India’s cable major RR Kabel reported a decline in operating profit (earnings before interest, taxes, depreciation and amortization or EBITDA) in the July-September quarter. Attributing this decline to lower gross margins driven by high volatility in the copper price, Rajesh Jain, chief financial officer, said that as the company operates strongly in the copper sector, fluctuations have affected the business-to-consumer (B2C) segment.

The company has failed to fully pass on the increased costs to customers, Jain said in an interview with CNBC TV-18 on Friday.

Historically, the company has been able to adjust prices with a slight lag, and Jain is confident that this setback is temporary, expecting a return to normal levels of profitability in the coming quarters.

RR Kabel’s market capitalization stands at around £17,566m, with shares gaining nearly 14% over the past year.

Below is the verbatim transcript of the interview

Q: Your gross margin fell from 20% to 16% and your EBITDA margin fell from 7.5% to 4.7% and that’s a sharp decline. Is it due to commodity price issues? What is the reason and what makes you confident that this will turn around and improve in the second half?

A: Any decline we’ve seen in EBITDA is directly related to the reduction in gross margin. In the last quarter, we’ve seen a high impact of copper volatility because we’re more in the copper business, we’ve had a bigger impact, which directly affects our B2C line, where we can’t pass on the full impact of the high volatility. .

Historically, we have always been able to pass on this price with some lag impacts. So we’re confident that this was a one-off quarter where we couldn’t pass on the full impact, but going forward it will return to normal. So we’re pretty confident that, again, we’ll be within the normal range of what we’ve been doing in previous years.

Q: So that takes a little bit more understanding because one would typically imagine that for the wire and cable company, the commodity prices, most of it would have to be a pass. But what is the reason you can’t pass it on? Is there a lot of competition in the market? You don’t want to take price increases right now and back to the main question — what makes you confident that it’s going to normalize in Q3 and Q4? That is, are price increases planned or do you suspect that the price of the commodity itself is cooling?

A: There are two parts where there is very high volatility, like a spike, and when we tried to raise prices, copper went down and market sentiment was not good, so we couldn’t raise prices immediately.

Read also: Why this expert considers copper a strategic investment for your portfolio

Now, as copper prices are again in a very limited range, and as per our usual practice, whenever there is a 3% downward or upward correction, we will continue to change our price in relation to what we have been doing early and again is very normal. , however, in this quarter, the full price increase could not be passed on, but in a normal way, we will be able to move on and that’s why we think that in Q3-Q4 we will be on normal trading. .

Q: You’ve been aggressive on volume, it seems, and it’s come at the cost of margins. But still, if you compare it to your peers, the volume growth is not as much and the margin contraction is more. So let’s get some numbers out of the way. Earlier, when you joined us, you said that you were all targeting close to 20% volume growth for the year. What is the revised number? Can you do this for the year? Point number one. Point number two is, on the margin, you were saying you can improve by 100-150 basis points this year. Is that still the margin number we should be working with?

A: When we talk about the second half of the year (H2), historically for this industry, H2 is better compared to S1 in terms of volume growth; most of the growth comes only in the second semester and when we talk about volume growth, earlier we were expecting 20% ​​volume growth but now since our semester was not that big, now we are expecting to be in the line of growth. of 15% volume growth and margins as well since S1 came out on track and it wasn’t what we expected and it’s down almost 3%. So now we expect that at a normal level we’ll be in the EBIT margin, specifically in wire and cable, in the 8-8.5% range, which is our normal expectation in the margin.

Q: Fast moving electrical goods (FMEG) business, there has been some growth. You clocked close to ₹482 odd crores. I remember having this conversation earlier when you said that at ₹1,000-1,100 crore you could probably break even. So you can do it ₹1,000-1,100 crore this fiscal year (FY25) and would that mean the FMEG business is breaking even?

A: Annually, of course, there will be some losses, but when we see on a quarterly (QoQ) basis, maybe by Q1 of next year (FY26) we will be EBITDA positive in the FMEG sector. Compared to peers, our growth in FMEG has been the best and even margin improvement has been the best in the industry in terms of almost 25% growth in topline and 400-500 bps margin improvement in FMEG. So in that way we are on the right track in our FMEG business.

Read also: RR Kabel Q2 results: Profit down 33%, revenue up 12.5%

Q: Give us guidance on the overall top line for FY25 and how you are likely to close the year.

A: Almost 12% of revenue in the first half of the year and we expect it to be in the range of 15-18% in Q2 as well. So overall we expect 15-18% top line growth.

Q: Your export business is close to 24% of your total mix. There are signs that the globe is slowing down. Is there a risk to this export number or do you think business will be fine? Also, when you’re growing at 15-18%, what should your mix between domestic and export business look like?

A: Export has been greatly affected due to the shipping crisis, and most of our exports are to Europe, there have been delays in deliveries, so we have not been able to time or execute some of the orders on time. but now we believe that our export growth may be slightly lower or on par with last year, but the domestic market is expected to increase by 15% in the second half of this year.

For the full interview, watch the accompanying video

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