POLYCAB INDIA LIMITED (NSE: POLYCAB) Q2 2025 Earnings Call dated Oct. 18, 2024
Corporate Participants:
Gandharv Tongia — Executive Director and Chief Financial Officer
Inder T. Jaisinghani — Chairman and Managing Director
Chirayu Upadhyaya — Head, Investor Relations
Analysts:
Ravi Swaminathan — Analyst
Girish — Analyst
Pulkit Patni — Analyst
Achal Lohade — Analyst
Amit Mahawar — Analyst
Shrinidhi Karlekar — Analyst
Hardik Rawat — Analyst
Natasha Jain — Analyst
Aniruddha Joshi — Analyst
Umang Mehta — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to the Polycab India Limited Q2 FY ’25 Earnings Conference Call. As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Gandharv Tongia, Executive Director and Chief Financial Officer, Polycab India Limited. Thank you, and over to you, sir.
Gandharv Tongia — Executive Director and Chief Financial Officer
Good afternoon everyone, and thank you for joining us. I hope all of you are staying healthy and safe. I’m Gandharv Tongia, Executive Director and CFO at Polycab India Limited. On this call, we shall discuss the Q2 FY ’25 results, which were approved in the Board meeting held yesterday. We will be referring to the earnings presentation, financial results and financial statements, which are available on the stock exchanges as well as on the Investor Relations page of our website.
Joining me today from the management team, we have our Chairman and Managing Director, Mr. Inder Jaisinghani; our Head, Investor Relations, Mr. Chirayu Upadhyaya.
Let me now hand over the call to Inder bhai for his comments.
Inder T. Jaisinghani — Chairman and Managing Director
Good afternoon, everyone. Building on strong market demand, our business achieved remarkable growth. Setting new revenue records for the second quarter and first half of the year. This outstanding performance underscore our expectation, execution, capabilities and the strength of our extensive distribution network. Our ability to adopt and respond swiftly in evolving market dynamics has further enhanced our growth trajectory. As it is a typical demand — typical demand is expected to pick-up in the second half of the year. And we are fully prepared with the right team, capacity and operational expertise to capitalize on the opportunity with INR100 billion of revenue achieved in the first half. We are set to achieve a projected goal of INR200 billion revenue a year ahead of the targeted FY ’26 timeline.
With this, I would request Gandharv to give you the flavor of the macro environments.
Gandharv Tongia — Executive Director and Chief Financial Officer
Thank you, Inder bhai. India continues to shine on the global stage, as evidenced by recent projections from major international organizations. Moody’s ratings have revised India’s GDP outlook upward to 7.2% for the current fiscal year, an increase from its previous estimate of 6.8%, and has also raised its FY ’26 forecast to 6.6% from 6.4%.
Supporting this optimistic outlook, GST collections have shown a healthy run rate of over INR1.8 lakh crore in the current fiscal and has remained above the INR1 lakh crore mark for 31 consecutive months, indicating sustained domestic demand. Additionally, a higher than normal monsoon and an increase in karif sowing suggests improved prospects for rural demand in the coming months, with passive demand expected to further bolster momentum.
The services and manufacturing sector PMI has consistently remained above the threshold of the peak since the last 38 months and 39 months, respectively, indicating an expansionary phase. Although the services PMI slightly slowed in September due to cost pressure and subdued international order, major [Indecipherable] still reported solid job creation and improved business confidence. Further, the recovery in rural demand, coupled with the acceleration of private consumption and a pickup in government expenditure signals continued growth momentum during the remaining part of the year.
The Reserve Bank of India, in its latest MPC Meeting last week, shifted its stance on monetary policy from withdrawal of accommodation to neutral by unanimous vote, the first change since April 2022, and has also retained its FY ’25 inflation projection unchanged at 4.5%. Further, RBI remains positive on the perceived growth outlook, maintaining its GDP projection at 7.2% for FY ’25. Expected interest rate cuts in the second half of the year by RBI, in line with global counterparts is expected to further boost the demand momentum. Overall, a combination of positive growth projections, supported government policies and improving demand dynamics positions India for sustained economic momentum moving forward.
I would now hand over to Chirayu to take you through the financial performance for the quarter gone by.
Chirayu Upadhyaya — Head, Investor Relations
Thank you, Gandharv. I would request everyone to refer to slide four of the earnings presentation. For the quarter ended 30th September 2024, our consolidated revenue grew by 30% year-on-year, driven by strong performance across all the business segments. EBITDA grew by 4% to YoY, with EBITDA margin at 11.5%.
The sequential decline in EBITDA margins of around 90 bps was on account of three reasons. First, decline in FMEG segment margin due to increase in advertising and promotional spend relative to the first quarter. This is in line with industry A&P spend trend, where spends pickup gradually during the year, especially ahead of anticipated festival and seasonal demand. Over and above that, increase in employee expenses, as we added manpower to create separate vertical wise sales teams also negatively impacted the margin.
Secondly, within the retail wires business, we witnessed heightened competitive intensity, as players look to maximize volume growth during the heightened demand witnessed in the later part of the quarter, as copper rallied by 14% cumulatively, leading to margin compression. Third, the high growth in our lower-margin institutional business relative to the channel business, on account of continued commodity price decline in July further impacted margins for the quarter.
On a year-on-year basis, the EBITDA margin decline was because of four reasons. Within the wires and cable segment, lower contribution from the higher margin international business, 6.1% this quarter versus 9.3% in Q2 of FY24, led the bulk of the contraction. As mentioned in the quarter-on-quarter review, margin compression in wires, because of its sharp commodity uptrend, added to the compression.
