of our company. There could be some few instances of changes on month-on-month or quarter-on-quarter basis, but if you were to take an annualized view, it won't have significant impact on the profitability of the company. You know, we are the largest consumer of copper in India, and we have those benefits available both from international suppliers as well as some domestic suppliers.
Got it, sir. Sir, lastly, on the gross, also is it a fair understanding that the current gross margins of almost 25% level, it would be sustainable or there can be some kind of improvement going ahead from here, maybe 100-200 basis points? Because of either, it can it be either because of the export mix which is coming in or the current inventory being of a lower priced raw material? Is there any scope which can be there in terms of improvement or can the current levels sustain?
Over the past few years, we have maintained EBITDA margins of 11%-13% in our cable and wire business on an annualized basis. I think for your modeling purposes, it's best to assume a range of between 11%-13%. I think probably, even if we are able to better the margins in terms of actual numbers, it will only give you positive surprise and no negative shock.
Got it, sir. Got it. Thank you for your time.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to one per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Nikunj Gala from Sundaram AMC. Please go ahead.
Yeah, good afternoon, team. Sir, I just have one question with respect to your cable and wire division. When you are, you know, mentioning that you are, you will be maintaining your, you know, EBITDA margin in the range of 7%-13%, but I just want to understand during the deflationary, you know, scenario, is that understanding correct that during this period, your absolute, you know, gross profit. I'm just focusing on the contribution margin perspective, that absolute gross profit in a deflationary scenario would be lower in that case?
You know, let me share with you my experience of this industry in the last 50 years or so. What I've observed in this industry is whenever there is reduction in commodity prices, generally the contribution margin and EBITDA margin would improve for cable and wire manufacturer. It is the other way around whenever there is increase in commodity prices. I would expect something similar to happen if there is significant reduction in copper or aluminum prices. If that doesn't happen, I would probably then expect significant competitive intensity in the industry and significant market share gain. Generally speaking, I would expect you know improvement in contribution and EBITDA margin if the commodity prices are falling.
Okay. Understood from that point, sir. Why I'm you know seeking clarity on the absolute contribution. If you look at our numbers from FY 2019 to FY 2022. FY 2019 commodities were you know approximately, just to give you example of copper, from FY 2019 to FY 2022, the basket of commodity has increased by 60%. For example purpose, your procurement was at INR 75, you were selling at INR 100, hence your contribution margin was at 25%. When I look at your FY 2022 number, the commodity basket moved from INR 75 to INR 120 purely on account of 60% inflation. At the same time, your realization also increased from INR 100 to INR 160. During this period, your contribution remained 25% to 25%.
However, at a gross profit level, your gross profit, which was INR 25 in FY 2019, had become INR 40. That was scenario we have seen in the FY 2019 to 2022. In the next, for the example purpose, going forward, say, let's take a similar example when you are procuring goods today at INR 75, but if this 75 reduces by 20%, which has come down to INR 60. I just want to understand the INR 100 which, you know, which you are selling will come down to 85 or 80. If it comes down by 85, then you know, try to maintain your, you know, increase your margin, but your absolute profit comes down.
Yeah. I think I probably lost you when you were changing numbers from 75% to 60%, but I think I'll probably oversimplify for you as well as for others. We work on EBITDA margin targets. We don't work on per ton targets. That is where you know I gave you guidance of 11%-13%. At the same time, what I highlighted to you in my experience in this cable and wire industry, in falling commodity prices, you should be able to get better margins both at contribution level and EBITDA level. That is where I would suggest that yeah for your modeling purposes, you can consider EBITDA margin in the range of 11%-13% as far as cable and wire business is concerned.
If I were to give you color on FMEG business, which is almost 10%-12% of our top line now and expected to grow over the period, the current EBITDA margin or EBIT margin is around 2%, and we would expect to be in the range of 10%-12% EBITDA margin by fiscal 2026, and that is where there is a fair amount of upside which is possible as far as that particular business of FMEG is concerned.
