Key insights shared by leading companies during the quarter
In the competitive landscape of business, companies often respond to market demand and competition by adopting various strategies to maintain or regain their market share. When multiple companies within the same sector begin to act similarly, these actions can evolve into industry trends. This phenomenon is driven by the need to stay competitive and meet consumer demands effectively.
In today’s TOPICAL UPDATE, we’re diving back into one of our previous newsletters that followed the Q1 FY25 results for leading wires and cable companies. As we progress, we’ll share insights from the Q2 FY25 results and conference calls these companies have conducted. The industry is currently experiencing strong demand, leading to impressive performances this quarter. During our result analysis of major listed companies, we’ve also identified an emerging trend of focusing on increasing exports within the industry. Let’s explore what these companies’ management teams are saying.
Our top FOUR insights from Q2 FY25
Let’s explore each of the above in detail.
1. Impact of Commodity Price Volatility
During Q2 FY25, the prices of commodities, especially copper, continued to fluctuate. This volatility had an impact on the EBITDA margins of all companies.
Management Commentary:
Anil Rai Gupta (Havells): “A steep volatility in commodity prices impacted cables margin, as we saw absorption of high-cost inventory against the falling raw material and sales prices during May, August – May to August 2024.”
Chirayu Upadhyay (Polycab): “As mentioned in the quarter-on-quarter review, margin compression in wires, because of its sharp commodity uptrend”
Rajesh Jain (RR Kabel): “The reduction in EBITDA and PAT was largely influenced by a contraction in contribution margin driven by heightened volatility in metal prices during the quarter.”
Rajeev Gupta (KEI): “A little bit impact on the EBITDA margin, mainly because of, as we were earlier explaining that, if the copper or aluminium prices get fluctuated, so in 1 particular quarter, it get increased or decreased, which will be adjusted in the another subsequent quarter.”
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2. Competitive Pricing Pressure
In this quarter, companies couldn’t fully pass the increased raw material costs onto consumers. This was because of a delay in taking price hikes due to competitive pressures. Havells’ management explains the industry behaviour clearly.
Management Commentary:
Anil Rai Gupta (Havells): “Usually speaking, if the commodity prices start going down, it’s passed on to the market very quickly because that’s the expectation and the trade starts holding back. But if the prices go up, then there is a general lag in terms of being able to pass on the entire thing because the competition also starts delaying the price increase. So when there is high level of fluctuation, it generally affects the margins in that particular month or quarter.”
Chirayu Upadhyay (Polycab): “As far as the price hikes or passing on is concerned…within wires, while we are the leader, the second and third largest competitors are pretty close as far as their market share is concerned. And all of them have a specific part of the country wherein they have very good stronghold on. So over there, it’s very difficult for us to control the prices. We have to be in alignment with what the industry is following. In the last part of the quarter, specifically in September when the prices went up by almost 10% to 12%, the distributors, obviously, they wanted to cash in on this benefit because they wouldn’t want to wait until October when the price pass-on would happen… so, everybody wanted to optimize on their volume growth, and that is where everybody tried to gain on as much market share as possible. Since we wanted to protect our market share, we also did as much of sales as possible, and that is where the margin compression has happened.”
Rajesh Jain (RR Kabel): “As per my understanding, the impact on pricing was with all competition also. If you see their margins have also reduced in the similar line what we have done. The thing was that since the fluctuation in copper prices were very high and whatever the approach we have to pass on this price in systematic manner with some lag impact to consumers, this time this cycle could not be completed as there were some delays in implementation of new prices or effect of giving new prices. So, there was a reduction at gross margin level, and I think it is similar with my peers also.”
Amid the pressures of fluctuating commodity prices, a distinct difference in performance was observed between companies that manufacture and sell wires and those that only trade them. This perspective was highlighted by the management of Orient Electric, which primarily focuses on trading wires and cables.
Ravindra Singh Negi (Orient Electric): “When the commodity prices increase, you can push wires in trade. It’s just that we do a lot of trading and hence at a certain point of time, versus somebody who makes in-house, we were at a little disadvantage of how much to buy, at what rate, and at what rate to push.”
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3. Export Opportunities
This quarter, companies experienced a slowdown in exports because of logistical challenges. Despite this, they remain hopeful about future opportunities in the export market.
Management Commentary
Chirayu Upadhyaya (Polycab): “See, demand momentum across different geographies will vary depending on whatever is the scenario in the country at that point of time. But being at the level that we or any other Indian player is, we are as of now quite small as far as the overall export or demand opportunity is concerned. So largely, any weakness or so in a particular geography shouldn’t affect the kind of growth numbers that we should be able to exhibit.”
Rajesh Jain (RR Kabel): “On the export front, while shipping delays may persist for a while, we are actively addressing these challenges. We are in process of getting key product approval in both the European and U.S. markets, which once secured in the near future, will enable us to introduce higher margin products to these regions. Despite short-term hurdles, these efforts are aimed at strengthening our position and drive sustainable growth in the long run.”
Anil Gupta (KEI): “No. I think there is no structural problem in the exports. So yes, it is taking time to pick up. But I don’t see any problem going forward in the growth of exports.”
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4. Heavy CAPEX Continues
All the major players continue to add new capacity to manufacture wires and cables.
Management Commentary
Chirayu Upadhyaya (Polycab): “Our CAPEX for Q2 FY25 stood at Rs. 290 cr, accumulating to Rs. 570 cr for the first half of the year, in-line with our guidance of doing Rs. 1,000 cr to Rs. 1,100 cr of CAPEX during the year.”
Anil Rai Gupta (Havells): “The committed CAPEX from the company in these two — the next coming year is about — already about Rs. 1,900 cr, out of which we believe that about Rs. 1,000 cr will happen in this year. About Rs. 350 cr has already been done in the first half.”
Rajiv Jain (RR Kabel): “Our strategic and initiatives remain firmly on track and we are on course to complete the current CAPEX cycle…In parallel, we are actively working on our next CAPEX cycle for the coming three years and we look forward to updating you as we mark progress on this front.”
Anil Gupta (KEI): “The future outlook of the company during H1 of FY ’24-’25, company has incurred a CAPEX of approximately Rs. 312 cr, out of which Sanand, Rs. 169 cr; Chinchpada in Silvassa, Rs. 48 cr; Bhiwadi, Rs. 25 cr; Pathredi, Rs. 38 cr; and other plants and locations, Rs. 32 cr…Apart from the brownfield CAPEX in FY ’24-’25, company has planned a total CAPEX of Rs. 900 cr to Rs. 1,000 cr on greenfield expansion at Sanand for expansion for LT, HT and EHV cables in Gujarat, commercial production for which will commence by first quarter of FY ’25-’26. We started the construction in FY’23-’24. Further, we will spend another Rs. 600 cr in the next financial year to complete the project to maintain a CAGR of 15% to 16% per annum as against achieved CAGR of 14% to 15% during the last 15 years.”
With its Q2 FY25 result announcement, KEI’s board also approved a QIP of Rs. 2,000 cr. Following was the response of the management when asked about how the company plans to utilize these proceeds.
Rajeev Gupta (KEI): “Further every year we need to spend around Rs. 500 cr to Rs. 700 cr in future so that maintain the growth. Because if we need to maintain a growth of 17% plus we need to have the capacity in place well in advance because it takes almost 2 years before because we started this project last year and it will take two full years to execute or to reach at a level of sale.”
So these were the four crucial insights that we came across while analysing Q2 FY25 results for leading wires and cable companies. See you on Saturday.
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