Finolex Cables Limited (FINCABLES) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Analyst Conference Call of Finolex Cables Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Mamta Samat from Perfect Relations. Thank you, and over to you, ma'am.

Thank you, Lessard. Good evening, everyone, and thank you for joining us on Finolex Cables Limited Q4 FY '23 Analyst Conference Call. Today, we have with us the senior management represented by Mr. Deepak K. Chhabria, Executive Chairman; and Mr. Mahesh Viswanathan, Chief Financial Officer. Before we begin, I would like to say that some of the statements that will be made in today's discussion may be forward-looking in nature. We will begin the call with the opening remarks from the management, after which we will have the forum open for the interactive Q&A session. I will now request the management for the opening remarks. Thank you, and over to you, sir.

Good evening, and thank you all for joining us on this call today. I will start with some brief remarks to explain what we have achieved during the quarter as well as the full year '22, '23, and then we'll open it up for questions. So revenue for the quarter was INR 1,224 crores, in comparison, corresponding quarter of the previous year was INR 1,168 crores, so about 3% up. On a sequential basis, we were up by about 6%. This is on the value side. But on volume terms, electrical wires volume increased by about 7% compared to quarter 4 of the last year, and the communication cables growth was much larger. On an average, all product lines reported a growth of about 25% in volume terms. For the full year, our turnover was INR 4,481 crores, as against INR 3,768 crores in the previous year, an improvement of about 19%. And here, the volume growth in electrical wires was 16%, and in the communication cables segment, all product lines reported, like I said earlier, a growth of more than 25% in volumes, while the optic fiber cable product line reported a growth of more than 50%. So we grew double there. The third segment, which is the Others, which is a combination of all the appliances there the growth was muted during the year. We had expected much more, but while inflation -- headline inflation has come down, I think discretionary spends are still very sluggish. Sentiments are still not at the levels that we would expect them to be. And added to that was also the channel clearing stocks of fans when the changeover happened from the previous energy efficiency norms to the current ones. So that -- these 2, I think, kind of impacted the revenues there. We were expecting to cross the total -- combined total of about INR 200 crores there. We close -- came very close to it about INR 195 crores. We still maintain our target that in the next 2 years to 3 years, we should hit a INR 500 crore turnover there. We are almost halfway there. So it should not be too difficult to reach that target. On profitability, margins stabilized. While in the first 3 quarters, there was a certain amount of volatility on commodity prices, which led us to take pricing actions at different points of time during the year. The margins in the fourth quarter were more or less stable. So on a comparable basis, margins were higher by about 2 percentage points. And for the full year, gross margins were at about 21%, again, comparable to the previous year. But as we speak now, the volatility on commodity prices is showing up once more, commodity prices have softened. And in the last 2 months, we have taken 2 pricing actions to reduce the prices, keeping it -- keeping them in line with current LME trends. So going forward, as long as the volatility remains, you might see from quarter-to-quarter some changes in the margin profile. But as we have always been stating, our aim is to ensure that raw material costs are seen as a pass-through with probably a small lag in catching up on the margin side. That said, the profit for the year -- for the quarter before taxes was INR 173 crores compared to INR 126 crores in the previous year. The improvement is primarily volume-led growth for the -- in all the major segments as well as the pricing actions that we have taken. And for the full year, profit was INR 646 crores before taxes, as against INR 526 crores in the previous year. All these are standalone results that I'm talking about. Okay. So with this brief background, I will now open it up for questions. I'm sure you must have seen our numbers posted on the BSE website, you must have also seen the presentation we have posted again on the BSE website. So we are open to questions now.

[Operator Instructions] The first question is from the line of Rahul Agarwal from Incred Capital.

A few questions from my side. Firstly, need some help of yours on how to look at communication cable segment going into fiscal '24, both on top line and margins, what should we expect, what kind of growth and what kind of margins here?

So we do see growth potential there. Business seems to be coming back online. And with more applications going towards 5G, I think the field opens up. We are fairly confident of the sector, which is why we have announced our CapEx program recently on the communication sector side, where we are going to put up a preform making facility. We will be spending approximately INR 300 crores over the next 18 months to 20 months in setting up the plant here in Pune. Do you want to add anything there?