Okay. What you're saying, just to clarify, you know, in that case, you are saying if the cable and wire business, INR 100, you are making INR 11-13, and if tomorrow, this INR 100 becomes INR 80 on account of, you know, passing on the prices to the consumer, you will make 10-13 on INR 80. That understanding is right, sir?
That is partially right. What I highlighted is, in my experience in the last 15 years, in the falling commodity prices, the margin should improve.
Okay.
If that happens, we should have a positive surprise onto the range of 11%-13%.
Okay, sure. Thank you. Thanks for your time. Yeah.
You are welcome.
Thank you. Next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah. Thanks for the opportunity. Sir, on the new brand, Etira, can you shed more light means basically where it is launched, and which are the products that we have entered right now with what is the pricing difference versus Polycab brands and where it is exactly positioning. I agree it is at low end of the market, but compared to unorganized products or the premium products like Polycab, where it is basically positioned. Is there any 3-5-year target that the company is working on? Yeah.
Okay. Etira was launched as part of our rural as well as low-cost product offering. We have initiated our work on penetration of rural market. We have a vertical called Emerging India, which is being headed by Deepak, who joined us around a year back, and he has significant experience on the rural market. Etira was launched in the fourth quarter of the fiscal 2022, and if I'm not wrong, we have a sort of 100% growth on sequential basis. Of course, numbers are small with the numbers are not significant, but the fact is, the growth of 100% shows that's very promising. As of now, it has been launched only in the wire product portfolio.
As we go forward in the current fiscal, we will introduce Etira brand for other businesses as well in FMEG, for example, fans.
Okay. Is there any target that the company is working with, three-year, five-year kind of a target or?
You are absolutely right. We have very ambitious target for the rural market, and Etira would help us in achieving that over the period. On a quarterly basis, we'll continue to provide you update on the actuals for the quarters, quarter comparables.
Oh, okay. Sure, sir. Thank you. Thanks a lot.
You are welcome.
Next question is from the line of Kunal from B&K Securities. Please go ahead.
Sure. Thank you for the opportunity. Most of my questions have been answered. Just one question, sir. You mentioned that, you know, strengthening of the leadership team was one of the focus area. If you can talk little bit about how has that moved and, you know, what has been the key additions of late and, you know, especially on the FMEG side, it would be really useful.
Sure, Kunal. You know, when we were thinking about Project LEAP and this was almost 15 months back, and we were in active discussions with our partner, Boston Consulting Group, we realized that, the workstreams which we identified, the total of 24 workstreams as part of Project LEAP, if we want to successfully implement those 24 workstreams, we need probably, more experience and more leaders, at the top management level, you know. You know this business and company, Kunal, already. We don't have any capital risk. We are sitting on cash in our balance sheet. We are only leaders. The only risk we have if we were to, the particular challenge is execution risk. What does that mean? That even if you plan for something, you are not able to implement it in the most effective manner.
The way to mitigate that is have better quality of the leaders, have more leaders to support the journey of INR 20,000 crore piece of top line by fiscal 2026. We have hired leaders for various businesses and functions in last a year or so, if I were to talk about top leaders, probably we would have hired almost 18-20 leaders. But at the same time, there is significant augmentation of middle-level managers as well. Let me start with the functions first. We hired Rajesh from Tata Motors as our CHRO. He worked with Tata for 28 years, and all of us know Tatas are known for their HR and people skills and practices.
We believe that Rajesh would be able to support us in transforming HR practices of Polycab. We hired Vivek Sharma as Deputy Managing Director. As you know, Vivek superannuated from Panasonic in India, and he is looking after the B2C businesses. We hired Head of Fan Business from another large company. We hired Deepak Mitra for Emerging India, Deepak Seeman for TMO. I probably would go on, but just to give you a broad color, we have manned almost all the businesses and functions now, and it's also slightly getting reflected in the employee cost of the company. We have all the ticks in the checklist in place. Now it's a matter of implementation and execution.