Higher losses in the FMEG business on account of higher organizational expenses was the third reason. And fourth, higher contribution from the lower margin EPC business also added to the decline. At the PAT level, our company achieved its highest-ever quarterly PAT of INR4,452 million with a PAT margin of 8.1%. Finance cost for the quarter stood at INR453 million, while other income totaled INR762 million.
A detailed breakdown of finance cost and other income is provided on slide 18 of our earnings presentation. Further, our net cash position improved to INR24.3 billion compared to INR16.4 billion in quarter one of FY ’25. In addition, our working capital cycle improved to 44 days, facilitated by the clearance of finished goods inventory buildup in the wires and cables business at the end of the previous quarter and improvement in [Indecipherable] day supported by the increase in acceptances.
Furthermore, our capex for quarter two FY ’25 stood at INR2.9 billion, accumulating to INR5.7 billion for the first half of the year, in line with our guidance of doing INR10 billion to INR11 billion of capex during the year. On a half-yearly basis, I am immensely proud to share with you all that our H1 FY ’25 revenue, EBITDA and PAT are the highest-ever in the history of the company for half-yearly period.
Our revenues grew strongly by 26% year-on-year, surpassing INR100 billion milestone, setting us up to achieve the INR200 billion revenue goal during the current year itself. EBITDA was up by 5% year-on-year and EBITDA margin at 11.9%. And PAT margin grew by 2% year-on-year — sorry, PAT grew by 2% year-on-year with PAT margins at 8.3%.
Moving on to slide number six. The wires cable segment recorded a robust 23% year-on-year growth, with the domestic business registering a remarkable 28% year-on-year growth, supported by mid-teen volume growth. The domestic distribution driven business, while slow in the first couple of months, picked up pace during the end of the quarter.
Institutional business continued its strong growth momentum on the back of robust demand. For the first time in many quarters, wires growth has outpaced cables growth. Our efforts on increasing penetration in emerging markets, as well as expanding the product offerings, are now bearing fruits. Contribution of ranges launched over the past two to three years contributed almost half of the retail wire sales during the year. Geographically, growth in wires was driven by the Western and Southern region, with substantial contributions from the states of Maharashtra, Telangana, Karnataka and Tamil Nadu.
Looking at the broader economic landscape, the demand environment remains robust across the sector. Government spending and infrastructure investments have picked up following the General Assembly elections, providing positive momentum. The government is expected to increase its spending over the remaining months of the fiscal year to meet budget targets, which will serve as a significant tailwind for growth.
Real estate markets also remain on solid footing, driven by low inventory levels, rising prices and healthy project launches. H1 of FY ’25 recorded the highest number of half-yearly new project launches and sales in the last decade. These ongoing projects will continue to drive demand for wires over the next few years, contributing to accelerated industry growth. Further, the expected interest rate cuts over the next few quarters will further boost real estate offtake. The international business registered a 36% quarter-on-quarter increase, resulting into improvement in its contribution to the company’s top line to 6.1% in this quarter compared to 5.3% in the previous quarter.
Order booking in countries, excluding the USA, remains healthy, with significant new demand getting generated across countries and sectors. We expect second half of the year to show improvement in international business days compared to the first half. On the margin front, we discussed the reasons for the decline a while back. It is pertinent to note that in spite of the contraction, the wires and cables business continued to generate margins within the guided EBITDA range of 12% to 14%. Structurally, second half of the year is always margin accretive and we expect a similar trend this year as well.
Moving on to slide eight for an update of the FMEG business. The FMEG business recorded robust growth of 18% year-on-year despite being a traditionally weak quarter. This growth was driven by success of company’s initiatives on channel expansion, product architecture enhancements and implementation of the influencer management program. The fans business registered robust growth year-on-year, albeit on a lower base. Our focus on premiumization within the segment is progressing well with premium fans contribution in high-20s to the overall fan sales during the year.
An initiative in the same direction is driving sales through e-commerce which has seen decent offtake during the year. The switchgears segment continues to register healthy growth, supported by strong real estate demand. The lights and luminaries segment recorded healthy volume growth, driven by the introduction of 60-plus new SKUs, and addition of almost 100 distributors and over 4,000 retailers during the year. However, sales value registered a decline due to ongoing price erosion.
Pricing in bulbs and battens remained almost stagnant during the quarter. However, pricing in [Indecipherable] witnessed 5% to 10% correction during the quarter. Taking a near- to mid-term view, we believe FMEG demand should pick up next year, fueled by robust real estate growth. Margin contraction in the segment is something we discussed in the initial comments.
Moving on to slide number 10. This slide provides an update on our other businesses, which primarily comprises of our strategic EPC business. We achieved revenues of INR5,488 million in quarter two, marking a 241% year-on-year growth. Profitability increased by 263% year-on-year with segmental margin registering a growth of 80 bps quarter-on-quarter to 11.8%.
The robust growth within this business was driven by strong execution of the RDSS order book. Looking ahead, we expect a similar quarterly run rate over the next two years as we execute our RDSS order. The business contribution to the company’s consolidated top line is expected to be in mid- to high single-digit range. The annual sustainable operating margin for this business is expected to remain in high single-digits over the medium to long term. So that was the update for the quarter.
To summarize the key takeaways, we expect the demand momentum to remain strong in wires and cables business, with second half to be better than the first half. Margins too are expected to improve in the second half of the year, to be within the guided range of 12% to 14% at EBITDA level. The company is confident of achieving the INR200 billion of top line goal in the current year itself and are working on its next five-year goals, which we intend to disclose by the end of the current financial year.
Thank you. And we are now open for questions.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Ravi Swaminathan from Avendus Spark. Please go ahead.
