Finolex Cables Limited (FINCABLES) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Finolex Cables Q3 FY '20 Earnings Conference Call hosted by Yes Securities. [Operator Instructions] Please note, this conference is being recorded I now hand the conference over to Mr. Tarang Bhanushali from Yes Securities. And over to you, sir.

Well, hi. Good afternoon, everyone, and I welcome you all to the Q3 FY '20 earnings call of Finolex Cables. From the management side, we have Mr. Deepak Chhabria and Mr. Mahesh Viswanathan. On the onset, we would like to thank the management for giving us this opportunity to host the call. And I would first let the management give some opening remarks, and then we can start with the Q&A.

Good afternoon, everybody. Thanks for participating in this afternoon's call. I'm sure you must have read, seen the results already. You must have also seen the presentation that we put out in the website. And so instead of spending too much time on the numbers on the presentation as such, I would like to get directly into the call -- into the questions. So I leave it open to you to start asking the questions, and we are happy to take the -- give our perspective on the results.

[Operator Instructions] We have the first question from the line of Sonali Salgaonkar from Jefferies India.

Sir, am I audible?

Yes, you are clear.

Sir, my first question is would you be able to share an update on the end-user segments of yours and the demand scenario that is currently in those segments? For example, in Electrical, how is Construction, Auto, Industrial and Power doing? And in Communication, you have already stressed that OpEx is down by more than 30%. So when do you expect that to revive going forward?

Okay. End-user visibility in Construction, in real estate is -- it is still very sluggish. However, for us, in this quarter, the -- within the Electrical space, the product line that grew -- there were 2 product lines which did well. One was the General Electric Wire, which is normally sold in Construction space; and the Automobile one. In the Construction space, I think we believe that our efforts on improving our distribution are starting to pay off, and we now have a better footprint than before in terms of reach and visibility across different markets. I think that has given us the volume increase that we have seen in this quarter. I don't believe that the market itself has -- the demand itself has grown. As regards to Automobile, here, again, we've been able to add new customers during the last quarter, which has resulted in an increase in volume. We recently qualified for supplying to Honda, and I think that has increased -- the initial orders have increased our volume a little bit. But beyond that, in general, in the economy, you would find that things are a little sluggish. And while -- and that is visible in most macro indicators as well. Optic fiber, we had mentioned in the press release that our quarter numbers were down by more than -- almost 1/3. And yes, the result -- I mean the reason is the issues that the telecom industry faces itself today, both from the government sector as well as from the private sector. So until a resolution is found to both BSNL and money flows back into those projects from government allocations or when -- until the issues of, I mean, the ADR are settled, I think you are going to see a period of disturbance. Now whether that is going to be 2 quarters, 1 quarter or 1 year is anybody's guess at this point in time.

Sure. Sir, if I look at your sales mix, it was almost 70% B2C and almost 30% B2B. So how is, in particular, the B2B segment doing? Because you had mentioned in your press release that there is some pressure on the industrial side of it, so just wanted to understand that -- are liquidity constraints causing this constraint or probably there's much more to this?

I think it's partly liquidity and partly general apathy towards additional investments at this point in time.

Sir, but are you seeing any renewal in traction in the bigger B2B projects? Or are you fairly seeing them as stalled right now?

I think it's very slow at this point in time. We don't have too much of evidence to say that things are moving, the way it shows.

Got it, sir. Sir, on the distributor and retailer count, could you help us with the recent numbers post the expansion that you have done?

We are now at slightly over 300 distributors. So our plan for the year was to touch a strength of 500. And on an average, each one of them would be able to cover approximately 300 to 350 retailers. So then your effective reach would have gone up to 124,000, 130,000 retailers from our past 30,000 to 35,000. So we are now at the 300 mark, and we still hope to be as close to 500 as possible in the next 1.5 months.

Sure. Sir, my last question, ad spend in new products, the absolute amount in Q3 and 9 months.

I don't have that right away in my head. But in the quarter, I believe we spent about INR 7-odd-so crores -- 1 second. Yes. In the quarter, it was INR 7.5 crores and about 1/2 of it to our newly products -- our new products.

Okay. Sure. So we even look at maintaining a 1.5% to 2% of net sales in terms of ad spend, right?

It will be around 1.5%, not 2%.

[Operator Instructions] Your next question is from the line of [indiscernible] from JM Financial.

So just want to understand what is the share of auto and non-auto in our mix at this point of time?

Auto will be approximately 10%, 11% of Electrical revenue.

Sure. Sir, and what is the share of this [indiscernible] 1.1 kV cables in our FY '19 Cables business?

I'm sorry?

What is the share of the [indiscernible] 1.1 kV cables in that particular business?

See, the general wire is less than 1.1 kV. Agricultural wire is largely 1.1 kV and less. The wires which are flexible wires are all 1.1 kV and less. So I really do not understand your question. Are you saying -- are you wanting to know how much is the general wire?

Yes, sir.

That will be about 70% -- 65% to 70%, somewhere around that.

[Operator Instructions] We have next question from the line of [ Deval ] from [ SIMDL ].

Sir, just a strategic question relating to our FMEG space. So what is the whole strategy in terms of -- since we are a late entrant in the segment as compared to players who have reached a decent scale, I mean, what's our sales pitch to our distributors in terms of pushing our product? I mean what kind of price discounts we are giving or in terms of better credit period or the quantum of credit period, if you can specify, to our distributors? If you can just throw some light on these aspects.

