Bajaj Electricals Limited (500031) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 FY '20 results call of Bajaj Electricals hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Naval Seth from Emkay Global. Thank you, and over to you, sir.

Good afternoon, everyone. I would like to welcome the management and thank them for giving us this opportunity. We have with us Mr. Shekhar Bajaj, Chairman and Managing Director; Mr. Anuj Poddar, Executive Director; and Mr. Anant Purandare, President and CFO. I would now like to hand over the call to the management for opening remarks. Over to you, sir.

Good afternoon, friends. I'm sure you'd be happy with the results, those who are following Bajaj Electricals. As I had promised that we are going to control our EPC business, and therefore, you must have seen that from INR 1,400 crores, we've brought it down to INR 400 crores. And as far as [indiscernible] we're just really happy that our consumer business in spite of the slowdown, we've grown by 12.5%. But more interestingly, our margins have improved from a level of 6.8% to a level of 7.7% and a 27% improvement in EBITDA has taken place. This is something which was our objective that we have to go towards that level of 10% over a period of 3 years. So that first 2 quarters, we were not able to get our percentage of margins up. But now in this quarter, we were able to do so. Also, if we look at that because now the business is exactly reversed, it was 66% in the third quarter of last year to 66% was our EPC business, and 1/3 was our CP business. This year, exactly 66% is our consumer business and 33% is our EPC business. The result of that is that the overhead which is there gets distributed on a bigger load comes from the CP business. If that extra load was not there, then the margin would have gone up from 7.7% to 8.4%. And therefore, that is something which is a reality that we have to take that hit in the CP business because the business has gone up. But we are very happy that in terms of our cash flows, and more details, of course, will be presented by Anuj, is that we have been able to do exactly whatever we had promised in terms of our concentration on CP business, the reduction of this thing and also work on trying to get our cash flows under control. So our cash flows also, when the numbers Anuj will share with you, has been brought down substantially and plus with the rights issue INR 350 crores coming, our whole debt-to-equity ratio will be very much under control. And therefore, our re-rating is something which we think is a very important aspect, is that once we get this in place, we hope that we will go for re-rating in the month of April. And we hope that we'll get our rating back to what we have been used to. So we are extremely happy. We'll be very happy to answer your questions. But before that, let me hand it over to Anuj Poddar, our ED. Thank you.

Thank you, and good afternoon, everybody. Just to add to the CMD's comments, we are -- I'm very pleased with our Q3 results. We have exactly stuck to the strategic direction that we've been sharing with investors for the last few quarters. Three headlines there, 3 strategic direction points that we've always made. Number one, shift in business focus, derisking of EPC while growing consumer, that's point one; number two is a very strong focus on cash from operations, that's point two; and number three is reduction in debt and improvement in balance sheet. On each of these 3, on the first part, to add to what CMD said, consumer continues to grow at the double digit. It is also ahead of Q2 growth that we had. So it's a good growth in what continues to be a soft economy. I won't repeat all of it, but the margins, and therefore, the profitability of the consumer business has done well in this quarter for us. Cash flow. To give you specific numbers, we've generated positive cash from operations of about INR 205 crores in Q3. And we've also used that to repay debt. Our debt has come down by about INR 140 crores in Q3. In addition to reduction in the actual debt, we've reduced the advances from customers, which is interest-bearing advances by a further INR 59 crores in Q3. So cumulatively, for me, it's almost INR 200 crore reduction in amounts against which I was paying interest, and that is also reflecting every quarter on my reduction in finance costs. I'll stop at this right now, and we'll take more questions as we go along.

[Operator Instructions] The first question is from the line of Renu Baid from IIFL.

My first question is if you can help break up the 13% growth that we saw in the consumer products portfolio across various segments; and comment in terms of how the performance was for the festive range as well as seasonal products this quarter?

The growth in Lighting was 30.1%, the Appliances 10.4%, Fans 16.3% and Morphy Richards minus 5.3%, total 12.5% -- 12.4%.

Morphy Richards declined by how much, sir, if you can repeat?