No. We are also adding capacity on the cable side along with the preform as well as on the tower side. So we'll have preform, the fiber drawing tower and the cabling side all getting expanded to take us to a capacity of about 8 million fiber kilometer per year.

So margin, I think -- around margins, I think if you've seen the numbers, they have reversed positively. And I think over the next few quarters, we should get back to the usual 9% to 10% that we used to see in the past.

Sir, on the top line growth, just to clarify, obviously, this capacity you spoke about will come after 18 months, so what should we expect in fiscal '24? The order book like supports what the growth we saw in fiscal '23 because that was a very high number, right?

No, we are coming off a low base. So to that extent, I think it is -- we've had a benefit. But I think double-digit growth is not ruled out.

Okay. I get it. And on the company level margins, obviously, gross margins have come up almost like 4%, 5% versus pre-COVID averages for the company and some previous quarters, you've explained why, there is some new channel discounts, which have come in. But any sustainable range would you like to guide us for over the next 2 years to 3 years? I'm not asking about short term, but where should the company settle down? Or is it a new reset at this number?

I think the EBITDA number -- see, there were -- because of changes in the reporting norms or before -- because our adoption of Ind AS standards, some of the lines got moved from an expense line to reduction from the sales line. So that impacted the percentages that were showing up. I think 13%, 14% at a company level should be something that is sustainable.

Got it, sir. And CapEx, just to clarify, obviously, you mentioned there's a cabling addition, there is a drawer -- drawing tower addition and there's a preform addition. This will need INR 300 crores over the next 2 years. Over and above that, you have the EBM thing, which is -- which I think is going on for quite a long time now, and you have some other CapEx. So if you could just give me like a bit of clarification here, fiscal '24, how much do you spend and where and '25, how much do you spend and where?

Okay. Fiscal '24, I think we would be spending around INR 250 crores, and fiscal '25 would be maybe another INR 75 crores to INR 100 crores. This would be on top of the normal standard replacement CapEx of [ about ] INR 25 crores.

The next question is from the line of Sonali Salgaonkar from Jefferies.

Sir, my first question is, could you quantify, what is the -- what are the 2 pricing actions that you have taken over the past 2 months that you mentioned for keeping in tandem with the softening commodity prices?

Both the actions were taken in May. I think, we have dropped prices by overall.

2% each time.

Yes, about 2% each time. So 4% is what we have dropped prices. Yes.

Understand. Sir, my second question is you mentioned electrical wires 16% volume growth for the entire year. Could you help us give the segmental breakup of both electrical cables and wires of yours as well as communication cables in terms of end user segment?

For the fourth quarter?

Sir, for the fourth quarter, the full year.

Okay. So for the fourth quarter, broad numbers were electrical cables, our revenues were INR 1,032 crores, which is about 9% higher than the immediately preceding quarter and more or less flat when you compare it with corresponding quarter of last year, but this is value that you're talking about. Here, you need to remember that March quarter of 2022, copper was running at about $10,500 a tonne. March quarter of '23, copper has been running at on an average about $8,300, $8,400 per tonne. So that's a big difference, which is why the volume growth is not visible in this number. Like I mentioned, volume growth in electrical wires in quarter 4 was 7%.

Understand. Sir end user segmental split, if you could give for both electrical and communication?

I think we did very well in auto cables. We did fairly well in wires. We also did very well in flexible cables, all 3 sectors.

Sir and construction is about 60% of electrical cables, is that correct?

Construction wire would be at close to 60% of electrical wires. Yes.

Understand. Sir, thirdly, on the industry scenario right now, you did mentioned that consumer discretionary is looking a bit weaker, which as you know could be -- could lead to softer traction in your appliances. Sir, what about electrical and communication cables, as in how are you seeing the industry demand the channel inventory and also the order book?

