Bajaj Electricals Limited (500031) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Bajaj Electricals Limited Q3 FY '21 Earnings Conference Call, hosted by PhillipCapital India Private Limited. [Operator Instructions] I now hand the conference over to Mr. Deepak Agarwal from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Thank you. On behalf of PhillipCapital, I welcome you to the Q3 FY '21 Earnings Conference of Bajaj Electricals Limited. From the management today, we have with us Mr. Anuj Poddar, Executive Director; Mr. Anant Purandare, CFO; and Mr. E.C. Prasad, [ Vice President of Finance ]. We would like to thank management for giving us the opportunity to hold this call. Now I will hand it over to the management for their opening remarks. Post which, we'll open the floor for Q&A. Over to you, sir.

Thank you, Deepak. Am I audible?

Yes, sir, you are.

Yes, sir, you are.

Great. Thanks. Good afternoon, everybody. This is Anuj Poddar, and welcome to our investor call. Firstly, I hope all of you are pleased with the results. It is another second very strong quarter that we've delivered on. It is the highest-ever profits for our Consumer Products business and also the highest-ever PBT impact as a company that we've delivered on. Well, before I get into the number details, with the numbers all known to you, I just want to say that it's not just the total numbers or the absolute numbers, which is why I'm pleased, but actually, the composition of those numbers and the underlying message from those numbers. I think,the composition point that I want to make is that it is a secular performance on all parameters, whether operating or financial performance. So it's operating or financial parameters across every element, the performance has been good, and I will talk about that a little more. And it's also representative of what I call the new Bajaj Electricals. I've been sharing this for a while that we are on a transformation journey. We are doing many internal things. And I think the fact that we are now truly here, truly able to deliver, truly able to execute well and play to our strategy, I think that's the underlying message that I want to highlight from the numbers and the financial performance that you're seeing. Just quick headlines on the numbers. You've all seen that, but our top line growth at a company level is strong at 17%, clearly powered by our CP growth at 34%. Like I've been maintaining, we intend to deliver higher bottom line growth than the top line growth continually and therefore, seeing the operating leverage play out, our margin expansion on CP has been very sharp and strong this quarter. But the margin expansion, which has happened from 7-odd percent to 12.3% is a combination of operating leverage and the internal changes and improvements in efficiencies that we are working on. So while the operating leverage may be a bonus because of buoyancy in demand, but I think the underlying efficiencies and improvements that we're bringing in are here to stay. So some of that will clearly sustain into the future. Beyond that, all the improvements on the balance sheet are now starting to play out very strongly. In the P&L, you're seeing the reduction in the finance cost and therefore, the step-up on the PBT and PAT level also. The other big piece, which is our EPC segment, while on the top line that has come down, that is part of the calibrated strategy, I think important is that we continue to reduce our losses. It's a single-digit loss for the quarter. It is much lower than last year. So despite a lower top line, we've cut back costs much more sharply in that business, and therefore, are able to control the losses to a significant level, where we are now at a level where I think the loss from the EPC business is not necessarily a huge drag for us as a company as a whole. It is something very easily able to manage on a consolidated basis. So that's the P&L view. I think the other headline for us is the cash flow. The cash flow continues to be strong. We've delivered INR 142 crore of cash from operations in this quarter. And like always, bulk of that is being used to reduce our debt levels. Our debt levels are down from INR 550-plus crores in September to about INR 440 crores or INR 441 crores now in December. So our debt levels quarter-on-quarter continue to reduce, and our balance sheet has become much healthier. Our ratios are all looking healthy. So that's the overall financial performance. I will just again end with headlining the fact that it's a secular growth or improvement on all parameters. And more importantly, for us as management, it's the internal systems, internal working, internal execution excellence that is most heartening for us, and that is here to stay. And that's really what we are betting on for the future. So with that, I'll pass it on back to yourselves.

Shall we open up for Q&A, sir?

Yes, please.

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

Congratulations for the very strong performance coming back on board. So my first question would be to understand a bit more on the consumer side of the business. If you can throw some inputs in terms of individual segment-wise which business is that growth? And where did we see the market share gain coming through? And aligned with this, in terms of margins for the Consumer business, though, there would be input cost headwinds, should it be fair enough to assume that if you continue to grow the business, we should now be reasonably able to sustain the double-digit margin profile in Consumer business?

So Renu, thank you. Good afternoon. In the first part, the segment growth for CP overall is 34%. Within that, subcategories, our appliances has grown at about 36-plus percent. Fans has grown at 22%, lighting has grown at 18%. And the good news here is our Morphy Richards, which had been dormant for a while, has grown at 69-plus percent in this quarter. So it's a growth across all the categories. And this what I was referring to in my opening remarks, it's the underlying metrics. The dormant business, such as Morphy, is finally showing great traction, and this is the second quarter back to back, and we are driving growth there. In terms of market share, quite frankly, it's data that's hard for us to put out there. But I think the top 3, 4 players, including us, have gained market share at the cost of all the rest of the players and the rest of the market. I'm aware that many of our competitors also have declared similar top line growth. But I think these are 3, 4, 5 players that have declared such top line growth. I do not believe that industry or total aggregate consumer demand for our category has grown at that level, and we are clearly ahead of the average growth of the industry as a whole. In terms of margins, we've expanded our margins sharply, like you know, from 7.7% last year Q3 to 12.3%. As I said in my opening remarks, that's a combination of internal measures and the operating leverage that we've earned. How much of that will sustain, hard to put a number, but I do think a fair amount of that should sustain going forward also because a lot of the improvements that we've done for efficiencies that we brought in and some of the costs that we've cut this year, we're not going to go back to 100% of that; though, some of it will come back. Again, the good news there is advertisement cost, we brought it back up -- brought it back in, in Q3 itself. So some of that, which had cut very sharply in Q1, Q2, is actually built into these numbers. Employee costs, and we can talk about that later. You've seen a good correction on employee costs, though, we will have -- we have taken an increment from Jan. So you will see a little increase in employee costs in Q4. The only other element that I would talk about there is the commodity pricing. As we all know, commodity prices have gone up. That's happened really from December, so it's only about 1 month of that baked into these numbers. But that said, we've also taken a price hike from Jan 1. I think the price hike should partly, if not significantly, offset the price -- cost side price hike on the commodities. So that's where we are. The only thing we're waiting to see is how does the market trend from here on. But overall, we have a fairly optimistic view going forward.

Right. And on the Consumer business, if it's from a long-term perspective, what is the type of investment that we're doing in terms of new products, R&D or distribution to make sure that the kind of market share growth and so-called semi-premiumization that you've been trying to drive continue and sustain for the next 2 to 3 years as well?

So as I've said in the past, we're not going to be very short term. We are playing for the long-term to drive continuous growth for the long term. Two of the areas that I flagged off earlier that we will invest in is products, which is R&D, and brand. Brand, you've already started to see a step-up in investment, except for the COVID quarters. And R&D, product investment will continue. But these are investments that we can absorb comfortably in the P&L. These are not large CapEx nature investments that we intend to do. But just make sure that the margins, the additional profits that we're generating, we keep reinvesting that into the future. At the same time, we're committed to continue to expand our margins. So my view is these investments should not come at the cost of margins, but we should be able to deliver growth as well as margin expansion while building for the future.

And if I can ask 1 last question on the EPC business, can you share some more inputs with respect to the balance sheet or on the working capital and the receivables, how do the equation stack up there in terms of pending receivables and retention money?

Sure. So I'll bring in our CFO, Purandare there. Just the headline there, Q1, Q2, I know we had lower corrections -- collections. Some of that has improved. Q3, our receivables have come down, collections have improved, but let Mr. Purandare give you the numbers.

Yes, EPC receivables have come down to around INR 1,600 crores, which was as of March INR 1,973 crores.

Sorry, sir, your voice is not very clearly audible? It's come down INR 200 crores?

INR. 1,600 crores, INR 1,597 crores precisely.

Sure. Got it. And of this, what proportion would be receivables related to the UP project?

UP project is around INR 700 crores -- INR 730 crores or INR 740 crores.

[Operator Instructions] The next question is from the line of Nitin Arora from Axis Mutual Fund.

The question is basically the way you guided about the debt, you think now is where we can do further reduction in the overall debt numbers or it'll be more led by when we will receive the cash from the UP receivables, then only we will reduce the debt part? That's my first question. And second, given the commodity cost increase, so you said that these margins are sustainable, fairly amount of -- is sustainable because of the, let's say, the market share increase or the demand you are seeing so far. But generally, in your sense, what's the commodity impact you are building in for your Q4? Those are the 2 questions.

So on the first question, debt, we have been reducing debt every quarter. We do expect to reduce debt in Q4 also. And yes, the EPC collections will be a part of that, and we will drive that. So it will be driven by both UP or EPC collections as well as Consumer products, we will maintain that. Having said that, will the debt reduce by similar INR 100 crores or more, or less in Q4, a little early to say. Only thing to keep in mind is Q4 is a period or by March is when you stock up for summer. So to that extent, your working capital in Consumer Products in inventory does go up. So we will make sure that we are not -- we are making sure that we are funding that effectively, but that's an intentional thing. Other than that, we do intend to maintain the trajectory of collections and cash flow and debt reduction. In terms of commodity prices, like I said, we've taken a price hike from 1st of Jan. The price hike across categories varies between 5% to 8% to 9%. We think that should offset a significant part of the cost side price hike for us in the commodities. We do carry some inventories from the past, which are not, therefore, entirely affected by the price hike. And therefore, we're looking to see how we can offset a large part of that price hike while maintaining margins. The only aspect to factor in is the demand side and what happens there and therefore, the operating leverage impact. But other than that, I think we're well covered for the price hike as well as channel efficiencies kicking in and being sustained here.

Sir, is it right to say that the secondary sales would be some percentage point lesser than your wholesale growth? Or if you can throw some color on your secondary sales so that it'll give a little perspective on the inventory position about the channel is?

Not for us, and I think that distinguishes us a little bit from the rest of the industry, where because we work on the replenishment model and the RREP and TOC, we do not have aggressive primary sales. And I know at this point, because price hike was imminent, a lot of the market has resorted to a lot of extra stocking by distributors, et cetera. That's not the model we have. So our secondary sales is pretty much bang on and consistent with our primary sales even in this period in this quarter and December month.

The next question is from the line of Achal Lohade from JM Financial.

Congratulations for the great numbers. My first question was with respect to the cost control, you said certain cost measures have also improved the margin. So can you elaborate -- would it be possible for you to elaborate a bit on these cost reductions, what kind of -- what is the nature of the cost reductions are?

So it's a mix of many items, Achal. One is that the COGS or supply chain level, if you keep aside the whole commodity price increase, in general, we are yet working on making our supply chain sourcing and COGS more efficient. We have done that in this quarter also. Number two, our logistics cost is something that we are working on. Number three is the overheads overall. Overheads includes things like employee costs, operational costs or office costs, et cetera. So across the primary cost, which is COGS and logistics as well as secondary cost such as overheads. So each of these line items, we've been aggressively targeting and cutting back on or -- by cutting back, I don't mean artificial cutting back, but actually more structural cutbacks that makes it more efficient and sustainable.

And with respect to the cost reductions what we were talking about, talked about the 3 or 4 quarters ago with respect to scale down of the EPC business, where have we reached on that? Have we crossed 60%, 70% of that execution or it is still much below than that?

So my EPC guidance has been last time also that 2 quarters of next year is when we should be then turning around after that. I maintain that guidance. But it's not -- that's in terms of turnaround on profitability. But important is the absolute number of the loss. Like you see this quarter, the loss number is very small. So hopefully, even before we turn profitable, the loss number itself should be something that no longer we are very concerned about or worried about. But more importantly, EPC, we are driving also from the working capital or capital employed or receivables metric. That is important to keep generating cash over there rather than just looking at the P&L side on the EPC.

Sir, is it fair to say that the losses will be for next 2 quarters will be -- will not be as large as what we have seen in -- or be in a similar range what we have had in third quarter? Would that be a fair assumption towards it?

I can't give a number guidance, Achal, unfortunately, but it should not be something that now shakes up P&L -- consolidated P&L at all.

Understood. And just last question, if I may, with respect to -- some of these market share gains is also driven by the supply disruptions for the other. So in terms of the competition, are those supply chains normalized? Have you seen the smaller guys also coming back? And how sustainable these market share gains are? Why I'm asking is, basically, these numbers or tabulars upwards of 30% for most of the reading eye, well, as you indicated that the market growth isn't as significant? So what is the kind of number? I know it's hard to say for the company, but at the industry aggregate level, what kind of growth do you see for the categories we are in?

Achal, let me answer the first part in terms of do you see the other people come back. I think we're at least 2 to 3 quarters away before things normalize where everybody can function as normal. So we're all delivering growth despite multiple challenges. The supply side challenges have persisted through all of this financial year, and it has persisted in Q3 also, but the nature of those supply side challenges has changed. I think during lockdown and otherwise, supply challenge was broadly in terms of inventory levels and manufacturing capacity. That has changed subsequently to China imports. Subsequently, it's changed to containers. Now the latest set of supply side challenges is pure logistics, transport, truck availability, movement, warehousing in parts of India, et cetera. So the reason I'm highlighting that is that our growth is despite that and not constrained by that. But for everybody, particularly the long tail to actually deal with these challenges is not easy. And I don't see some of these things normalizing over the next 3 to 6 months, at least. I think we do have, for better or worse, as long as we're able to deal with these effectively, like we've been doing, I think we should continue to maintain and defend our enhanced market share at least for another couple of quarters. And quite frankly, if you do that for that period of time, you do start becoming more and more entrenched and that becomes more and more harder to then shake off after that.

The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

Congrats for a great set of performance. My first question is on this receivables of about INR 1,600 crores, which you highlighted on the EPC side. So I just wanted to understand this better in terms of where do you expect this number to sort of reduce as we sort of enter FY '22? And how much of this could have been provided in the P&L?

Bhargav, just first, let me give you the numbers more specifically. So the -- as of September '20, the total EPC receivables was INR 1,721 crores. And as of December, that is INR 1,597 crores, it's about INR 125 crores or INR 124 crores reduction. Of that PD is INR 1,097 crores. Your power transmission is INR 353 crores and illumination is about INR 147 crores, okay? That's the breakup of that. So if you see the maximum reduction really has happened in the PD or power distribution business. And this is an improvement over the previous couple of quarters where we were not seeing reduction on that side of the business, okay? I do believe Q4 collections also should be stronger than Q3 collections, but let's see, but that's my estimate at this point of time. I don't know if you mentioned by end of FY '22, was your question?

Yes, yes, yes.

So again, I can't give a number guidance, but like we've discussed in the past on the calls, we do expect significant collections to come in over the next -- within the next fiscal. And you will see a much lower number like we've been guiding without me giving you a specific number on that here. There will be retention money that will -- some of that will continue post that. But most of the nonretention money should be collected within next fiscal year.

No. So I hope there are no negative surprises in terms of write-offs because this is a huge sum. So that's why I was asking.

If that was the P&L question, Bhargav, in our estimate, we are fully provided for. Otherwise, auditors would not have passed for that. So we're adequately and fully provided as far as we are concerned.

Okay. Secondly, sir...

I would like to just make one correction that UP outstanding is INR 690 crores. It's not INR 740 crores, it is INR 690 crores.

Okay. Understood. Secondly, you mentioned that you have stepped up your ad spend. So is it possible to quantify what was the ad spend as a percentage of revenue this quarter? And what was it same quarter last year, just to...

Yes, sure. So it was INR 35 crores in last year Q3 at 2.8%. This quarter, it is INR 45 crores at about 3.9%.

So, sir, there's a significant jump in ad spend on a Y-o-Y basis?

Yes. And that's the point I was making. So that is already baked into the numbers.

Okay. So is it possible to highlight what has been the gross margin improvement on the Consumer business? Is it possible to quantify that?

Gross, we don't share, Mr. Purandare, right?

We don't share because, obviously, it is -- lighting is different, appliances, fans, they have different, different gross margins.

Let me just tell you that it has improved.

Okay. Okay. Okay. And is it fair to say large part of the EBIT margin improvement would be operating leverage or driven by gross margin improvement?

No. So all 3. One is gross margin improvement. Second is operating leverage. Third is I would yet split operating leverage in terms of because of volume versus actual improvements in the operating cost of overheads. So even if we didn't have operating leverage, we would have had gross margin improvement and operating margin expansion because of overhead efficiency that we've brought about. So I'll put that in 3 buckets here.

Okay. And the last question is, you mentioned appliances growth has been 36%.

Yes.

Is it fair to split this into water heaters and kitchen appliances?

No, we don't split that up.

Okay. Because a lot of kitchen appliances...

Both have grown very strongly, so let me tell you that.

Because kitchen appliances companies haven't registered such a stellar growth. So I was wondering whether it's driven by water heaters or...

No, no. So both have. Though, to my knowledge, other kitchen appliances also have registered good growth, but any way to answer for ourselves, it is across kitchen and water heaters. And just if I may say that again, that's why my opening comments that why I find it satisfying that it is not lopsided performance-driven by something, but it's fairly secular performance on almost all operating dimensions that we -- that I see here.

The next question is from the line of Manish Sonthalia from Motilal Oswal.

Congrats on a great set of numbers.

Mr. Sonthalia, your voice is not clear to us, sir. Can you please use your handset?

Yes. Is it better now?

Yes, sir.

Okay. Great set of numbers, congrats on that. I just have a strategic question. What are you going to do with the EPC business after you execute this INR 1,200 crores of orders? I mean is it continuing business or you're going to stop bidding for projects? Because obviously, the quality of business is not that great with the huge amount of receivables and EBIT margins also the negative therein. And you really- don't know when the state governments are going to pay you money. So what's the strategy on the EPC side? Is it going to be a continuing business or whether you'll discontinue it?

So Manish, I'd like to split up the question in 2 different parts, in terms of the business going forward and the legacy receivables. And I don't think the legacy receivables are a function of the future business, okay?

Yes.

Let me answer the legacy receivables part. First, of course, we are collecting that and cleaning up. And by timing, we cannot predict because it's not in our control. We are aggressively working on that. And we will keep seeing quarter-on-quarter improvement, and you will see significant annual improvement. That's my commitment to you, okay? So that will get cleaned up without too much hit or without any hit hopefully on the P&L. On the continuing our future strategy on EPC, I maintained in the past that we have intentionally descaled that and calibrated that broadly from a capital employment perspective into that business and the total quantum of risk that we wish to take on that business. I think today, at the revenue level, we are at a revenue level of the EPC business at which we are comfortable. If you look at Q3, I think EPC is about 25% of our P&L. Now the thing that we're working on. So from here, I don't see the need to descale in absolute terms the EPC business, but what we are changing is the composition of that EPC business. So whether that includes the illumination business is also reported in that, that is something that we will continue to drive growth on. It also includes the transmission business that is fairly healthy, we will hold that business and includes the distribution business, which is the one that is most challenged. And unless we see compelling orders or profitable orders, we are being very careful in taking that part of the business. So net-net, going forward, EPC business, at the revenue level may sustain at these absolute aggregate numbers, but the composition of that will be much healthier at the top line or even in terms of product -- or business mix, and at the bottom line level, you will see a healthy profitable business on the EPC also even on these numbers. So that's the future business. The balance sheet cleanup, we'll continue to see and that will deliver improvements for you.

Okay. So which means that power distribution is not what you are going to be too gung-ho about, but the rest of it will continue?

Yes. And my view on power distribution also if something changes dramatically tomorrow, why not? But to me, we are a businessman, we have capital. We have alternative uses of that capital. So unless I say compelling tender, compelling margin and not just tender and margin, but the risk covered -- payment risk covered, we have alternative uses of our people and our capital.

The next question is from the line of Akshay Bhor from Premji Invest.

Am I audible?

Yes, Akshay.

Just a couple of questions.

Sorry, you've gone faint again.

Can you hear me now?

Yes.

Okay. So a couple of questions from my side. The first one, I just want to understand, in terms of product strategy from here on, are there any white spaces within the existing portfolio or there are newer opportunities that you see from a 2-year perspective that you're looking at?

So Akshay, a, like you said, white spaces, we're not looking at it across into newer categories, but focus on our categories because we believe there's enough room to grow in the existing categories. In the existing categories, it's a mix of white spaces versus improvising our product offerings. White spaces, there is a clear white space, for example, in premium fans. We have not -- we've traditionally been very weak in that part. We have already launched products, but it's yet a relative whitespace in terms of our presence in that segment of the fans category. And overall fans of the category is something that we lag in. So clearly, fans, as an overall category is something that we're focused on driving growth forward. Similarly, in some of the other product categories, I would not say absolute white space, but our trajectory will be more towards premiumization. Because our anchor point is on the median or lower median. And therefore, we do want to improve our anchor point of offerings upwards on many of these product categories. But I don't think they're absolute white spaces, they're absolutely virgin where we're not present. But there is enough scope for us to have better offerings and better range of offerings and more compelling contemporary products there. So that's the way we are working on. I think the more important strategy for us is faster churn of products. So that's what R&D is working on in terms of number of SKUs that we launch every year and have a much faster churn of products, and offerings in the marketplace for the consumer to choose from them.

Okay. Great. I just want to understand on the EPC side, how big is this B2B lighting, which you call the illumination that sits there? And what's the size of that, either in terms of F '20 or this year 9 months, and what is the kind of margins that you make on that? I mean if you can share any indicative number rather than...

No, so we can give you a number. Illumination traditionally is between INR 600 crores to INR 700 crores. Had this been a normal year, we would have delivered double-digit growth on that. Now we'll see how that trends out on a full year basis. On our Q3, particularly, we have grown at 11% in illumination. That is about from INR 135 crores last year to about INR 150 crores this year Q3. That's a Q3 to Q3 comparison, okay? But on a normal year full year basis, we should be topping INR 700 crores in that business going forward. And it used to be a loss-making business. This again because of COVID impact, it may not be profitable, but next year it will be profitable.