Finolex Cables Limited (FINCABLES) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm [ Malika ], the moderator for this conference. Welcome to the conference call of Finolex Cables Limited arranged by Concept Investor Relations to discuss its Q3 and 9-month FY '21 results. We have with us today Mr. Deepak Chhabria, Executive Chairman; and Mr. Mahesh Viswanathan, Chief Financial Officer, Finolex Cables Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand over the floor to Mr. Mahesh Viswanathan. Thank you, and over to you, sir.

Thank you, Malika. Good afternoon, ladies and gentlemen. Welcome to this call from Finolex Cables. Before I start my comments, I would like to make one statement. Mr. Chhabria will not be joining us today. He's unwell. So it's going to be me on the call. So he sends his apologies for not being able to participate in today's call. With that, let me make my opening remarks. Third quarter turned out to be much better than what most people had anticipated across the country and so it was with us. All product lines showed, both volume as well as value growth, compared to the prior comparable quarter of the previous year. Also with the previous quarter, sequentially also, there has been an improvement. At a 9-month level, we are still about 10% behind in terms of revenue. But I think if the momentum carries forward, we should be very close to hitting last year's numbers. On an overall basis, for the quarter, revenue was about INR 830 crores. This is approximately 30% higher than last quarter sequentially and 18% higher than the corresponding quarter of last year. At margin level, we realized about 26%. This is -- when I say margin, gross margin. So this is revenue minus cost of goods sold, which is slightly lower than what was experienced in December quarter 2019. And that was basically due to the pricing actions that we have taken this year. On a 9-month basis, again, gross margins were about 26% compared to 27-plus percent last year. Other income was slightly lower this quarter, primarily on account of the fact that the dividend income, which normally kicks in during this quarter from Finolex Industries, was pre-received in the March '20 quarter itself. Beyond that -- besides that, also the returns on the liquid investments or other investments that we have was lower in the current period owing to reduced interest rates. At an expenditure level, the only item that I wish to talk about is other expenditure. Absolute numbers look to be slightly higher, but then that is also the result of higher production volumes and therefore, consequence in costs on energy and so on. At a profit-before-tax level, we have been steady at about 14%. And profit after tax was about 10% in this quarter, more or less similar to what we saw last quarter. On an absolute number, again, we are -- we're slightly higher in profit numbers as compared to the corresponding period of the previous year. Of course, for the 9 months period, we're still behind. And as I mentioned earlier, part of it is due to the dividend period mismatch and the other part is the under equity towards fixed costs of the first 2 quarters. If I go to the segmental area, then again, all segments have shown a growth. Electrical showed -- electrical cable is about 28% higher than the immediately preceding quarter and 18% higher than corresponding quarter of last year. Communication cables also saw growth, not as high as electrical cables, but then it was a positive number. The most pleasing performance was from the newer product lines, where, right from quarter 1, this year, we have been showing both the volume as well as the value growth. EBIT numbers again, are steady at about 14.25% on electrical cables. And yes, communication cables is -- the EBIT numbers are lower. But that again is the result of lower volumes from the government sector. Practically, nothing much was realized in the first 3 quarters. We have just started seeing some orders coming in from the government. So the result of the government spending should be seen over the forthcoming quarters. With this brief background, I'm open to questions now.

[Operator Instructions] The first question is from the line of Sonali Salgaonkar from Jefferies India.

Sir, my first question is regarding the gross margin of the company. Now we have shown a very good recovery in sales. But on the gross level, I think the gross margins have dropped to 25.2%, which is 160 bps down year-on-year, which has sort of led to the EBITDA margin being lower by 40 bps as well. So this quarter, we had seen a sharp rise in copper prices as well. So indicatively, that should have -- or rather, could have aided our gross margin. So probably an update from your side as to whether this is related to the product mix or anything else.

No. I think I explained this even in the earlier 2 quarters. See, earlier on, we used to run a lot of schemes for the trade. And those schemes were target-based. So at 100% achievement of target, a certain amount of incentives or payout was made. Now, obviously, not everybody hits 100% of their targets. So while we calculated 8% or so, the actual payouts were around 6%, 6.25% somewhere around that. This year, because of the extraordinary situation, we are often not relaying targets, and we have been given the rate often straight away on the invoice. So if you later do the math...