5.3%.

5.3%. Okay. So as in terms of mix, it looks like Appliances and Morphy Richards, so called which was urban-centric portfolio have declined. So how should one read this in terms of the consumption patterns in the end market and performance of Appliances and the seasonal products category last quarter?

Yes. So Renu, this is Anuj. The distinction is not so much in urban and rural. But first, let me add a little more color. So we have grown market share in Appliances and Fans -- sorry, in Lighting and Fans, okay, both of which we had launched new products a few months ago. In Appliances, while overall it looks at a 10-odd percent, that's a mix of different products within that. So within that, our domestic appliances and water heaters, et cetera, has done fairly well. So that is the seasonal products. There has been a softer growth in the kitchen appliances, particularly certain products because of supply and other BIS kind of issues, and blenders, choppers, some imports [indiscernible] et cetera. So it's more because of certain operational or logistical reasons. I wouldn't read too much reason into it. And it's definitely not to do with rural or urban differentiation.

Okay. And aligned with this, if I can add now that in the recent budget there has been increase in the import duty from 10% to 20% across range of Appliances and Fans. What would be the impact on our consumer electricals portfolio here? And what percentage of the portfolio is being imported, especially during the small appliances and everything combined?

So if you look at across our consumer business, a little less than 20% is what we import. So more than 80% is locally made, number one. Number two, within that, there are specific categories that are more import dependent. That includes table, pedestal, wall fan, the TPW fans, microwave, which microwave raised to already 20%, steam iron, rice cookers, et cetera. We are yet in the process of determining an action plan in each of these specific product categories. Some of these are things that in the medium- to long-term or maybe more medium-term not long term we will look at local sourcing. So we are happy to move towards the Make In India and Make In India sourcing for some of these things. Few things like microwave, et cetera, I don't see that happening, but we'll take a call on each of these categories and how we deal with that. And number three, some of these calls will also be a potential renegotiation from our vendors in China and/or a pricing correction in the market that may not be unique to us but all players may have to resort to that.

Right. And sir, second question is, again, on the EPC side of the business. Given the fact that the business has been broadly flattish in terms of revenue, a capital employed seems to have reduced by close to INR 200 crores. So how has been overall the overall working capital situation for the company? And as you mentioned, you have been able to reduce debt by INR 140 crores. So overall, at the end of the year, as of end of December '19, what was the debt on books? And what are the plans for year-end number? What are we looking in terms of the net deleveraging level for the company as a whole?

Okay, there's many questions loaded in. Let me try and answer which ever I can remember. Number one, you're right, our capital employed in EPC business is down from INR 1,755 crores in September to about INR 1,578 crores in December. So that's almost a INR 200 crore reduction. Number two, our debt has come down by INR 140 crores. So from INR 1,458 crores in September to INR 1,325 crores as of December. Number three, our advances, which you understand the advances from the PD clients, that has also reduced from about INR 134 crores in September to INR 75 crores in December, which is a INR 59 crore reduction. So cumulatively, there's significant movement on all of these 3 parameters. If you remember, the numbers we have been sharing at the start of this year, these were the targets that we had for end of the year, which is around March. We are, therefore, ahead of the curve on the total cash collections and balance sheet improvement as we speak, without infusion of the capital that we are looking at. To your question on where we might be by March, Q4 will be slightly moderate collections in cash because that's also when you stock up inventory for summer, et cetera. So I don't want to put out a specific number on cash generation and further reduction in Q4 from an operational perspective. But because we have the rights issue INR 350 crores, that will be used to retire debt almost entirely. So you'll see a big swing in the debt-equity ratio. So debt-equity ratio, which has come down significantly this year, will now go well under 1 by March.

Done. And if I can ask 1 last question, how is the receivables positioned at the end of December, of which what is less than 6 months and more than 6 months?

I'll ask our CFO Purandare to share the details here.

So receivables for overall at the company level is -- as of December '19 is INR 2,472 crores, which was as of March INR 3,144 crores.

Okay. And less than more than 6 months, would we have the number right now?

