Bajaj Electricals Limited (500031) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Bajaj Electricals Q1 FY '22 Earnings Conference Call hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vineet Shankar from Phillip Capital India Private Limited. Thank you, and over to you, sir.

Thank you, moderator. Good afternoon, everyone. On behalf of PhillipCapital India Private Limited, we welcome you to Bajaj Electrical Limited Q1 FY '22 Earnings Call. To discuss the results from the management side, we have Mr. Anuj Poddar, Executive Director; and Mr. E.C. Prasad, Chief Financial Officer. Without taking much of their time, I will now request sir to give his opening remarks, post which we'll open the floor for Q&A. Thank you, and over to you, sir.

Good evening, everyone. This is Anuj Poddar. Thank you for joining us today for this earnings call. I will start by putting the headlines, and then I'll share some data. As you know, this has been a tough quarter for everybody in terms of being COVID impacted and with lockdowns; and number two, on issues around commodity costs, et cetera. That said, we are -- we continue to maintain our strategic direction and improve on that in all fronts, and I will talk about that a little more. On growth, we are happy with our top line numbers in terms of direction and our consumer business. On bottom line, I know there's a lot of questions, particularly on consumer products. A couple of headlines from me there. Number one, it is -- there's reasons for the bottom line of consumer products. I'll take you through that. There are various one-time costs and/or noncomparable items there. That's what optically, it looks that way, but we are not really -- as we take you through that, you'll understand why that looks that way, and it is not as much a matter is concern. Number two, we are very confident in Q2, Q3 and on a full year basis, we will bounce back. So the direction on that remains intact with what we've been guiding earlier, we are not really -- we are really no confident on that part. Additionally, I'll talk to you about the cash flow and bank and balance sheet situation, which again continues to deliver with our guidance and trajectory that we've been maintaining so far. Quickly, on our headlines and specific numbers, et cetera, you've all got the financials, I believe the first filing that happened online on exchange, there was some visibility issue on the font in some cases. So that has been uploaded just for your information if some of you have not gotten it, that's been corrected in terms of [ one month ] exchanges . That said, I will not repeat all the numbers since we have access to that -- to headlines on our consumer products, rather let me say, overall growth for this quarter has been 41% in which our consumer products growth has been 56% from INR 395 crores to INR 617 crores. Keep in mind, this is a time in cooler quarter where we are not leader and typically, Q2, Q3 is better for us. But given our position in the various segments, we are fine with this growth. We think we've done fairly well. Coming to consumer products EBIT, which seems flat and which is where we've be getting some questions. That is net of many one-off noncomparable items. I will walk you through some of the specific items for you to understand what are the cost elements that have gone into this. Number one, as we've been saying for the past couple of years, our consumer products business revenues have been going up in our EPC business has been staying flat, in some cases going down, and therefore, a proportionate share of consumer revenues to total company revenues has been increasing. And part of that, every year, we relook at the allocation of some common unallocated support or fixed cost between the 2 segments. To that extent, we have had an incremental allocation of overheads of INR 12 crores that have moved from the EPC segment to the consumer segment for reporting. So that's point one. Point two, in this quarter, we've increased our publicity spend. Last year, Q1 was INR 14 crores, this year INR 29 crores. So there is an incremental INR 15 crores spend on publicity. This we maintained is basically important for us on our journey. This comes to about 4.7% of our consumer sales this quarter. We are happy to be at a variance on this versus competition because we think, strategically, long term, this is important. I've been calling that out that we will not shy away from investing in our brand for the next couple of years to get us a short-term quarter performance. Number three, there is, I would call, a one-time or noncomparable cost. We've been transitioning our logistics outsourcing our entire 3PL to Mahindra Logistics as you are aware, over the last couple of quarters. Some of that condition that's been happening on a sales manner across various warehouses and geographies across India. This quarter was supposed to have a transition of our single largest central warehouse in North India. So entire -- which is the bulk of our -- or the centerpiece of our own logistics. That transition was delayed because of the COVID. And therefore, there has been a fair amount period in the entire quarter, where we had double rental costs, not transitioned as per the original plan. That was unavoidable. And because of that, because of double warehousing and as a resultant suboptimal transportation management on this and double movement of goods, we've had incremental cost of INR 5 crores on this [Indiscernible]. This will start the way, we are seeing current logistics transition by around mid-August, this will start normalizing. In Q2, this will start coming down, in half of Q2, we will start seeing the benefits of this transition. So to that extent, we had a INR 5 crore incremental over budget impact in Q1. Number four, we paid out employee incentives in early July. This is a reward for we've beaten budgets last year financially and achieved highest ever profits. We had extra incentives payout. And to that extent, there's been a INR 3 crore incremental incentives cost built into the Q1 numbers. This will again normalize from Q2 onwards. Number five, we've had -- yes, we've had a commodity price impact. While we passed on part of that, not all of it was passed on in Q1. As per our internal calculation, we've had about a 3.2% impact on margins on the [ FLM ] as a result of that, aggregating to about INR 19 crores. And I will take a question on this because I'm sure that will come as to how do we see that playing out over the coming quarters. To add all of these items up and I'll leave you to do the math on that, so that is up to a significant amount. I'm not saying all of it could be avoided, some of this you can consider business expenses are not. But a fair amount of this could have been considered as something around back for seeing a normalized performance on a full quarter basis. Last year, of course, as you recall, you had 3 months of sales versus 2 months of sales decrease. So because of these various reasons and seeing the trend lines in Q2, we remain as confident of delivering the coming quarters from the trajectory we maintained. We'll see the results for short-term thing. I've also shared, I think, probably in March, one of our investor interactions with all media interactions. But there are short-term challenges, we will face those short-term challenges. But to counter the short-term challenges, we will not under invest or shy away from doing what we're doing from a long-term perspective, that includes R&D spend, et cetera. So we will continue to incur and invest in these things, okay? So that is to give a roundup of the quarter 1 consumer products business. Quick commentary on our EPC business, while the overall trajectory remains like we've been speaking, the loss has been coming down. The highlight there in EPC comprise 3 segments Illumination, Power Distribution and Transmission, all of which were a drag on the company with losses in the past. Our Illumination has turned around, so we had a breakeven in this quarter in Illumination business. And through the rest of the year, Illumination will give us positive EBIT, and therefore, that will only leave power distribution, power transition that we continue to fix. So to that extent, strategically coming back to a strategic direction, we are now seeing a turnaround Illumination business as we've been working towards it. Final couple of points, I want to make on our balance sheet and debt position. We have generated positive cash from operations of INR 39 crores in this Q1. So irrespective of the P&L view that you see, our focus on cash flow remains and the fact that we generated positive cash flow operation points to the inherent strength of the operating business that we have been running in net-off accounting P&L [ entry ]. I would dare to say that one of the few companies that have generated positive cash from operations in this quarter. Lastly, on the debt position, our March net debt was about INR 425 crores, March exit. June -- 30 June debt INR 56 crores, there is an increment. But keep in mind, this is after adding in the debt that we inherited from Starlite as part of merger transaction that was planned. We inherited about INR 215 crores of debt of Starlite. And therefore, this addition of debt is really pointed towards that. To that extent, we continue to actually fix that on a consolidated basis and I'm going to now fast forward into the debt position as of 7th August. So you get a little bit into how we're fixing that and how our cash flow is trending. As on August 7, our net debt, which was INR 656 crores on 30th June is now down to INR 434 crores. That's by over INR 200 crores in these 37 days. That points to both more efficient cash generation, and we are restructuring our working capital and credit terms, et cetera, to start this for the advantage of the business. With that, we remain confident on our overall cash position and debt and balance sheet trajectory for the rest of the year. Our guidance last year was that we will exit March '22 as the stand-alone Bajaj Electricals in a net debt free position. We continue to hold the guidance. We've got an incremental debt in this Q1 of Starlite, as you're aware. We will also seek to repay some of that, while we may not be repaying all of that. But we there remain confident and hold true all our guidance that we've given for this year on a full year basis. So with that, I will take a pause and hand it back to the moderate for the question and answer.