In the quarters to come, we should be able to get better results with the help of these leaders who have joined us very recently over the period of last 10-12 months.
Thank you, Mr. Kunal. May we request that you return to the question queue for follow-up questions. The next question is from the line of Gopal Navandar from SBI Life. Please go ahead.
Yeah, hi. Thanks for the opportunity. Sir, if you can just highlight, you know, because of this decline in the commodity prices in the June, what kind of revenue loss would have been there for cable and wire business and because of this GTM implementation?
Sorry to interrupt you, Mr. Navandar. Please increase the volume of your device.
Am I audible?
Yes. Now you're audible, sir. Thank you.
Yeah, yeah. Thank you. Yeah. If you can just highlight the revenue deferment because of decline in the commodity prices for cable and wire business and impact on the fan business because of GTM and whether that GTM is through or it will further have impact on the remaining quarters.
In our business, Gopal, generally speaking, you would not necessarily witness a demand loss or loss of a quantity. At max, it will deferment from one month to another month, one quarter to another quarter, and this is a generalized statement. My expectation is that the second half of the year should be significantly better than the first half of the year. That is where I would not necessarily like to quantify the impact on the first quarter. I would like to give you this comfort that, in the history of the company, this was the best quarterly performance as far as the first quarter of the fiscal is concerned. On fans, I think, we have completed almost all the alignment. By September, we should be able to complete everything.
Fan is a slightly seasonal business, so the benefits of the alignment would get reflected in the next season, which will start sometime November onwards. More meaningfully in the fourth quarter of this year, as well in the first quarter of the next year, we should have some benefit in the P&L because of the realignment of GTM in the fan business.
Sure, sir. If you can just highlight the gap between the increase in the commodity prices for FMEG portfolio and the kind of price increases you have taken. Are you seeing any kind of price correction post this decline in the commodities in the last one and a half month?
You know, the way we revise our prices in cable and wire business on monthly basis, same way in FMEG also we take corrective action as and when required. Of course, after considering the actions taken by other participants at the industry level. We have done that, and we will continue to do that. Wherever there is an opportunity to pass on the benefit to end consumer or increase the prices because of increase in commodity prices, we are doing that very promptly, and we'll continue to do that in the quarters and periods to come.
Okay. Lastly, you know, what should be the, you know, the long term-
Sorry to interrupt you. Sorry to interrupt you, Mr. Navandar. May we request that you return to the question queue for follow-up questions. The next question is from the line of Abhijit Akella from Kotak Securities. Please go ahead.
Yeah. Good afternoon, and thank you so much for taking my questions. Just a couple. First one was on the gross margins, which have, you know, improved quite a bit this quarter to about 25%. Just to check whether there's any one-off item in there that might have boosted these and should we expect these to come back down in coming quarters? That was one. Second, if you could just give us some sense of your market share trends in both the segments, say over the past year or so, if you have any data points with you.
Last one, I just wanted to clarify, when you mentioned, this 87% of revenue coming from, the distribution-driven business, does that include, some element of institutional sales also within that or, you know, is that only the remaining 13%? Thanks a lot.
Sure. Sure, Abhijeet. I think your first question was on the gross margin and EBITDA margin. There is no one-off in the first quarter. As I was mentioning to another participant, we have maintained EBITDA margin of 11%-13% in cable and wire business and, in the periods to come, we should be able to. As far as market share is concerned, in cable and wire business, of the organized market, we have almost 44% of market share. In FMEG, we are comparatively small. It ranges between 1%-1.5%. In terms of ranking order, we would be anywhere between a sixth player to eighth, ninth or tenth player. We are comparatively that way in the FMEG business, we are small.
On the last one, on the distribution, you are right. 87% of the total revenue comes from distribution. Institutional and export is over and above 87%.