Well, at the moment, channel inventory will be impacted by any softening in commodity prices. So if they see prices softening that the indication is that it is going to soften further. There may be a slight pullback in demand. That is possible now, which is why I said, volatility will impact the numbers [ short term ]. But I think if you look at activity around real estate, activity around construction, there is visible proof that there is quite a bit of improvement in the activity levels. And as you know, our product comes towards the tail end of a project getting finished. So barring any unforeseen circumstances, I would still think that demand for wire in the medium and long term would be fairly good, leading to definitely double-digit growth numbers.

Sir, and also CapEx of INR 300 crore CapEx for the optic fiber that you just mentioned, what could be the revenue potential and from which year can we start the revenue to accrue?

I think the second half of '25, '26 is when we are expecting the project to generate revenues. Now this plant -- the preform plant, when it is set up, the initial customer will be ourselves. So instead of importing preforms from abroad, then we will get to use our own material, so which means margin accretion, and also the ability to compete deeper in certain projects if need be. It is -- it will also open up potential for us to sell fiber in the market, which currently is -- it is -- we do sell some, but it is not large quantities, but that will also open up. So these 2 opportunities will definitely present themselves at that point of time.

Understood. And just -- sorry, just a last clarification. You mentioned in Q4, your communication cables overall has grown by 25% volumes, right?

That's correct. So that, that includes LAN, that includes the other products there as well as [ other companies ].

The next question is from the line of Reshab Sisodiya from Sameeksha Capital.

Am I audible?

Yes. Very clear.

Sir, first question is on the working capital. So if I look at, there is obviously been a significant improvement over the last 2 years and also significantly comparatively low given the past 5 years. So how do you see that going ahead? What are the steps that we have taken to keep our conversion at this low level right now?

Okay. We've been focusing on maintaining a strict vigil over inventory, also trying to see the cycles to the extent possible the cycles are kept close together. We are working on solutions around channel finance. But then our basic philosophy there has always been channel finance without any risk to the company. So it is any program that we work on is without any recourse to the company. And we are also working on a project, wherein we are aiming to improve the supply chain from end to end, which will bring about reductions in inventory at all levels, where -- from raw material stage all the way to finished goods, while at the same time, improving delivery and service to the customer. So we are working with a very well-known consultant. We are trying to automate most of those processes and bring in some amount of AI and tech there, which will hopefully help us achieve those objectives. The project has just started, but we expect that to give results over a 12 month to 18 month period.

That is helpful. So what will be our institutional and retail mix from a overall revenue perspective?

Sorry, I didn't get you. Your voice is...

Yes. On the overall revenue perspective, what would be our institutional mix.

Institution mix...

Institutional mix, you mean, government versus channel? Or how do you want it?

Yes sir. Yes, the government versus channel?

Okay. Bulk of our sale -- revenue comes from products, which are distributed through our channel. So about 70%, 75% of the revenue comes from channel and the rest is a mix of both B2G as well as B2B. So if you look at communication, especially OFC, it is largely B2B [indiscernible] largely B2B and B2G. If you look at auto cables, it is 90% B2G -- B2B. But all the other product lines would be substantially B2C.

Sir, one last question from my end. So sir, given that our CapEx, if I'm not wrong, I heard, it could be commercializing by the second half of FY '25. Is that correct?

Yes. That's right.

Yes. So till then, do we have sufficient capacity to [ fulfill ] our, let's say, double-digit growth target for FY '24?

Yes. We do. We do.

The next question is from the line of [ Shivam Mittal from Purnartha Investment Advisers Private Limited ].

Am I audible?

Yes, you are. Go ahead, please.

Sir, what is the current capacity utilization?

What is the current capacity utilization?

Yes.

I think slightly under [ 2/3 ] at this point in time.

And how do we see like new CapEx will ramp up [indiscernible] by FY '24, '25?

I'm sorry, I didn't get your question. How...

Sorry to interrupt, [ Mr. Mittal ], can you use the handset mode, while speaking and not the speaker phone.

Yes. Sure.

Thank you, sir.

So I want to know how is the capacity ramp-up you know, like, once the CapEx started production.

How is the capacity ramp-up once...

See, the capacity utilization is different for different product lines. So Mahesh told you about an average for the entire company's number, but let's say, for house wiring, the capacity utilization is different, the fiber optic is different, in LAN cable, it's at 100%, in auto cable, it's at 100% at the moment. So it's different for each product line. And our internal growth or machinery ordering expansions are happening separately for each of these product lines. But generally, the company likes to have a capacity utilization above 70%. And at that moment of time, we ordered the expansion equipment because it normally takes a year for the machines to come, so that you are normally at 80%, 85% before the new machines get installed. It's very rare you are at 100%. It's 80%, 85% average capacity utilization is very good for the company.

Sir, I just want to know like we have a target of INR 11,000 crores...

Sorry to interrupt, [ Mr. Mittal ], we are not able to hear you clearly. Your audio is not clear.

So am I audible?

Sir, can you use the handset mode and not the speaker phone?

Yes. It's better now.

Sir, yes, please proceed.

So we have a target of like INR 11,000 crore revenue by [ FY '28 ]. So how do we see like that is achievable like double-digit growth of 20%, [ '24 to '28 ].

[indiscernible]. Yes. That is in each year, '28, I think. So it's 5 years from now.

Yes. So I think where we are today is about -- is almost close to INR 5,000 crores, INR 4,800 is what we've done. So getting to INR 11,000 crores in 5 years at 12%, 15% growth on an annum is, I don't think, a major issue at this point in time. And where we sit today, we don't see that to be a major issue.

Yes. It's around [ INR 4,800 crore ] like INR 11,000 crores, so 18% kind of top line growth. It is achievable. That's correct.

It is achievable. And we are adding new product lines. So what we're talking about is only the existing product line. So as we add more product lines, as we spend money on increasing capacity, as we spend money on any acquisitions that we are talking about, so this INR 11,000 crores is not a very difficult figure to achieve.

And how do we expect FMEG like other segment [indiscernible] because we are doing CapEx of -- so we have target of like INR 200 crore revenue to INR 2,500 crore from [ FY '23 ] to FY '28?

We couldn't hear your question clearly. Your voice is not very clear. We are not able to hear the full sentences clearly.

So sir, is that audible?

Your voice is audible, but it is not clear. Can you please repeat your question.

Is it better now?

This is better, I think.

Okay, sir. So the question was regarding the 2 subsegments over here, one is the FMEG segment, which currently is around INR 200 crores of revenue, and if you see the mix, we are targeting a mix to reach it to 25% by in the next 5 years to around INR 2,500 crores. Now traditionally, this segment is a low-margin segment compared to the -- our core electrical wire segment. So how do we see a 18% to 19% top line CAGR translating to a similar in the bottom line or up to the EBITDA level?

So see, we had, I think mentioned once before on this topic that we have several product lines in this INR 200 crores, which is lighting, which is fan, which is water heaters, which is...

Switches.

Switches.

Switch gear.

Switch gear, and then lately, we've even added irons.

And these are largely outsourced, right?

These are all get -- not all are getting outsourced. Some switches are made in-house, the MCBs are made in-house. The other products are outsourced. Now as we go along and build each product line, and once each product line crosses INR 100 crores of revenue, then it becomes viable to set up a plant and then try to grow the business. When you have your own plant, you are able to service the market better. Here, you're depending at the moment on many suppliers and the deliveries are not timely. But when you manufacture own product, you are going to be able to service the market better, and plus, you'll develop newer products on your own, and you will get value addition in the company and hence, even higher profitability what you asked about. So in the 5 years, we do expect this would happen and multiple plants would come up for these product lines. And that's why we have been trying to seed the market and get the brand acceptable in these new product lines because earlier we were known only as a wire and cable company, we are trying to change that. And we do hope that we will be able to achieve that in the 5-year period.

Okay, sir. And one last question regarding the gross block. So currently, we are at -- if I look at 1-year [ product ] revenues to gross block, which has a broad operating metric, currently, we are at a peak level. And the capacity addition, which is coming is largely into backward integration. So this 18% to 19% CAGR, is it -- how is it achievable for next say, '24, '25 on the top line revenue level? Because from a peak of gross GB -- revenue to GB, is there a certain potential to improve the capacity from say, currently 66%, 67% to 80%? Or will be requiring some [indiscernible] additional also?

No. There -- we constantly evaluate for each product line, where we need capacity and incremental capacity keeps on getting ordered. So for example, in automobile, we have reached 100% and a new order of equipment has gone out. It will come and get installed and it keeps coming in smaller parts. If you look at LAN cable, for last 2 years, 3 years, we've been adding capacity about 20% to 25% every year, and so this year is getting added. And we are close to 100% each time of capacity utilization, and we go on ordering equipment. So house wiring same thing, capacity is available, in fact, in that -- in this particular case. So we don't foresee capacity to be in the way of achieving the next year's target of double digit. There is capacity available in many product lines for growth.

Still it's double digit, not 18% to 19% top line growth because I was trying to [ compare it ] through the longer-term guide -- target to the short-term number.

Double digit can be from [ 10 all the way to 99 ]. So yes, we are not giving exact numbers out here. But the trend is definitely that number is something that is not very difficult to achieve is what we're trying to say.

The next question is from the line of Nirav Vasa from Anand Rathi.

Sir, I have a question, which is pertaining to your copper rods business, sir, where the revenue was actually, I can say, nearly doubled in FY '23 and even if I look at historically, that business has not contributed much in terms of margins. So as I understand that we are -- we intend to reinvent our business and target really high aspirations. Do you think this business would be a part of your portfolio? And how can I look at it from near and medium term?

See, copper casting will be part of our business for sure because it allows us to control quality of material that goes into our wires. So it will definitely be a part of our business. Having said that, we -- our plant at Goa has been underutilized for the past few years. So whenever an opportunity presents itself and there is opening for better utilization, we do that. So now with GST having come in and [ set ] and the entire process having settled in, we do think that there is scope for improving the utilization there. And at the same time, while the utilization improves, your fixed cost per tonne obviously will drop, and that gives us some scope to sell certain volumes in the market as well, and then we become competitive as compared to earlier. So that's what we are trying out. So it may not be something that will help us reach that INR 11,000 crores. But whenever we do see an opportunity to increase the volumes there, we will do so.

Sir, revenue in this business -- this vertical had shown -- have shown sharp increase in FY '23. Any color that you can give for '24?

One second. So it's -- that is basically -- if you look at the revenue number and also look at the intersegment revenue consumption, so it is mostly for home consumption.

Get your point, sir. Sir, my other question is -- get your point. Sir, now I wanted to understand what is the EBIT margin differential that we are earning by selling our cables and wires to institutional customers, whether it's government or non-government that versus channel partners. And how can the margin trajectory expansion can happen, as we intend to expand the base of channel partners going forward?

Okay. Our wires are largely sold through the channel. There is very minimal sales to institutional customers there. Yes, we do sell to large contractors or to large construction companies, builders, which would be at a discount when compared to what is there in the market. That is for sure. But the difference may not be more a very substantial difference there. So government exposure are very bare prices kind of sale may not be very much there. Where do we have exposure to institutional sales is primarily on communication cables because the customers are institutional, so you have the likes of Bharti, you've got the likes of Jio, you've got the likes of Tata's and so on. So those would be tender driven. Those would be reverse auction driven, where the pricing is going to be fine, but that will guarantee steady and consistent volumes and large volumes. So it is -- that's the way that business model works. Automobile cables is again largely institutional, very fine pricing, but you get access to volumes, and you also get access to technology. So that is something that we will continue to do so. So that [indiscernible] questions.

Partially. Sir, as we are targeting around INR 11,000 crores of -- let me reframe it, as we are targeting INR 11,000 crores of revenue in the next 5 years, what contribution are you seeing of the revenue to come from channel driven business for this [ industrial ]? Maybe in next 4 years, 5 years, as we are working with a consultant, do we have plan to gradually start increasing our revenue from channel-based make systematic efforts towards that? And how can the margin expansion along with net working capital reduction can happen, as we -- if we do that?

Today, our channel-driven business is approximately 80% of total revenue. So if I talk wire, then that 65% of the business, then some parts of communication also is channel-driven, and so is the new products. So those are all channel-driven. So unless, we say, we completely exit the non-channel driven business, I think the channel-driven business would be around the 75%, 80% mark going forward as well. I don't see it going to 100%. That would mean that we exit certain businesses, which is not in the plan. Having said that, as we expand capacity, as we utilize more of our existing capacity, our ability and as we go backward into integrating some of the raw material that goes into our products, our margin expansion, some of it would come from there because we would have access to -- we would not have to depend on other sources. We would be making it ourselves, and we would bring those value addition into the company.

Sir, my final question is pertaining to other income. Sir, in FY '23, that number was close to INR 118 crore versus INR 71.4 crore in FY '22. Did it include any one-offs or it was purely treasure income?

Sorry, just one second there. FY '23 was INR 198 crores versus INR 151 crores of the previous year, correct?

Sir, I'm referring to other income of around INR 117 crores?

In which schedule do you get it from?

Sir, one minute, I think [ it's the ] other income -- other income, which is given in the after revenue from operations?

Yes. So that is what I'm saying, that's INR 198 crores, right?

Yes, sorry, [indiscernible], it's INR 198 crores. Yes.

Okay. So INR 198 crores and INR 151 crores. So out of this INR 198 crores, approximately INR 80-odd crores was dividend from our associate company, Finolex Industries, which in the previous year was slightly lower. What will come in '24, '25 and future years will depend on how they issue dividends out. The rest of the INR 198 crores, so -- about INR 100 crores was from treasury income. It was interest on deposits. It was -- we do hold, if you see we've got approximately INR 2,300 crores of money sitting in liquid funds, so which we use for day-to-day cash operations, as and when money is required. So there have been -- as we buy or sell, there have been profits that have been booked on that as well. So that's the income that you see there.

The next question is from the line of Abhishek Ghosh from DSP.

Sir, few questions. In the presentation, you have mentioned that the auto cables and the industrial application cable has seen good improvement. If you can just help us the contribution of volume from these 2 segments?

I think auto cables, we were close to INR 400 crores this year, and the flexibles was about INR 300-odd crores.

Sir, flexibles typically would go into which user industry just...

It will go into panels, it will go into internal wiring of equipment, it will go into connecting wires.

Got it. And sir, just in terms of the communication cable, you've done about close to INR 570 crores, INR 580 crores of top line this year and the future capacity of about INR 300 crores of CapEx that you're incurring will come in about the next 2 years. So with all of this, how should one look at the peak revenues that you can do in the communication cables given the capacity addition that you're doing?

Like I mentioned, one part of the CapEx that we are doing will be towards backward integration and that will result in largely value addition getting created within the company. So that while a certain capacity from that addition would also be available for sale in the external market. At the moment, I think, I'm still not ready to share those numbers in a public forum. I think it is a little too early to share those numbers out.

But sir, is it fair to assume that the current capacity that you have in communication, and I think, you mentioned it largely, but just reconfirming that you can grow at 15% to 20% for the next 2 years even with the current gross block of communication cable, is that the right assumption?

That is true because actions on the cabling side have already been taken and some expanded capacity will become available very soon.

Sir, you also have added certain capacities at -- in last 2 years to 3 years in Urse and other places and also discussion about the [ movement ] of solar cables and cables delivered to EV getting added as a part of portfolio. Any update, any progress around that will be helpful for me?

On the Ebeam?

Sorry?

Yes. You are asking, Ebeam.

Okay.

On the Ebeam project, you are aware we have mentioned earlier that we had ordered some machines from China and with the problem with the Doklam crisis and all that, there was no visas being given to the Chinese nationals to come into India. And hence, that project was kind of stalled without which you couldn't complete the bunker and the building, where these equipment have to be housed. So we waited a lot of time for this resolution between the 2 countries, which hasn't happened. So we've canceled those orders, and we've ordered now equipment on Korean companies, and we expect they will come in 2 phases, which is about 6 months to 7 months from now, the first machine and another 4 months to 5 months, the second machine. So now the work on the building is getting completed, and this project is -- it will go live in this time frame, as the machines come.

So in '25, sometime in end of '25, we should expect this project to get commissioned, sir.