[Operator Instructions] We have the first question from the line of Renu Baid from IIFL Securities.

So my first question is on margins of consumer products again. So at the start of the year when we made the guidance of flattish margins between 9% to 10% level, did we price in the increased allocations coming in from the EPC business of nearly INR 12 crores? And this allocation is INR 12 crores on a quarterly basis? Or how should we look at this number at the annualized base level? And in addition with this, if I can just add, given that INR 12 crores of corporate allocation are moved to consumer, which effectively means that if INR 13 crores of EBIT loss in the EPC business technically not a big improvement that still continues to be under the water. So your comments on both of these will be awaited.

For the EPC margins, we -- if I go back to [Indiscernible] come to current, we had spoken about 1% margin expansion every year by which we should have been at 9% margin for this year, which is FY '22. On a -- I'll always say that leave aside an odd quarter that tends to steal numbers. If you take the rest of the 3 quarters, we will deliver that 9%. We will internally try to deliver 10% given that we did that last year, which is at #1 for the remaining 3 quarters. This was after factoring in the increased allocation. So why I always remain yet slightly conservative on margins, because we know, we had taking our price not this incremental allocation this is coming. So actual margins improvement delta is much higher, but we're delivering this improvement after taking some of these incremental allocations and our incremental spend on brand and R&D that is starting to kick in this year. So for the short answer to your question, yes, we will hold to 9% guidance that we've given, but a 10% target that we're chasing for EPC margins for the rest of the 3 quarters currently. And that hopefully answers your second question also on the INR 12 crore for this quarter, but it will replicated itself through the rest of the year, but with guidance on margin after that. To your question on EPC margin, yes, it looks as if it was worse, if one look at factors withing. But actually, we had a onetime again, write-off of about INR 10 crores in the EPC also because some provisioning that we've done there. So that is the net debt. Overall, we remain content EPC losses also continue to shrink.