Thank you, Mr. Akella. May we request that you return to the question queue for follow-up questions. The next question is from the line of Ankit Babel from Subhkam Ventures. Please go ahead.
Sorry I missed the initial comments. Just wanted to confirm, was there any inventory loss in Q1?
Ankit, you know this business. You have been tracking our company since long. We have a very robust hedging framework in place, and when we procure inventory, it comes with embedded derivatives. When we decide the selling price of our finished goods, that is when we have the ability to decide the procurement price, and that is where it becomes a pass-through. That is the reason, generally speaking, I would not expect any inventory loss to incur to the P&L of our company. To directly answer your question, there is no inventory loss.
Okay. That's it, sir. Thank you so much.
You are welcome.
The next question is from the line of Viraj Mehta from Equirus PMS. Please go ahead.
Yeah. Hi. Thanks a lot, sir. Just one thing in terms of FMEG. If we look at, you know, our
Sorry to interrupt you, Mr. Mehta. Please use the handset mode.
Hi, Gandharv Tongia. If we look at our growth in FMEG segment has significantly slowed down to our vis-à-vis the market compared to our growth in earlier years. What do you think that is hampering it, and what are we doing to kind of correct that situation?
I would partially agree with you. You know, when you're talking about a slowdown, it's slowdown because of the base effect. When the business is small, the CAGR will be slightly higher. When the business is larger or sizable, the CAGR will go down. That's, to that extent I would just agree. At the same time, if your question is on the aspiration, whether it can be better, you know, we are an aggressive company as far as growth is concerned, and we believe that we can always do better than what we've achieved. Only one element which I would like to add, here is, slight realignment which we have done in the last couple of quarters on the FMEG business GTM, which has impacted the growth of FMEG business.
Other than that, almost all the large businesses have registered a fair amount of growth. By 2026, when we are talking about achieving INR 20,000 crore of top line, FMEG as well as retail wires will have a significant share of that INR 20,000 crore of top line.
Thank you. Mr. Mehta, may we request that you return to the question queue for follow-up questions. The next question is from the line of Varun Basrur from Julius Baer Wealth Advisors. Please go ahead.
Hello. Good afternoon. I hope I'm audible.
Yes, Varun, you are. Please go ahead.
Yeah. Thanks for taking my question. Just wanted to understand, are we seeing any improvement in rural market demand of TIC?
It's a mixed bag, Varun. There are a few pockets where we have noticed there is slight uptick in demand, but in few pockets slight sluggishness. Our reading from the ground suggests that this onset of this monsoon should help in reviving and improving the rural market demand.
Thank you. Next question is from the line of Deepak from Unifi Capital. Please go ahead.
Hi, sir. Thank you for the opportunity. Sir, as we expect a better H2 this year, you know, but we had a healthy base in the previous year supported by, you know, the higher prices. In this inflationary environment, how will we able to defend the strong base of last year in H2?
Deepak, you know this business. You are investing in our company since long. As far as B2B business is concerned, we are taking steps to deliver industry-leading growth. As far as B2C business is concerned, as part of Project LEAP, we are targeting to get to a breakout growth. Irrespective of softening of commodity prices, we believe that we would be able to beat the industry growth in cable and wire business over mid to long term. In FMEG, we should have a significant growth in comparison to industry growth.
Thank you. Mr. Deepak, may we request that you return to the question queue for follow-up questions. The next question is from the line of Srinivasan G from HSBC. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question would be on FMEG segment margin, where you have reiterated that your ambition of 12% margin by FY 2026. Would it be possible to guide us on what is going to drive this sharp margin improvement and price increases are going to drive substantial part of this margin? That's my first question.
Sure. Do you want to give me your second, and then I can take both at once?
Yeah. The second one, Gandharv Tongia, is that you alluded to some change in the payment methodology during Q1. Can you please elaborate that? These are my two questions. Yeah.