I'll have to get it and then I'll let you know.

Not a problem, sir.

But let me tell you that as far as project business is concerned, most of it is coming after 6 months. So looking over 6 months in a normal consumer business, yes, over 6 months is something to worry about. In EPC business, 6 months is considered to be a normal outstanding. So if the outstanding is more than 6 months, is that a 80% over 6 months is expected to be so, okay?

Or alternatively, I should have asked in projects business, how much is receivables over 1 year, probably that would have been the right...

It's been 5 years.

The next question is from the line of Jiten Doshi from ENAM Asset.

Congratulations on a very good set of numbers. My question pertains to the year-end. What are we expecting the year-end debt to be?

So year-end debt, Jiten, this is Anuj speaking, we had guided at the start of this year to expect debt to be around INR 1,400 crores to INR 1,450 crores. We are already at INR 1,325 crores. From here on, the rights issue, which is INR 350 crores, at least INR 300 crores plus will go towards repaying debt, almost entirely except for a little bit operation cash flow that plus, minus may happen. So obviously, it will be under INR 1,000 crores. The only other remaining factor is actually cash from operations that we generate in Q4. We will see how that goes because Q4 tends to be also a period of stocking up for summer. So we may have moderate free cash from operations. So to that extent, there may be nominal further reduction in debt, but not a significant reduction.

So one can expect it below INR 1,000 crores?

Below INR 1,000 crores is given because of the rights issue and equity...

Sure. Now if I were to look 1 year forward, 12 months from today, what's your vision for that because you're doing all of this for that?

Jiten, we'll tell you -- we'll listen to you after that, let me complete this particular part. Now what happens is INR 350 crores is also going to change our equity, debt will go down to below INR 1,000 crores, as it was mentioned by Anuj, but our equity will go up from INR 1,000 crores to INR 1,350 crores. And therefore, our debt-equity ratio will become 0.8. So it's both the INR 350 crores also reduces your debt but also increases the equity by INR 350 crores. That's an important aspect from a debt-equity ratio point of view, okay? Sometimes we'll miss out. We only say your debt is coming down to INR 1,000 crores, your debt ratio is 1:1. It's not 1:1, it is INR 1,000 crores to INR 1,350 crores, okay?

Agreed. So Shekharji, next year, we should be generating equal amount of cash because all of these payables will -- receivables will get paid, so all the overdue amounts will come in. So you expect another INR 300 crores, INR 400 crores of reduction next year?

Yes, yes.

So that means it will improve even further. That's what I'm just trying to...

That's correct. So what we are looking at it is by -- our original game plan was, we have made a significant progress by March '20, but to be in a very, very comfortable position, March '21 with a very ideal balance sheet.

Right. So March '21 should be about approximately INR 400 crores, INR 500 crores of net debt on the books.

You do the calculation, Jiten, I've given you guidance.

Okay. Fine. And wishing you all the best, and I hope you all continue to keep performing this way. We look forward to INR 400 crores, INR 500 crores of debt reduction next year and to a double-digit margin in the consumer durable business.

Double-digit will not happen in 1 year, so let me set your expectations right.

The next question is from the line of Sonali Salgaonkar from Jefferies India.

Sir, my questions are more centric towards the industry. Now how do you view the situation on the ground for both your consumer business as well as your B2B business? So in particular, we would like to understand that are you witnessing destocking in the consumer business? And also, given the liquidity situation that we are facing right now, are we willing to say, channel financing or any other sort of financing to help us drive through this?

Let's talk our consumer business. Consumer business, we've -- earlier, we had 7,600 direct billing points. Now that with our TOC and RREP, which we have been doing, so now we've been able to reduce that distribution to only 500 billing points. We've got 500-odd distributors to whom we are selling. And all the 500 are using channel financing. So for our streets, we are using no credit at all. So they are using 100% channel financing. As far as the MRF like a big car and all, of course, we give them credit or -- in online also. But in the trade which is 65%, 2/3 of our business, there is no credit at all required. It's all by channel financing.

Sure. Sir, are you witnessing destocking in the Appliances segment?

Why should there be destocking?

No, sir, given the liquidity situation, so I'm asking this more from the industry perspective.

Never heard of anybody destocking. Everybody keeps hoping that they will sell well. Others won't do, I'll do that so therefore everybody stocks up in our business. We've seen nobody ever destocks and says, "Oh, I'm going to lose market share." Everybody says, "I'm going to take somebody else's market share." So everybody pushes, pushes, pushes. A lot of new players are coming in. And therefore, the competition is going to continue.

Understand, sir. Sir, my second question is, would you be able to share the approximate market share that you have in the Appliances segments that you are in right now?

Sonali, that varies by product category, but to be honest, generally, I don't like to share because the numbers vary significantly in terms of different estimates that we see. They come with a lag. But I will tell you very specifically, we have grown share in Lighting and Fans because if you look at just the growth rate that is well ahead of market.

In Lighting and Fans, there's at least -- there's a trade body, IFMA and ELCOMA. So at least there's some numbers which are there. There is no numbers as far as Appliances are concerned. So it's all a guestimate of by talking to people because there is no data available to be able to see how our mixer grinders are going, our how toasters are going because there is no authentic data. So what Anuj is saying is that -- and everybody says, I'm the market leader. In mixer grinder, we say we are market leader, somebody else says, we are market leaders. In water heater, we say we are market leader, somebody else says, he is the market leader. So everybody can keep saying what they like. We can't help it.

Got it, sir. Sir, and my last question is, how much of your business mix in B2C right now?

As I mentioned, that second quarter -- sorry, third quarter, now the B2C business has become 2/3 of our total turnover. Last year in the same October, December quarter, it was -- 1/3 was consumer business and 2/3 was EPC business. Once year to do this is unusual.

The next question is from the line of [ Siddharth Mehta ] from Principal India.

Sir, my question is on Starlight and Hind Lamps, if you can just throw some light where we are? I have FY '19 number. And I think both the entity was making loss actually and we have some debt on those 2 entities.

Siddharth, this is Anuj. First on Starlight, yes, actually, both of these entities have been making a loss. Starlight continues to make a loss at a cumulative level, but a few months ago, first time Starlight has broken even at an operating level since October. Having said that, the debt in the financial cost is what continues to contribute to loss of Starlight. That will take a while for it to be corrected. My guess is maybe about 3 years. We have a turnaround plan in place for Starlight, but that will take its time to make it rectify. So operationally, we've come into breakeven or positive terrain. In over the next few years, we'll take that into cumulative breakeven. That's on Starlight. On Hind Lamps, I'll let our CFO also update because there's some progress and activity on that.

Yes. As you are aware of Hind Lamps demerger scheme was with NCLT. So NCLT Allahabad has already approved the scheme and NCLT Mumbai is going to have -- we'll have a hearing on 26th of February. So most likely that will be get cleared, and we'll be able to, I think, demerge Hind Lamps into Bajaj Electricals before 31st of March.

Okay. Sir, so whatever debt is there on Starlight, it is being reflected in our consol interest line item?

No, because they are not a subsidiary. Starlight is a JV, so it is not consolidated. It is only the beneficial interest that is reflected in our account. Investments are write-off, yes, and -- but there is a contingent liability that is disclosed in request of Starlight.

Okay. So would it be possible to say that in FY '20, at the year-end, we have to take some write-off or we will be just waiting in the sense for both this entity to turn around?

There is, obviously, always -- every time we have to do the impairment testing on the basis of future cash flows from that business. So that we'll be doing as of 31st March. But looking at the progress which is happening at Starlight, we are adding a few more products and the operation margins are improving. I don't think, as of that, at least there is need of making any provision.

And no additional funding from stand-alone entity?

As far as the working capital requirement is concerned, they are self-sufficient. But at the same time, when the repayment of debt and -- will be there, they will require some kind of support.

Okay. And if you can quantify that amount approximate?

No, it is already in the contingent liability. We already given that disclosure in the annual accounts.

Let me also add that as far Hind Lamps is concerned, it will become part of Bajaj Electricals. So all that debt and everything will be part of us. To that extent, they'll have become much more competitive because today, them losing money, they obviously have a cash flow issue. And therefore once, it is under Bajaj Electricals, we'll be able to improve the working, we can improve the cash flows, everything will be much better.

Okay. Because the last number, sir, that I have for Starlight is we were getting around INR 400 crore of debt. So that is...

It is at similar level. There is no much increase in the debt.

The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.

Sir. My first question is, I don't [ expect ] answer to that question. But coming to the second business, which is EPC business. Can you tell us in terms of FY '21, how much revenue is still pending from the distribution business? And how much revenue you think you'll be booking for your non-distribution business? My second question is, in FY '22, how do you see the same business going forward in terms of [indiscernible] and margins? And my question number three, related to the same business, are there any pending write-offs in this business?

As far as EPC is concerned, the current order book, which is there, that is INR 1,742 crores, which is a breakup is: transmission line tower business of INR 726 crores; power distribution, INR 860 crores; and illumination, INR 156 crores. So obviously, some of these orders will get build during February, March. And some new orders will come in illumination and transmission line tower. And obviously, the scope of order may change during this period. So broadly, INR 1,742 crores orders are in hand for EPC. As far as consumer durable business is concerned, there is no order book because...

No, no, I'm talking about EPC only. So my question was, out of this order book, how much revenue you should look for in FY '21 and FY '22? And what kind of margin guidance you would look for -- from EPC business for FY '21 and FY '22?

See as far as broadly EPC business composition is concerned, the illumination is around INR 650 crores to INR 700 crores revenue we generally book per annum. And transmission line tower is INR 750 crores to INR 800 crores. So that will be the annual turnover for EPC. Power distribution, as you know, we are closing a lot of projects in Bihar as well as UP. So whatever remaining scope, which is around INR 800 crores will be build during this FY '21. So that is what is the broadly EPC turnover would be.

Some of -- just to clarify that INR 800 crores, some of it will get build now in Q4, as we speak, and a lot of that in the coming years, not all INR 800 crores in 1 year.

Sure. So basically, therefore -- and repeating my question. So hence, from the margins perspective, how should we look at margins of this business for FY '21 and then FY '22 because I understand that FY '22 is going to be more normal year rather than looking at FY '21?

Okay. So let me add a little more to that. Number one, at a headline level, our revenue this year should be under INR 2,000 crores for the EPC business. My guess is that should be a similar trend line that should continue next year and going forward. So we are not looking at ramping that up. We're only looking at changing the mix within that while controlling the overall business size in terms of revenue, point one. Point two, our focus is more on increasing the capital returns within that, actually to do that quantum of business with lesser capital employed and continue to pull back capital from that business to normalized levels. Number three, margins, it will continue to be negative for the next 1 year in FY '21 also because our overheads are much higher for that business as we speak right now. That will take a little while after project closures, et cetera, before we can start addressing those overheads for that business. From FY '22 is when you'll see a shift on the bottom line also in that business.

Correct. So FY '22, which is going to be more like a normal year and since you already have order book, so at what margins normally you are getting the orders as far as transmission and illumination business goes?

So Rajesh, FY '20 -- I don't have orders today in hand for FY '22, a very nominal that will...

I mean, current level, I'm saying...

But it will be a -- from being a negative business, we expect it to be positive, and it will be low single-digit positive in my guess for that nature of business.

So see, basically the question is, in terms of when you are bidding any project in these 2 segments, beyond distribution side, what is the in-built margin you are assuming? And what kind of risk management is in place because time and again and we have discussed it for many, many times in last 3, 4, 5, 10 years, but there have been disappointment during different time intervals. The question is what is the inbuilt margin, what you are assuming? Why are you bidding for this project? And the risk management going forward to make sure that there are no further write-offs for next 3 to 5 years?