Ravi Swaminathan
Hi sir, thanks for taking my question. My questions — many of them are related to the breakup or mix in the cables and wires business. First is, if you can give a breakup of the cable and wires categories, how it is in the first half or this quarter, and how it has changed compared to the earlier quarter or previous quarter in the earlier years. And within the cables segment, you had mentioned three categories. So one is government, private, real estate. Any broad mix as to how this is within the cable space. And within government, if you can give further breakup railways, road, power T&D, airports, even if you include data centers, how it is. So this is my first question, largely related to breakup of the — even ballpark numbers are fine — broad numbers are fine.
Chirayu Upadhyaya
Sure, Ravi, thank you. As far as the cables and wires mixes are concerned, as I mentioned, this quarter, the growth for wires was better compared to cables and the growth was — growth in wires segment was almost 2 times of that in cable segment. But of course, because of the lower base on wires, the percentage improvement in mix is roughly about a percentage point. So that is the general mix of — during the previous quarter, or the Q2 of last year, generally the mix for us versus cables and wires is in the handle of 10 to 30. Of course, it keeps on moving a couple of 100 basis points here and there based on — quarterly basis. So this time around, the gain in wires mix will be about 100 basis points.
As far as the second question is concerned on the demand from various end segments, see the demand is very strong across different sectors and we have presence across irrespective of whatever sector you name, be it railways or roadways, highways, power distribution, manufacturing and so on and so forth. As you’re aware, almost 90% of our sales are generally done through distributors, and they are the ones who generally end up taking the orders from the end customers. So in that sense, we wouldn’t have an exact breakup of what sector is generating what form of demand. But we do know that on a relative basis, for us, manufacturing and real estate are the worst sectors, wherein for us the exposure is higher. Sectors related to energy, transmission, generation, distribution, as well as oil and gas and mining are something wherein the exposure is relatively lower. But irrespective of the exposure, we have sales which are done through — across all the different sectors and we are seeing traction across all of them. Of course, quarter one was something when — wherein the government was a bit slow in terms of ordering newer investments. But I think that has picked up pace in quarter two.
And as I mentioned in the initial comments, we expect the government investments to improve in the second half of the year. Over and above that, private investments are again something that we expect will pick up pace going ahead. We see a lot of stars aligning in that direction. Interest rate cuts have already started happening globally and probably in the second half of the current year we should see that in India as well. As interest rates goes down and borrowing rates for private companies goes up, as well as the consumption improves as the inflation is under control, the private capex should again start improving. And that is again something that should be very well — or help us in good stead, because as I mentioned for us that most of the sales are through distributors. Manufacturing and real estate are something, wherein the end customers, they prefer to buy from distributors. And that is where we have lower competition. Most of our other peers, they are more institutional in nature. So as and when, over the next leg of the infrastructure cycle, when the private investments pick up, it is going to be much more beneficial for Polycab because we have much more exposure over there. So to summarize, I mean we are very, very bullish on the demand environment of wires and cables going forward. And it’s across the different types of sectors, be it government or private-led.
Ravi Swaminathan
Okay. Specifically power T&D, you can bifurcate it both as transmission and distribution. That — then renewables, that is solar and data center, these four subcategories, any sense on the exposure that you would be having from the cables and wires side?
Chirayu Upadhyaya
For the power side, we will have relatively lower exposure on the transmission side because largely the extra-high voltage cables are the ones which are utilized over there. Of course, couple of years down the line when our new facility will be adding value, we will have incremental exposures going ahead. But as of now, the exposure is lower. But we are very well present on the distribution side. As you already know, even we have a lot of orders on the EPC side within the RDSS Group wherein we are supplying a lot of cables for the power distribution services getting set up. So distribution is something wherein we have a very good exposure. Of the other sectors which you mentioned, data centers is again something wherein we have a lot of approvals and we are supplying incremental cables to. But, of course, if you look at the overall cable pie, data centers, while growing at a very fast pace, is a very small part of the overall mix. So maybe five years, 10 years down the line, you can — we can talk a bit more in detail as far as what it is that we expect from that scheme, but as of now, it is a very, very small part of the overall cables pie, and all the other larger pies, they are growing at a very rapid pace.
Ravi Swaminathan
Understood. And distribution, when we say we have a good exposure, it will be like a high single-digit as a percentage of overall revenue. I am just pushing for numbers, so please bear with me. So will that be a sense? And any schemes that are there in the pipeline which can further drive this growth?
Chirayu Upadhyaya
So our exposure as a percentage of our overall cables and wire sales would be in double digits as distribution — energy distribution part is concerned. And of course, the RDSS scheme is something wherein we are very positive on and are applying for. So that is where our exposure, at least for the next two to three years, seems to be quite good.
Ravi Swaminathan
Okay. And next question is with respect to capex next — this year, FY ’25 and ’26, what kind of capex that we are building in? And my last question is, with respect to the optic fiber business that you had talked about in the TV, INR50,000 crores of orders that we are bidding. Is it something completely new, or already we have a certain proportion of our cable and wire business from optic fiber, and if you can give some more clarity as to how much business we are already doing there and how much it can grow into.
Chirayu Upadhyaya
Sure. So on your first question, for the capex for the year, we will do somewhere between INR10 billion to INR12 billion of capex for the year. Most of it will be for the cables and wires business. A similar run rate is something that we will have next year as well, and again, largely more for the cables and wires business. It will be spread across the different types of cables that we have. So the domestic cables, which are generating very good demand, the cables that we export, the special purpose cables as well, and the EHV facility which we are setting up. So the runway for this year, next year, and probably the year after that will be pretty much in the similar range of INR10 billion to INR11 billion each year. As far as the second question is concerned, on the BharatNet project, yes, we’ve applied for tenders in the phase three tenders which were opened in August. We’ve applied for the entire 16 tenders of the different states. While, of course, winning it or not is something that we have to see probably when the results come out, but as of now, we do have optical fiber manufacturing capacity at our plants. Its contribution to the overall top line of the company is, as of now, very low, low single digits. But if we do get some sizable order from the Bharat Net project, over the course of next two to three years that can be a much more meaningful number than how it is right now.
Ravi Swaminathan
Understood. But can we assume a 20% strike rate in terms of these orders getting converted into — I mean, the entire pie getting converted into order book?
Chirayu Upadhyaya
Ravi, very difficult to say. It’s upon the government whom they give out the order to. So we’ll probably have to wait out and see who wins what amount of work.
Ravi Swaminathan
Understood. Yeah, thanks a lot.
Operator
Thank you. The next question is from the line of Girish [Phonetic] from Morgan Stanley. Please go ahead.
Girish
Yeah, sorry if I have missed this comment. Can I get the growth in wires segment this quarter versus cables segment, volume growth?
Chirayu Upadhyaya
As far as the volume growth is concerned, in wires, it was north of 20%, between 20 and 25%, and within cables it was in early-teens. As far as value growth is concerned, for wires it was close to 40%, whereas in cables it was about 21%.
Girish
Okay. Just on the interview, you — the management team mentioned that the competitive intensity was on the wire side. I noticed the copper prices started going up, I think in the last two, three weeks of the September quarter. So wanted to understand, like, what really happened there in terms of — because that also is a reason on margins being slightly weaker on a year-on-year basis. So wanted to understand, normally, you guys take price hikes every 15 days in wires segment and — I mean, if the prices are going up, then why did the competition resort to — suddenly to price cuts in an increasing price environment — input cost environment? That was the second question.
Chirayu Upadhyaya
Girish, generally the price variation that we take are more on a monthly basis and that generally is a followed method for us. As far as the price hikes or passing on is concerned, see, in cables, while we have a very good market share and we are way ahead of the second or third-largest competitor, for wires, while we are the leaders, the second and third-largest competitors are pretty much close as far as the price is concerned. And all of them have pretty — 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. And seeing the kind of demand that was generated — and as you are aware, within the wires industry, there is no capacity constraint.
Everybody is sitting on additional capacity. 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. But as I had mentioned in the initial comments, hopefully, such kind of high volatility or increase or decrease trend is something that we should not see. If that — if a bit more stable fluctuation happened in copper or copper prices, which has generally been the case historically, you wouldn’t see any such material compression, et cetera in margins. It’s just that over the past three to four months, the fluctuations in commodity prices have been way higher. And because of this you have seen a different kind of margin trend for the industry this time around.
Girish
So just a follow-up on that. So I believe, Gandharv, also mentioned that above $500 is a lot more volatile to pass on, on the wire side, given the capacity that exists. In cables, that is not a problem today. I appreciate that point. But would it be fair to say that with more cable capacity coming through, and if there is such volatility, maybe you could have a similar situation in cables also if the volatility persists at these levels, because we can’t forecast the price of copper or aluminum, right? So I’m just trying to understand that the pricing discipline that exists today for cables, and it got deviated for wires, can it happen in cables few quarters down the road?
Chirayu Upadhyaya
See, Girish, the scenario on cables is completely different than in wires. In wires, all the peers or the entire industry is sitting on additional capacity. Within a particular quarter or a particular month if there is a way higher demand, everybody can actually utilize their capacities and start cashing in and do much more of sales. But that is not the scenario in the cables sector. Plus, with the kind of demand momentum or demand which is expected going ahead, we generally believe that even the capacities which are being put up right now, those will fall short. So we don’t envisage such a scenario in which a similar thing plays out in cables which has played out in wires in this quarter.
Girish
And just last question, I believe you guys have participated in Bharat Net tenders worth INR50,000 crore thus far. Obviously, this is subject to review and tenders actually getting awarded. And you also mentioned that margins will be similar to domestic cable and wire. Just from an accounting perspective, will this be more classified in the cable and wire domestic revenues whenever you win such tenders? Or will it be more EPC tenders? And what is like a time here on a slightly more longer-term basis, if you can comment on that?
Chirayu Upadhyaya
So, Girish, there will be a cable supply component of the contract and there will be an EPC part of the contract. The cable supply component will be classified within the cables and wires in the segmental variation, and the EPC part of it will be within the EPC. It’s pretty much similar to the RDSS project that we are executing right now, wherein the cable supply gets accounted in the cables and wires segment, whereas the EPC part is in the other segment.
Girish
And, roughly, like a ballpark, INR1,000 crore project here could be how much cable versus EPC, roughly, if you had to win a INR1,000 crore project?
Chirayu Upadhyaya
It actually varies depending on which tender — which state tender you are winning [Speech Overlap] that is awarded to us, probably we will be able to — we will be in a better position to answer that question.
Girish
Okay, thank you.
Operator
Thank you. The next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
Pulkit Patni
Sir, my questions are what Girish has already asked. So I don’t have any further questions. Thank you.
Chirayu Upadhyaya
Thanks, Pulkit.
Operator
Thank you. The next question is from the line of Achal Lohade from Nuvama. Please go ahead.
Achal Lohade
Yeah, good afternoon. Thank you for the opportunity. My first question is pertaining to the industry. You mentioned that the capacity what is getting added in cables will be short of what is required —.
Chirayu Upadhyaya
Sorry, Achal, your voice is not very clear.
Achal Lohade
Is it better?
Chirayu Upadhyaya
Yeah, it’s better now.
Achal Lohade
Yeah. Sorry. So, my question pertains to the industry. You did mention that the capacity addition in cables will probably be short of the demand what you are seeing at the industry level. Is it possible to get some sense, where are we in terms of, a, the capacity, in terms of volume or value, and what kind of capacity addition are we seeing? And this is for cable segment.
Chirayu Upadhyaya
So, Achal, as we have guided, we will be doing INR10 billion to INR11 billion of capex each year for the next three years. Majority part, roughly, let’s say, about 70-odd percent of the entire capex will be towards the cables and wires business. The capacity addition for us will be something which will continue to happen in phases. Of course, a part of that entire capex is going towards EHV plant, which will be something that will become operational by the end of FY ’26. But for everything else, it is something wherein the capacity, it will be coming up in phases. As of now, anyways, for us, capacity utilization is not a constraint. We are having additional capacities in place. So for us, it’s not something that derails our growth rate. But of course, looking at the future demand expectation, it’s very important that you put up those capex ahead of time, so that you are not in a scenario where there is demand but you are not able to service that. So that is where we are doing the kind of capex that we are going to be doing over the next three years.
Achal Lohade
Correct. Chirayu, I am trying to understand more from the industry perspective, what kind of capacity addition are you seeing? Is it 40%, 50%, 70%, or it’s just 20%, 25% you’re seeing which is giving your comfort or conviction that the demand will outpace the capacity addition?
Chirayu Upadhyaya
So, Achal, the kind of calculations which we’ve done is based on the announcement which other listed players and other larger non-listed players have made. We believe that going ahead, the growth rate in cables at an industry level will be somewhat closer to the [Indecipherable] of real GDP number, which gives us a rough estimate of the kind of incremental demand which can be coming up — which will be coming up over the course of next, let’s say, three to five years. If we look at the kind of capacities and inflation rates of the larger peers which are currently there, and the announcement that’s made in terms of the newer capex that they’re putting up for cable capacity, you roughly arrive at a conclusion that this is going to be lesser than what kind of demand which is estimated to be coming in. Over and about that, exports or international business is something which is a very, very big opportunity. And obviously, most of the larger players in the country are looking to take advantage of that. Again, you have to have additional capacity for that as well. So keeping — looking at both the variables, one largely arrives to the conclusion that there will be a requirement for much more capacities. And I believe, over the course of next two to three years, we will actually continue to hear much more capacity addition announcements from the industry.
Achal Lohade
Understood. Understood. Any color you can provide with respect to the demand momentum in the exports market? Are you seeing any sign of weakness, struggle out there or it is as robust as it was in the past year?
Chirayu Upadhyaya
See, demand momentum across different geographies will vary, depending on whatever is the scenario in the local 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 exports or demand opportunity is concerned. So largely, any weakness or so in a particular geography shouldn’t get — affect the kind of growth numbers that we should be able to exhibit. Of course, there can be some internal things related to each company and how they are operating which might affect, for example, scenarios wherein — where the freight costs are much higher and certain trade routes are closed. I mean, that can derail exports to a particular geography, but in general, we believe that the export is a very big opportunity than what we have currently been able to tap into. And the growth rate within international business, if you take a three to five-year view, that growth rates will be much higher, or higher than — as compared to the domestic cables growth rate that we’ll be able to see.
Achal Lohade
Great. And just one last question if I may. You did me make a comment with respect to the wires, the competitive intensity was much higher in the September month. Is it fair to say that the impact of that on the margin — on the wires margin, which is probably the second highest segment for us in terms of margin hierarchy, the impact could be 3 to 4 percentage points, and that’s why the margin impact on the aggregate cables and wires as well?
Chirayu Upadhyaya
See, if you take a sequential view, our margins in the cables and wires have only compressed by 30 bps. To that extent, it won’t be as high as the percentage that you’ve mentioned. But, of course, it is the major part of the reason, because of it there is compression
Achal Lohade
Right. But QoQ, the exports also picked up, right? I mean, the scale is better, so operating leverage, apart from the mix also, right? So I’m just trying to figure out if this is — yeah.
Chirayu Upadhyaya
Yeah. So, Achal, two parts over there. One, definitely, as you rightly mentioned, the international business has picked up quarter-on-quarter, and that would have helped in terms of margins. But the second point, which again you mentioned was the operating leverage. So if you recall, in quarter one, we had mentioned that we were operating at 70% to 75% of our capacity utilization. This quarter, the inflation rates are somewhere between 60% and 70% because a part of newer investment, the capex that we did, the capacity came up for us. Plus, the second thing is, if you recall, by the end of the previous quarter, we had a lot of inventory — finished goods inventory on our books, which we couldn’t sell because the demand kind of nose-dived during the end of the quarter. We were able to liquidate that during the course of this quarter. And hence, we were not required to manufacture or utilize much more of our capacity as compared to what it was in Q1. So operating levels to that extent would have been impacting negatively. So all these three to four variables would have impacted the entire margin differential between Q1 and Q2.
Achal Lohade
Understood. This is very helpful. I’ll fall back in the queue for further questions. Thank you so much, Chirayu.
Chirayu Upadhyaya
Thanks, Achal.
Operator
Thank you. The next question is from the line of Amit Mahawar from UBS. Please go ahead.
Amit Mahawar
Thank you. Hi, Gandharv, sir. I have two quick questions. I understand the copper and the inventory part, very well understandable. But one of the biggest segment for us is underground cables under RDSS, where we are by far having a higher market share, possibly, than the general cable and wire sector. When you export cables, generally, are these interchangeable? My point is, if supposing temporarily there’s a slowdown in underground cables and eventually it picks up, can you divert towards higher export, just to understand? I know probably capacities are fairly fungible, but export market is a qualification-based market. So I just wanted to understand that point, that’s first.
Chirayu Upadhyaya
Yes, Amit. So, yes, the capacities are fungible between the different types of cables. So if there is a slowdown in a particular type of cable’s demand, you can use that capacities for other avenues.
Amit Mahawar
Including exports? Fair. Second question is more about — last three years, there was a very strong, unprecedented demand in both domestic and export market. And maybe Polycab was the only player which could see it coming very clearly. Can we say, next three years, especially in cables, the competition is far better ready and keen than it was in last three years, and it could have some impact on sector profitability in general? Is that statement correct?
Chirayu Upadhyaya
See, Amit, the kind of profitability that we have been able to register over the past two to three years, or rather the improvement, it’s not just because we were the only player who had the capacity. There were a lot of variables that went into the play over there. We have been able to improve our sales through channel, which is a better medium in terms of profitability. We have been able to change the mix of the kind of cables that we will be selling domestically, plus the improvement in the contribution of exports. All of this has contributed towards the improvement in margin. So it is not correct to say that even if you going ahead there are capacities coming up for our peers, we will see any form of slowdown or compression in margin. But as I mentioned a while back, we do believe the kind of demand which is expected over the next three to five years is way ahead of what the capacities which are coming up within the industry. And so, to that extent, as of now, sitting on this particular day, we don’t believe there should be any form of material margin compression because of whatever incremental capacities are coming up.
Amit Mahawar
Yes, Thanks.. And maybe third quick one is, next three years, where will be our export volumes, or maybe in value terms, what is that we’re targeting in exports? Thank you.
Chirayu Upadhyaya
Sure. So, I mean, the guidance on exports is something that will be a part of our next five-year guidance which we are working on right now, where we are trying to come up — release that guidance during the course of this financial year. And that will give a very clear idea of what it is that you can expect in terms of contribution from international business, as well as the domestic growth rate, etc. and so on and so forth.
Operator
Thank you. The next question is from the line of Shrinidhi Karlekar [Phonetic] from HSBC. Please go ahead.
Shrinidhi Karlekar
Yeah, hi. Thank you for the opportunity. Sir, a couple of questions on the RDSS business that you do. May I ask the current order backlog that you have in this part of the business? And second thing is, how is the whole order prospect pipeline looking like in this?
Chirayu Upadhyaya
Sure, Shrinidhi. So as of now, as at end September, the open order book of the RDSS scheme for us was roughly about INR48 billion. This is something that we have to execute over the course of next two to three years. So probably — and that is why we give a comment that over the course of next two to three years, we will see probably similar run rate from the EPC or the others based on contribution to the overall — or the quarterly run rate. As far as the incremental opportunity is concerned, there are still a lot of orders which are yet to be coming. We’ve applied for many of them. Of course, I have — as of now, it will be very difficult to say what it is that we will be able to get, because again, it’s similar that — wherein the government, which is kind of awarding it, because as and when during the course of this year, we get those incremental orders, we’ll further disclose the open order book, and that should give you an idea of what to [Indecipherable]
Shrinidhi Karlekar
Okay. And the second question is on the whole EBITDA margin that you generate, both what you book in your cable business and what you book in the EPC part of it. May I ask, what are the blended margins that you get or some color on what are the margin versus your portfolio margins?
Chirayu Upadhyaya
So cables business margin or the cables supply component margin is similar to — pretty much similar to what it is that we make when we do a normal cable sales in any other sector. And all of that gets accrued in the financials. You’ll see that within the cables and wires segmental margins. And the EPC margins are something which gets accrued in the EPC component. Overall, on the EPC part of the order, generally, you make somewhere in mid to high single-digits, and adding up the cables component, that increases ahead.
Shrinidhi Karlekar
Right. And last, if I may, I missed your comment on the export bit. I think you — did you say that H2 export is looking higher than the H1, and you’re also seeing some recovery in the US market?
Chirayu Upadhyaya
Yes, the second half of the year, we expect the international business to do well compared to the first half of the year.
Shrinidhi Karlekar
Okay. Yeah. Thank you for answering my questions. And all the best.
Operator
Thank you. The next question is from the line of Hardik Rawat from IIFL Securities. Please go ahead.
Hardik Rawat
Thanks for the opportunity. Probably all my questions have been answered. One question was with regards to switchgears, you pointed out that switchgears has registered some strong growth in this quarter. Could you please help explain how is the market looking like for switchgears? Has there been a broader decline in margins from a business perspective? And where is our position with respect to other players in the market, and what are our aspirations with regards to the same?
Chirayu Upadhyaya
So, Hardik, switchgear is one of the areas within the FMEG business wherein we are very much, or very highly focused on. It is a component wherein we want to increase the contribution of that particular product to the overall FMEG, because the margins which we make in switchgear segment is way higher compared to what we make on the fans and lights segment. We’ve had very good run rate of growth within the switchgear segment over the past almost two to three years now. And that’s largely because of the demand that gets generated for switchgears from the real estate which is coming up in India. So in switchgears, we are just present in the B2C segment. We are not there in the B2B. We don’t make or manufacture industrial switchgears. We are into the MCB manufacturing, RTC manufacturing and so on. For us, within that segment, we are, as of now, a relatively smaller player. So we’ll be somewhere between top-five to top-10 as far as our market positioning is concerned. But we are witnessing good growth rate in the switchgears business. And as I mentioned, it is something which is — something that we are very much focused on. For us, definitely — see, whenever we target or do a particular business, the target is to be among the top three players within that business. And that is something that we are targeting even in the switchgears business. It might take us a bit of time, but probably over the course of next five years, that is something that we definitely will target to be, one among the top three players.