Yes. As a company, we do not offer credit to any B2C customer. It's true for cables. It's true for the newer products as well. There is some overlap in our customers who carry both the traditional products as well as the newly launched products. So therefore, we do not want to create a situation where cash flow becomes an issue. So we have taken a position that we will not offer credit, but we will try and arrange credit for those people through the distributors or through channel financing, which is how we are trying to work that around. So that's on credit. You had -- in terms of pricing, we will be comfortable -- obviously, being a later entrant, our prices will not be carrying a premium as compared to the leading players. It will be at a slight discount to the larger participants. What value of discount will depend on the individual product line and individual modules, but there will be a slight discount to the leading players.

Sir, but I mean, like in terms of giving credit, [indiscernible] were already established, [indiscernible] giving credit. Then I mean, what is the kind of value proposition you're offering to the distributor to keep our FMEG products? Because in pricing also, we are offering some discounts. And in credit, we are doing a cash business, which makes their working capital very -- I mean, not cash [heavy] but still, they'll be more comfortable to keep someone else's product who are established brands. So...

So that's why I said we are arranging the credit to a channel partner, channel finance. So that means I protect myself, whereas somebody else who's a bank takes the credit.

But I mean it's like a short-term borrowing even if it's someone who're doing channel financing. I mean...

What is the requirement of the distributor, that he needs to have funds to rotate? Now whether he gets it from me or from a bank, as long as I'm arranging it for them, how does it matter?

[Operator Instructions] We have next question from the line of Lalaram Singh from Vibrant Securities.

Sir, do we have any presence in the cables for renewable energy, that is wind and solar?

Yes. We have products for the solar farms. In fact, we are -- ongoing expansion is on that. We have just started the various [ comments ] to construction of a plant which would -- from where the cables meant for the solar industry would be produced using electron beam technology. Currently, the same thing we are trying to achieve through a chemical installation process. But going forward, we will be using electron beam technology to do the final jacketing and insulation.

And how big would that capacity be, the ebeam capacity?

We are putting 2 ebeam accelerators, one which is 1.5 to 3 mV, and the other one is 0.8 mV. So this -- so that will handle different sizes. In fact, the smaller one can later on also be used for other applications; let's say, in automobile applications where the thermal requirements are increasing.

Okay. And is it a strategic focus for us going forward as well in the sense that -- are we bullish on renewable energy?

Yes, we are. That's why we are investing this money in it. It's going to cost us close to INR 75 crores to INR 80 crores. Construction has just commenced. We have put in the advance for the equipment, and we expect all of these to be ready in the next 7 to 8 months.

Okay. And how are the margins and the terms in this segment, at par with our current business profitability?

It is going to be B2B, so it'll probably be lower than your traditional B2C margins, but it will be broad.

Okay. And how much presence do we have in the power cable side [ ex utility ] as a overall cable strategy?

As overall revenue, on a yearly basis, it comes to somewhere around INR 180 crores to INR 200 crores, which is slightly less than 10% of total revenue -- of the electrical revenue. We are a very small participant in the power cable sector. Primarily, as you know, this is a business which is utility-driven and within the utility, specifically the discount-driven. So you have issues on collection. You have issues on prices, price levels. And you have another issue which nobody wants to talk about, which is bribery. So that is something that we really don't want to get into. And so we have kept our business exposure here very small. We know how to make a power cable. We're pretty good at it. But these 2, 3 things have prevented us from expanding on this line.

Got it. One final question. Do we have any presence in cables for railways?

No, not at the moment. We are working on some possibilities there. But we do -- we worked once with railways on fiber optic -- on the fiber optic side.

Okay.

Okay, not in electrical, but on the fiber optic side.

But we plan to foray into electrical as well?

We are looking at it. We are seeing what is possible. The ebeam plant when it goes live, it will have capability to make cables for railways, which are cured with ebeams. So at that time, we will get into instrumentation cable, which is specialized towards the railways.

We have next question from the line of Abhineet Anand from SBICAP Securities.

First of all, just wanted to know for the new products, at 9 months, what is the breakout, sir, in terms of enhanced features and others?

For individual?

Yes, sir.

I will share it with you except I don't have them right away. I don't have the sheet with me -- in front of me.

Okay. Secondly, we have had -- apart from in the optical fiber, the commentary is that we have had issues with telecom not [spending] and also some of the pricing impact of China, right? So I just wanted to know, the latest issues going around China, is it going to have some -- another round of negative impact or something?

We -- at this moment, as far as optic fiber is concerned, over the last 1.5 years, the large volumes available from China have depressed the fiber prices globally. Now with plants having been closed there for 1.5 months to 2, we are not really sure what that will do to the fiber prices. However, that is not impacting us because we have -- we draw our own fiber for the most part. And we -- what we need, we buy from our joint venture who gets the glasses from the U.S. So that should not impact us immediately. There are some intermediary items like tapes and stuff which were being imported, which are also available in India. Due to pricing, those are being imported from China earlier on. The availability of those items in the short run may be an issue. But then there are manufacturers in India who can provide those material. So in terms of making products available, I don't think there should be a major issue. Costs might be a concern there.

And our agreement with Corning, if you can maybe give highlight on that. How -- so what part of production is being done around [indiscernible] [roofing] and then [indiscernible] beyond which we do not? There is some clause, right? If you can explain.

Well, we have a capacity of 2.5 million kilometers. So anything that we require in excess of that number, we can buy it from the joint venture.

And as of now, how much of this 2.5 million is being utilized?

Currently, last 3, 4 months, not much because the industry...

Let's say for the year.

This [indiscernible] have an issue. For the full year, we should not have an issue on that.

So you won't see this hitting anytime soon, right?