Basically, as far as what is our internal margin consideration is obviously a very, very confidential number. I don't want to use this platform to give my competitor my internal strategy. So obviously, this number cannot be shared with you, but we are very clear that if it doesn't give me any margins, we are not desperate to get top line. That's why Anuj has mentioned that even the next year, around INR 2,000 crores, INR 2,200 crores is the type of numbers we are looking for. So obviously, if we were going very easy in taking orders, then we would have been at INR 2,500 crores or INR 3,000 crores, but we are not looking at those numbers because when we want to get our margins we will have to lose out a lot on these tenders, we will lose out because we will not be competitive. So we'll do limited business but do it properly. One thing is very clear, our experience of rural electrification has not been good. So amongst the businesses, rural electrification business, we are not going to -- now except for whatever orders are in hand, which we have to compete, we are not going to offer and going to quote for any new businesses for rural electrification. The power distribution also has the substation. Those will do because substation short duration and there is no ROW and all. So the risks are limited. So substation we will do, but we will not do any rural electrification. That is a clear-cut decision...

Mr. Rajesh, sorry to interrupt to you. Maybe request that you return to the question queue for follow-up questions. The next question is from the line of Achal Lohade from JM Financial.

Sorry, I'm hopping on the same segment, the EPC segment. Of the total order book, how much is for UP remaining to be executed? And I was just curious to understand why you're talking about negative margin from 1 year perspective, are you building any provisions or anything of that sort? Or is it purely the allocation of overheads, which is leading to a negative margin for next 1 year in EPC?

So let me answer the second part, and then I'll ask our CFO to answer the first part. On the second part, the reason we are talking negative margins and I've shared this transparently earlier that our overheads cost structure, scale of operations, et cetera, was geared up to a level to service a much larger business. We had an EPC business of INR 3,900 crores last year FY '19. That structure continues to be in place today and the overheads continue to be slightly disproportionate to our current business, which we scaled down on the market front on revenues and bidding. There will always be a lag of about 4 to 6 quarters before I can start pulling back the infrastructure that we have created to service a much larger EPC business. And therefore, to that extent, at a business or segment level, I will continue to make a loss in EPC for those 4 to 6 quarters. If I were to shy away from making that loss, the only way for me to do that is to keep bidding more and do that, then I'm on the treadmill. So that we're getting off and we're willing to take that cost in the P&L. So it's not about write-offs, but it's about a cost that we're incurring till a point of time that we can pull back on those costs. That's on the second part of your question. On your first part, let our CFO answer.

So as far as UP order is concerned, as you know, the current scope, which is confirmed by the client is INR 2,327 crores, so out of which INR 476 crores, which is pending to be executed.

Okay. And would you be able to give the debtors breakup also as to how much is of the total, how much is for the UP project?

UP project debtors are around INR 860-plus crores.

I just want to clarify, while UP, the receivables are INR 870 crores, this is not coming from the past. So we have substantial collection, but we also have new billing that is happening. So there's a gross of new billing.

Correct, correct. Understood. The total EPC -- sorry, if you could say that...

That is INR 2,472 crores.

So let me actually give you total numbers. So receivables for the PD business as a whole in March '19 was INR 2,055 crores. As of December, that is INR 1,471 crores. Of the INR 2,055 crores, actually, we've collected about INR 960 crores, but we've done a further billing of about INR 610 crores, of which also we have collected about INR 234 crores. And therefore, what you're seeing at the December end is a net of the old receivables net of their collection and the new billings and net of that collection. So there is a movement happening in those numbers.

Got it. In terms of the consumer business, you said lighting has grown 30% Y-o-Y.

Yes.

So I was just curious, is it -- is there any ESL-related...

No, this is not ESL. This is our consumer lighting business. We have introduced new products, I think, August, September, October in terms of battens and lamps. We had missing product gaps in our portfolio in panels et cetera. So this has come on the back of new product introductions and therefore, growth in market share. And this one, as you can see, is well ahead of all the competition numbers that I've seen for lighting business.

There is no ESL business at all.

And there is no ESL in this. So this is actual business.

So does it mean the volume growth is much more than 30%, like...