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Key takeaways from 3QFY24 earnings call

RR Kabel (RRK) management reiterated volume guidance of 20% YoY for FY24 (implies 20% growth in revenue YoY for 4QFY24) as well as for the medium term. Wires and Cables (W&C) segment volume growth was muted at 10% YoY during 3QFY24 primarily due to higher base of 3QFY23/2QFY24 (restocking/strong quarters). In 9MFY24, volume grew 19% YoY, led by Exports (+36% YoY; 27% of revenue) while domestic volume grew 12% YoY. Gross margin contracted 110bps YoY during 3QFY24, though it is expected to improve in 4QFY24 and the medium term. The company continues to augment/expand its capacity to achieve its target of 20% volume growth over the medium term. Fast Moving Electrical Goods (FMEG) segment revenue grew 17% YoY in 2QFY24 (+21% YoY in 9MFY24) on strong growth in fans and lighting (volume growth was partially offset by c.20% price reduction in LED YoY). EBIT losses reduced YoY/QoQ and the company maintained its guidance of break-even in FY25 (at EBITDA level). We have a BUY rating on the stock with Mar’25 TP of INR 1,790 (Link to our 3QFY24 update note).

Wires & Cables:

3Q/9MFY24 volume performance: RRK’s W&C volume grew 10% YoY in 3QFY24, primarily due to higher base of 3QFY23/2QFY24 while it stood at 19% YoY in 9MFY24. The management reiterated its volume guidance of 20% for FY24 and over the next 2-3 years. Generally, wires and cables industry grows at 2x GDP growth, i.e., 13-14% annually, implying continued market share gain for RRK.

Exports: RRK continues to expand its global presence (67 countries now vs. 65 countries QoQ) along with expansion of its product portfolio (higher mix of cables). This has resulted in 36% volume growth in 9MFY24 (+30% YoY). Exports margin profile continues to improve on the back of increasing share of cables in exports (globally, cables has higher margins than wires). The company is targeting to increase share of exports to 30-35% in the next couple of years, from the current 25-27%.

Margins: Copper prices rose by 4-5% during the quarter, which the company passed on to customers with lag of 20-25 days, resulting in negative impact on gross margin (c.70- 80bps QoQ to 19.1%). The management believes that if raw material prices remain stable, margins may return to 2QFY24 levels in 4QFY24 (gross margin in 2QFY24 was 19.9%). Going ahead, the management aims to expand EBITDA margin from 7.2% in 9MFY24 to 10-10.5% in the next couple of years, owing to improvement in product mix in W&C along with increase in capacity utilisation and profitability of the FMEG segment.

Capex: Capacity utilisation during the quarter stood at 65-70%/80-90% for wires/ cables respectively. The company has planned total capex of INR 5bn for FY24-25 (of which, INR 1.5bn was incurred in 9MFY24) to expand its copper wire/cable capacity (25% increase in volume terms), power cables (100% increase in volume terms), E-Beam facility and backward integration (manufacturing of PVC compound in house). This capex will be fully funded from internal accruals and will have asset turns of c.5x, as per the company. RRK plans to add power cable capacity of 1,000tn/month, wherein 500tn/month would be operational from Sep’24 and the remaining from Mar’25. The power cables expansion is expected to enable the company to broaden its product range, enhance delivery times, optimise costs and, thus, improve margins.

The situation in the Red Sea has increased shipment period; however, due to variable copper prices and freight component, it expects minimal impact on profitability.

FMEG

RRK posted revenue growth of 17% YoY in 3QFY24 on the back of strong growth in fans (low base due to liquidation of inventories in 3QFY23 because of BEE transition for fans) and lighting, despite significant 20% price correction in LEF category. Revenue grew 21% YoY in 9MFY24.

FMEG segment PBIT losses reduced from INR347mn/INR 198mn in 3QFY23/2QFY24 to INR 124mn in 3QFY24 on the back of a) improved gross margin, b) operating leverage and c) efficiencies. In 9MFY24 loss reduced to INR 491mn from INR 736mn in 9MFY23. RRK reiterated its guidance of break-even for FMEG segment in FY25 (at EBITDA level).

Others

Working capital days during the quarter was stable at 65 days, as compared to 65days/75 days in Sep’23/ Mar’23 respectively. The management remains committed to maintaining working capital days at this level.

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