As far as the margins are concerned, for us, the gross margins in the switchgears business are, as of now, north of 40%. We still believe there is a bit more of improvement that we can have on the switchgears margin front and that is something that we will be targeting over the course of next few quarters. Just the previous year, we actually expanded our switchgear manufacturing capacity. As of now, the utilization rates are a little bit lower. Since we are able to scale up that business at a good rate on a quarter-on-quarter basis, we expect operating leverage to start kicking in, again — margins to again improve. In fact, switchgears is one such business on the FMEG wherein we are already EBITDA positive. We’ve been EBITDA positive for a while now. And as and when the contribution of switchgear continues to increase going ahead, I mean, that will obviously add up to the segment’s profitability.
Hardik Rawat
Okay. One question with regards to how has — with our entry into switchgears and the kind of focus that we have in the space, are we seeing aggression from the current market players on price, for example? How is the competition dealing with our foray in this segment in a big manner?
Chirayu Upadhyaya
Are you referring to our entry or someone else’s entry? Sorry, I didn’t get that part.
Hardik Rawat
No. So since Polycab is now so focused on this segment, how are the existing players responding to this? Are they — there’s higher competition on price or are they responding in some manner?
Chirayu Upadhyaya
So, Hardik, as far as the switchgears, perhaps, is concerned, we’ve actually been able to leverage a lot of our synergies within the existing wires business. If you do realize, the demand for switchgears from the end customer in real estate gets generated at pretty much similar time when the wire demand is generated. We anyway have distributors who are distributing wires. We have the end customer, real estate players, whom we are supplying wires. We are able to cross-sell our switchgears along with wires, and that is how we are able to scale it up in a good way. Over and above that, the quality of our switchgears are something which has been appreciated in the market. We are also quite confident on its quality. And as a result of that, we actually provide seven years warranty on our switchgears, compared to the normal five years warranty which the other competitors provide. So, largely, we have a lot of levers available to us through which we are able to grow the switchgears business. And since the end industry itself is growing at a good pace, we haven’t actually seen any form of heightened competitive intensity from the existing players. We’ve been able to grow that business at a good pace, and it’s been almost two to two and a half years now that — that business is doing — are doing very well for us.
Hardik Rawat
Alright, that is helpful. Thank you so much.
Operator
Thank you. The next question is from the line of Natasha Jain from Nirmal Bang. Please go ahead.
Natasha Jain
Yeah, thank you for the opportunity. I have two questions. The first one on your gross margins. Now, for FMEG, I understand there’s a lot of channel incentives, promotional expenses, but ideally that would be a part of your opex. Coming to wires and cables, EPC I get it, but a 350 basis compression does not come from a 10% contribution business. So now, coming specifically to wires and cables, both use copper and aluminum. And because you make that commentary — you’ve been making that commentary throughout that we do a lot of derivative hedging. So ideally, if you hedge your contracts, you should not be impacted, right, in terms of volatility of your raw material? So can you please explain again what happened this quarter and did we lose out on the hedging part? So, first question is that.
Chirayu Upadhyaya
Sure, Natasha. So if you do understand the hedging part, well, you realize that you actually price your product — price your raw material post you receive the orders. For us, that translates into us not getting affected because of volatility. But you also have to take into account the competitors when you are looking at a product like wires. Over there, if there is a player or competitors who are looking to gain on market share and are willing to sacrifice on pricing just to gain on market share when the demand is very high, if as a player you want to protect your market share, you have to compete head-on on pricing part as well. So that is the reason why — especially on the wire side, we were — we had to — we had compression. But the 300 basis point compression that you are mentioning is more — is on year-on-year basis, not on a sequential basis. On year-on-year basis, the margin compression is not selectively just because of wires de-growth. It is a small part of the overall 3% de-growth. The major part is because of the international business. Year-on-year, the international business contribution is also much lower than the overall top line. Thus the margins have also been affected in international because — international business, because of the heightened freight cost. So that’s the larger reason on year-on-year decline in EBITDA margin from the — in the wires and cables. The wires margin compression effect that has happened is more of a sequential compression and that is just in the handle of 30 bps.
Natasha Jain
Understood. Just one more question, and if Gandharv can answer this. See, on your exports, last year your export contribution within your exports was close to 40%. This year, the way exports is moving, especially your US contribution, I think that you guys probably will land somewhere below 10%. Now in the offing with all the US elections, it’s a very macro-level question at this point. Given both the candidates have equal chance of winning, one of the candidates do not focus so much on renewables. Now, I understand that renewables, oil and gas, is the kind of cables that we export to the US. So at a very broader level, have you worked out the strategy if whichever — whichever way the election goes, does that further give pain to our export cables in US, in especially renewable cables? So that’s my second question. Thank you.
Chirayu Upadhyaya
See, Natasha, what we have actually done over the course of last five to seven years is that we’ve worked out or got an approval for various different types of cables. So solar cables are not the only type of cables that we export to the US. We have diversification in that manner as well. So irrespective of which candidate comes and what is the focus on — specifically on renewables, there is a lot of investment happening in the other states as well. For example, the power transmission and distribution. Entire infra for the US is getting upgraded after almost a century, and that requires all types of cables; low-voltage cables, medium-voltage cables, etc. And that is where we already have approval and we will supply it whenever the demand arises. So specific to US, yes, I mean, we have to see who comes to power and what are their policies. But it doesn’t really impact our international growth rate, because if you look at our international business, we have 79, 80 countries now wherein we export. US is not the only one. During the course of this year, you’ve actually seen that we’ve been able to do a lot of exports to other countries as well. Middle East is something that is — wherein a lot of opportunities are coming up. Australia is something wherein we’ve been able to do a lot of exports. Europe is opening up in a big way. So there are various different geographies wherein we have the opportunity to supply to. And irrespective of what happens in a particular single geography like a US, it shouldn’t derail the growth rates of small players, small international export players cycle. So we are not very much worried on that one.
Natasha Jain
Understood. Just a small follow-up on that, Chirayu. So sequentially, when you say that you’ve grown close to 40% in your export revenues, can you please call out specifically which geographies did we expand on, newer geographies that we took in? That’s it.
Chirayu Upadhyaya
During the course of this quarter, we’ve supplied a lot of cables, largely to the Middle East and to Australia. We’ve also added a couple of new countries as well. I wouldn’t want to name those countries because that is of importance for the competitors as well. But largely, we’ve been adding countries on a quarterly basis. We also have couple of other countries to be added in the pipeline over the course of remaining years. But largely, I mean, see, we have a plan charted out. We have identified the geographies wherein there is good amount of demand and as of now, we don’t have a [Indecipherable]. We even identified the geographies where we have a pool [Phonetic], but very limited type of cables, and we will want to expand across all those different types of geographies. The diversification strategy is in place. We have a very strong international business team which is working day in and day out to get approvals from various different geographies. And we don’t foresee any challenge in us growing our international business, even if there is a slowdown in a particular set of geographies.
Natasha Jain
So all geographies would command similar export margins in terms of cables?
Chirayu Upadhyaya
It varies. It varies geography wise, it varies the product wise and depending on what type of cables you’re supplying in which quarter or which year to which geography, your margins will vary. But irrespective of that, as of now, the margin profile for our international business is higher as compared to domestic. So irrespective of where it is that we will be exporting, which geography, we will be able to make better margins.
Natasha Jain
Understood. Thank you and all the best.
Chirayu Upadhyaya
Thanks.
Operator
Thank you. [Operator Instructions] The next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Aniruddha Joshi
Yeah, thanks, sir. Thanks for the opportunity. Now, in terms of the margins, we have seen our margins which used to be in the range of 8% to 9%, now they have reached as high as almost 14% now. So do you believe that probably the margins have kind of peaked out at around 14-odd percent level? And on a structural basis, do you see further triggers to see expansion in the margins? And anywhere, means, maximum the potential in terms of margins, what that can be? That is question one.
Secondly, now the competitive intensity is likely to remain higher because one company is starting the new plant and one company is doing QIP. So probably they may also expand the facility. So netted, if the competitive intensity remains higher in H2 and FY ’26, so what will be Polycab’s strategy, whether it will be market share first or it will be margins first? Yeah, that’s it from my side. Thank you.
Chirayu Upadhyaya
Sure, Anirudh. So as far as your question on margin is concerned, we already have a guidance in place. In cables and wires business, we believe 12% to 14% of EBITDA margins is something that we will be able to deliver. Depending on the kind of demand momentum that we see in a particular quarter, or which type of product which we are able to achieve, will move between that guidance. But as of now, we believe 12% to 14% EBITDA margins is something that we should be able to deliver. Probably, maybe in future, depending on whatever changes — or variable changes, we might revise the guidance, but as of now, this guidance holds.
As far as the competitive intensity is concerned, I like to make it clear again — once again, that in Q2 the competitive intensity increase that we are referring to was specifically in wires, and that was for a specific reason that the copper prices shot up very steeply in a very short frame of time. On the cable side, we don’t see any increased competitive intensity. The comment that you mentioned that there are new capacities coming up is kind of more relevant for the cables side. And that is again where I’ve kind of made a comment that we expect the demand momentum to be very strong and the capacities brought within the industry to being just enough or fall short of being able to service that demand. So we don’t expect any pressure on margins. So as of now, we don’t need to take a call of whether we need to go for top line or bottom line. At least on the cable side, we are quite confident that we will be able to achieve both.
Aniruddha Joshi
Okay. Sure, sir. This is very helpful. Thank you.
Operator
Thank you. The next question is from the line of Umang Mehta from Kotak Securities. Please go ahead.
Umang Mehta
Yeah, thank you for the opportunity. Sir, most of my questions are answered. Just wanted one clarification. You mentioned that traditional [Phonetic] business did better than distribution, and you also mentioned that wires did better than cable. Does it imply that you have done wire sales to real estate projects this quarter?
Chirayu Upadhyaya
I’m sorry, Umang, your question towards the end was not clear. I believe you ask institutional was better than channel and wires was better than cables. And what was the last part of the question?
Umang Mehta
Sir, this disconnect [Phonetic], right. You typically expect the distribution — domestic distribution to do better when your wire sales are outpacing cables. So is there a difference in understanding here?
Chirayu Upadhyaya
No. Umang, you’ll have to take into account the base, right, for our institutional versus channel. Institutional is 10% and channel is 90%, where cables and wires, the mix is 70-30. Right? Now wires have grown ahead of cables, but mix is only 30% of the overall. So it will have to grow over 2 times of cables for it to be — for the growth rate of channel to be higher than the institutional. Since it’s not the case, institution has still grown ahead of the channel mix. Plus, on the cables side, it’s more relevant, wherein institutional sales continue to happen, whereas in the first month of this quarter, because the copper correction was there in the handle of 12% to 15%, the channel sales were almost non-existent. So those were the two reasons, more institutional sales on the cable side, and while wires were — was seen growing higher than cables. Because of its mix being much lower as compared to cables, it doesn’t really impact at the overall mix point.
Operator
Thank you. Thank you very much. We will take that as the last question. I would now like to hand the conference over to Mr. Gandharv Tongia for closing comments.
Gandharv Tongia
Thank you so much for joining us for this call. In case if you have any follow-up questions, please feel free to write to us at investor.relations@polycab.com. We also take this opportunity to wish you and everyone at their home, as well as your team, a very happy Diwali as well as the new year. Thank you. Take care. Bye-bye.
Operator
[Operator Closing Remarks]