Sure. Srini, first question was on FMEG profitability. One is, with larger size, we will get operating leverage, and that is where the EBIT and EBITDA margins should improve. Second is, new product development and premiumization of our offerings. As I mentioned a while back, premiums contribution to FMEG top line was around 4% in fiscal 2021, almost 8% in fiscal 2022, and in the quarter gone by it was almost 12%. This is expected to go up in the quarters and years to come, and that is where the contribution margin will improve. Third is, fair bit of cost optimization wherever possible. All of these factors should help us in improving our EBITDA margin.
Having said that, at the same time, I would expect some increase in expenses, for example, advertisement publicity. In the COVID years, we were following a bit of a soft approach on A&P spend, but I would expect this to go up in the quarters and years to come. That was on the FMCG profitability between now and 2026. Second was on the payment terms. You know, when we procure copper, and we used to procure copper previously from the overseas supplier, we used to have the LC arrangement, which roughly means or broadly means that we need not to discharge the liability on day one. We have flexibility to discharge the liability, you know, two months or three months down the line.
Because of global supply chain issues, we decided to source some copper from local market in India. There, since these were domestic suppliers, we opted to make payments on advance basis or on the date of the delivery basis as against availing the LC, and which has impacted the working capital adversely, which is what is visible in reduction in number of days in payables. Having said that, in a quarter or two, we should be able to go back to our regular import vendors, and we should be able to avail LC. That is where the working capital cycle as such payables are concerned should get normalized. Since we are on working capital, let me also highlight that the channel financing percentage has improved over the period.
We are operating around 75% or thereabout of channel financing, and almost all of it is without any recourse to the company. That is where the number of days of receivables have improved significantly in last few quarters.
Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Hi, good afternoon, and thanks for the opportunity. Just one question I think is left with me now. On FMCG, Gandharv, you know, we're looking at 60%-70% coming from lighting fans. You know, the sector has a lot of large competitors, incumbents. You know, going forward, FMCG has to play a very large role in achieving, you know, that Project LEAP targets. You know, the botheration is essentially coming from how does this, you know, what does Polycab do different in terms of product offerings and getting to that growth number? Because growing this category now at an INR 1,200 crore base at more than 20% is gonna be tough. Market share gains in this category is gonna be tough because we have very large competition here.
Any thoughts which would help us understand what would Polycab do different in terms of, you know, either go to market or in terms of new product launches, or if you're thinking of new categories? Because fans and lights are two categories that are highly competitive and it's very tough to, you know, grow at 20% given the category growth itself is like 7%-8%. Could you help me understand that? That's my only question. Thank you so much.
It's a great question, Rahul, and believe me, we have invested lot of time in the boardroom, in the LEAP meeting and strategy meeting discussing deliberately. We have a complete blueprint in place, and the topics which you have touched upon, these are the areas where we are making considerable investment of time and are making lot of efforts. Whether it's GPN, dealer distribution expansion, adding more geographies into our network, whether working on brand architecture and so on and so forth. Let me give you know, a broader perspective to FMCG. You know, when we started this business 50 years back, we got into cables and today we are market leader in cables. In 1996 we got into wires.
We are a market leader in wires. When we got into FMEG business in 2015, there were many who were believing or who were of the view that we would not be able to get to the type of growth which we've experienced in last five-seven years. So any business is difficult, any business is complicated, but I think the quality of the management team which we have, we are absolutely comfortable with the top line target of INR 20,000 crore by fiscal 2026. Whatever steps are required to be taken are being taken, and we should be able to achieve our aspiration of INR 20,000 crore of top line by fiscal 2026.
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 this afternoon. In case if you have any follow-up questions, please write to us at investor.relations@polycab.com, and we would be pleased to attend your question. Thank you and have a great day ahead. Bye-bye.
Thank you. Ladies and gentlemen, on behalf of Polycab India Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines.