Finolex Cables : Q4 FY 23 Analyst Conference Call Transcript – May 27, 2023

"Finolex Cables Limited

Q4 FY '23 Analyst Conference Call"

May 27, 2023

MANAGEMENT: MR. DEEPAK K. CHHABRIA - EXECUTIVE CHAIRMAN - FINOLEX CABLES LIMITED

MR. MAHESH VISWANATHAN - CHIEF FINANCIAL OFFICER - FINOLEX CABLES LIMITED

MODERATOR: MS. MAMTA SAMAT - PERFECT RELATIONS

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Finolex Cables Limited

May 27, 2023

Moderator:Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Analyst Conference Call of Finolex Cables Limited. 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 a touchstone phone. 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.

Mamta Samat: Thank you, Lizann. 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.

Mahesh Viswanathan: 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 INR1,224 crores, in comparison, corresponding quarter of the previous year was INR1,168 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 INR4,481 crores, as against INR3,768 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 fibre cable product line reported a growth of more than 50%. So we grew double there.

The third segment, which is others, which is a combination of all the appliances there the growth was muted during the year. We had expected much more, but while 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 these 2, I think, kind of impacted the revenues there. We were expecting to cross the total -- combined total of about INR200 crores there. We came very close to it about INR195 crores. We still maintain our target that in the next 2 years to 3 years, we should hit a INR500 crores turnover there. We are almost halfway there. So it should not be too difficult to reach that target.

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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 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 INR173 crores compared to INR126 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 INR646 crores before taxes, as against INR526 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.
Moderator:	Thank you. The first question is from the line of Rahul Agarwal from InCred Capital.
Rahul Agarwal:	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?
Mahesh Viswanathan:	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
	INR300 crores over the next 18 months to 20 months in setting up the plant here in Pune. Do
	you want to add anything there?
Deepak Chhabria:	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 fibre drawing tower and the cabling side all getting expanded to
	take us to a capacity of about 8 million fibre kilometer per year.
Mahesh Viswanathan:	So margin, 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.
Rahul Agarwal:	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?

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	Finolex Cables Limited
	May 27, 2023
Mahesh Viswanathan:	No, we are coming off a low base. So to that extent, I think we've had a benefit. But I think
	double-digit growth is not ruled out.
Rahul Agarwal:	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?
Mahesh Viswanathan:	I think the EBITDA number -- see, 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.
Rahul Agarwal:	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 INR300
	crores over the next 2 years. Over and above that, you have the EBM thing, 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?
Mahesh Viswanathan:	Okay. Fiscal '24, I think we would be spending around INR250 crores, and fiscal '25 would be
	maybe another INR75 crores to INR100 crores. This would be on top of the normal standard
	replacement capex of about INR25 crores.
Moderator:	The next question is from the line of Sonali Salgaonkar from Jefferies.
Sonali Salgaonkar:	Sir, my first question is, could you quantify, 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?
Mahesh Viswanathan:	Both the actions were taken in May. I think, we have dropped prices by overall.
Deepak Chhabria:	2% each time.
Mahesh Viswanathan:	Yes, about 2% each time. So 4% is what we have dropped prices. Yes.
Sonali Salgaonkar:	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?
Mahesh Viswanathan:	For the fourth quarter?
Sonali Salgaonkar:	Sir, for the fourth quarter, the full year.
Mahesh Viswanathan:	Okay. So for the fourth quarter, broad numbers were electrical cables, our revenues were
	INR1,032 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
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talking about. Here, you need to remember that March quarter of 2022, copper was running at about $10,500 a ton. March quarter of '23, copper has been running at on an average about $8,300, $8,400 per ton. 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%.

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

Mahesh Viswanathan: 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.

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

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

Sonali Salgaonkar: 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?

Mahesh Viswanathan: 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 shorter. 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.

Sonali Salgaonkar: Sir, and also capex of INR300 crores capex for the optic fibre that you just mentioned, what could be the revenue potential and from which year can we start the revenue to accrue?

Mahesh Viswanathan: I think the second half of '25, '26 is when we are expecting the project to generate revenues. Now 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 will also open up potential for us to sell fibre 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.

Sonali Salgaonkar: Understood. And just -- sorry, just a last clarification. You mentioned in Q4, your

communication cables overall has grown by 25% volumes, right?

Mahesh Viswanathan: That's correct. So that, that includes LAN, that includes the other products there, as well as optic fibre.

Moderator:

The next question is from the line of Reshabh Sisodia from Sameeksha Capital.

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