[Technical Difficulty] Ladies and gentlemen, please stay connected until I reconnect the management line. Ladies and gentlemen, we have the management line reconnected to the call. Thank you. And over to you, sir.

Okay. Sorry, there was some glitch. So I'll repeat that part again. The -- I think I had tried to explain this even in the earlier 2 quarters. There is -- the gross margin this year has been lower by about 150 bps compared to earlier periods, primarily because we have changed the way that we handle schemes and turnover discounts and so on. These, in the past, used to be paid off basis, actual performance against the target. This year, because of the extraordinary circumstances, we did not give any targets out to the trade. And the entire amount that was kept in reserve for these schemes have been passed on, on the [ invite ] itself. So if the -- if at 100% achievement, somebody would have gotten 8% incentive in the past and actual performance was that not many people actually met 100% of their target levels. So at the end, the payout from the company was around 6%, 6.25%. Whereas this year, we are giving that 8% off directly on the invoice, so which means that my realizations are lower by about 150, 160 bps. And that's the reason for the lower margin -- gross margins across the board. And this has been a trend, which -- this has been a phenomenon, which has been there right from quarter 1 this year. So you will probably see it in fourth quarter as well.

Understand, sir. Sir, my second question is, could you throw some light on each segment like performance as in -- for example, in electrical cables, which segments have done relatively better? And also in the communication cables, what is the current pricing of optic fibers that we are seeing? And also any upside lift from the work-from-home lifestyle?

Well, wires -- practically, every product within the wire range has shown a positive growth during the quarter, while we are up by about 9% on volume. In terms of -- the only product line where we have fallen short after previous year's volume numbers was power cable, but then we are a very small player in that group. All other product lines, communication, whether you take speaker cables, whether you take LAN cables, CCTV or coaxial cables, every one of them has grown about 25%. Optic fiber in the current quarter, the consumption of fiber was about 23% higher than earlier quarter -- I mean, corresponding quarter of the previous year. So practically, every product line has shown a healthy growth. And as we go into the newer product lines, volume growth have been upward of 30% in each one of them. So whether it is switch gear, switches, fans, water heaters or lighting products, every one of them has a volume growth of 30% plus. Of course, in the case of lighting and fans, there has also been a serious price erosion. The base prices have come down across the board, and that is also reflected here. So all product lines have shown a positive growth. There's nothing which is -- exit, like I said, power cables, everything has shown a positive growth.

Got it. Sir, any comments on the housing part of it as in a residential versus commercial? And are we now operating at pre-COVID levels in the housing level? And also, the auto demand, sir.

I think all -- like I mentioned, the wire segment across the board, there has been a positive growth. Auto has grown. Auto has grown close to 30%, 30-odd percent. So like I mentioned earlier, every product line has grown. Now I am not able to really comment whether within the construction area, it is more of housing or more of commercial areas because like I -- like we sell through a network and it's kind of difficult to get that granular information from the trade.

I understand, sir. Sir, my third question is regarding the distribution. Last quarter, you had mentioned that we are targeting about 1,50,000 retail outlets or retail touch points by March '21. Last quarter, the number of distributors are about 488 and the retail touch points are about 1,10,000. Sir, any update -- updated figure for this quarter end? And do we still stick to a target of 1,50,000 by March '21?

Two things out here. When we have appointed 400 -- we're now close to the target of 500, right? And we have given each one of the potential of 300 retailers to service. Now all -- right from day 1, it is not possible for that distributor to service all 300 of them. It takes multiple visits before he is able to get there. So right now, the potential coverage that we have is approximately 142,000 retailers, of which 65,000 people had been billed by the distributors during the current year. So those were unique billings to 65,000 of them. And when I say -- and these people have been billed regularly. So every month, they've been buying from them. There would have been more people that have been -- that have purchased from them, but we have not counted them because -- unless they keep buying at least a few cycles, we do not add them into the account yet. So when that number starts climbing up from 65,000 towards 100,000 and 150,000, you will see corresponding volume growth for the company also.

Sure, sir. Sir, and what is the ad spend this quarter?

This quarter is about -- I think it's there in the presentation that we put up, one second. About INR 5 crores.

Understand. So there is an increase in the tax rate, absolute tax outgo this quarter. Is there any one-offs regarding that?

No. It will be the 25% to 36%, no? The absolute number has gone up from 26% to 34%. Then your -- the base profit has also grown -- gone up from 92 to 116.

Sir, the percentage after taking into account the deferred tax?

This was -- it's about 26%, if I'm not wrong.

Sir, what is the net cash position of the company as of December?

Also there in the presentation that we put out, it will be there in the balance sheet, INR 1,476 crores. So the item that is mentioned is investment and cash and cash equivalents.

Sure, sir. Sir, last question on the CapEx update, please.

Yes. So that program is on track, that what we talked about in the previous quarter, INR 200 crores. Most of those projects are running. Conduit has now been commissioned and the first -- actually, sale happened yesterday. So the plant is live. We had to -- we had issues in getting the plants commissioned because people were unable to travel from overseas. So we got around that by using Zoom link to commission the equipment and they are now crunched for time. So that was something new that we tried out this time around and it worked. So the plant is now fully functional.

Sure. So INR 200 crores over the next 18 to 24 months?

Yes, out of the INR 200 crores, about INR 35 crores, INR 38 crores has been spent on the conduit plants. The balance, INR 162 crores, will come out on the other projects that we talked about last quarter.

Sure, sir. Sir, just last question, if I may, please. The B2C mix of the company, how much would that be?

B2C, through the channel you're talking about?

Yes, sir.

Okay. We'll still be around 65% to 70%.

The next question is from the line of Manoj Gori from Equirus Securities.

Sir, if we understand, like roughly, you have highlighted like wires would have grown by roughly around 9%. So up, and we have reported somewhere around 18% to 19% growth in the electrical cable segment. So should we assume like the volume growth would be on the similar lines? Or you're witnessing even faster growth, probably November and December would have been faster and the same momentum continues in the coming quarters?

No. Sorry, I didn't follow your question. The volume growth in the quarter ending December for wires was about 9% compared to corresponding quarter of the previous year.

Yes. So what I meant was probably like, correct me if I'm wrong, so volume growth would have picked up during November and December and would have been faster than October as well. So the growth that we have witnessed during November, December, does it still continue and the momentum is favorable for you and other players as well?

As of last month, yes, it did continue. So I normally do not comment over current quarters. But yes, that trend seems to be there.

Right. And sir, also, your price hikes on a blended basis for the quarter would have been 10%. And looking at the current base metal prices, the price hikes taken over the period, maybe until January or February, would have been in the range of 15% to 20%. Is that...

From the beginning of the year?

From October to February '21.

It won't be 20%. It will be slightly lower than that. But now -- last April until now, it will probably be -- LME has gone up from somewhere around $4,900, $5,000 to $8,400 yesterday.

Right.

Yes. But -- And then in the last quarter, the polymer prices have also gone up. So we have, over the period from last April until now is probably around 20%.

That's right. Got it, sir. Sir secondly, on communication cable segment, obviously, this quarter relatively has been better. If you look at over the last 4, 5 quarters, we have reached those levels. So how do we see -- because earlier, maybe for a couple of years, we did somewhere around INR 470 crores, INR 480 crores on an annualized basis, which actually, in FY '20, obviously, there was a lot of pressure on this business. So how do we see, like what's the overall outlook? How did -- like B2G business would pan out or B2B business would pan out in this category?

So within the communications segment, there are multiple products there. So you have products like LAN, you have products like coaxial, speaker cables, telephone cables and so on. Those have been growing, and they're continuing to grow. The biggest item that can cause any amount of change is on the optic fiber side. The time that you talked about when we hit the 400-odd number, optic fiber was about 60% of that business, right? And although that 60%, another 60% is at least within our country, the market has now been dominated. So if there are no spends from the government, then that does not materialize. And also, you would remember that over the last 2 years, the investment in fiber assets by the private telecom players has also not been of high value. They are now targeting to reach homes. And therefore, while there are more cable kilometers to be sold, the fiber content in them is very small. It is maybe one or two fibers. So the value realized for that is not that high as you would when a trunk line is being commissioned. So the impact on the industry is going to be on 2 fronts where the government actually does the spending and the -- when the private telecom players against that -- rebuilding that or increasing their network. So in both the -- if both those things happen, then the volumes pick up substantially.

Right. And sir, what would have been the blended price hikes taken in the communication cable segment?