And this INR 10 crore provision pertains to cost overruns or receivables?

To receivables. And therefore, I would, again, dive back into cash versus noncash. I don't know which one you prefer. But for the provision, not a cash point -- to me, what is more important is to get the cash operating loss will be quickly down to zero, so that mean, at least we are not burning cash in there, we remain focused on that. And then some of these maybe increase that we have to keep adjusting. Keep in mind, one of the benefits is of getting the Illumination business to turn down because by Q3, Q4 once Illumination is delivering profit that will again start netting off. So the net business will remain -- accumulated basis, that will remain positive on [ Q2 ]exit this year.

The second question pertains to how are we looking at the broad-based demand outlook after the second wave of COVID? Is business now back to normal? And the various segments both in terms of regions as well as segment can give some color in terms of performance in the first quarter?

Yes. So number one, demand is fairly healthy. Q1 also, you've seen that we've seen about a 50% growth in consumer over the similar 2-month period over last year, maybe 6 week or 8 weeks versus 6 weeks of last year. That trend continues. It has become better in July. So we are seeing a demand uptick in July. Will that continue to Q3? I think it will -- But last year, if you look at the graph, Q3 demand -- growth was even higher than Q2? Will that much stronger growth happen in Q3? I don't know, but 45 days into Q2, we are seeing a demand being buoyant and being strong. I think the challenge this year is more on the commodity cost side and pressures on that and therefore on the margins. So that's a separate part. I'm sorry, you got another part to your question here.

Segment wise, how was the performance?

Segment wise, Home Appliances in Q1 have grown 35%, Fans have grown 49%, Morphy Richards have grown 85%. Lighting within consumer area report is 12%. But consolidated lighting, which is B2C and B2B, which are Illumination and other companies reported together with aggregate lighting growth is 86% for us.

[Operator Instructions] We have the next question from the line of Achal from JM Financial.

My question was with respect to other expense, if I see quarter -- Q-o-Q or Y-o-Y, we see the other expense get really much [ fall ], so just wanted to get some color, is there any -- apart from the provisioning, is there any other one-off we should be aware of, in the other expense item?

Achal, just a quick question. Are you seeing total -- segment total, right?

Total other expense. The reported other expense or stand-alone INR 173 crores.

At a company level. So 2 things, they call one is brand. So brand has gone up from 14 to 29. Then there's EPC write-off that I spoke about, I said, it operates at 2 levels at a gross and a net level. So there is actually a INR 20-plus crores that's come here, but that we get net off in the top line. So we can assume INR 10 crores net impact here. That has come into the other expense line. If I take both of these items out, then the rest of it is pro rata increase in line with sales growth. These are the 2 that have big proportionate increases in the other expense. And the growth I used to look at we are one of [Indiscernible] action I mentioned the logistics cost of INR 5 crores, the employee incentive, I just realized, but want to mention one more -- one of items, which is INR 2 crores of VRS cost or employee retention costs at one of our factories. So all of these can be other expenses as a one-off.

This VRS cost is part of standalone or consolidated?

It's part of the stand-alone, therefore, also a part of consolidated.

Understood. And secondly, if you could give us some sense about the gross margin partly. You've mentioned 3.2 percentage point impact, but my question would be in terms of gross margins, how are they like -- And how do you see over next few years or what kind of improvement can we expect? And with respect to the total raw material cost inflation and pricing could be affected.

So while we give out the segmental gross margin, we'll give you qualitative hint: number one, gross margins in the quarter are impacted because of the commodity price impact, like I told you that 3.2%, that we've not been able to pass on. But that's also because we've taken a staggered hike. We've taken a hike in May and June for certain categories, about 3% each. We have taken a further hike now in July in categories of 3% and effective 15the August, we're taking a further hike in the other categories about 3% to 4%. So between Q1 and Q2, by end of Q2, we will have normalized the gross margins to the normal level. We are seeing commodity, which have been continuing to be an uptrend. So there was a lag in passing on that, but commodity costs have now stabilized. So now the increase in price will actually go to the gross market contribution. So by 15th August on our book on our paper. But by, let's say, September in terms of realization, we'll be back to normal full gross margin level that we used to operate at. What you're saying that 3Q, 4Q any large effect. While we were increasing prices, the costs were increasing with [Indiscernible]. Does that explain that properly?

Yes, very much. Just for clarification. If we look at the cumulative cost inflation at the segment level, What would that number be in terms of in September or October of last year, similar to what is the RM cost inflation, at the weighted average of segment level, near 4% or 12% or [Indiscernible].

Total cost of goods sold or gross cost level, I don't remember max, but I think Q3 was about 3-odd percent, Q4 was about 6-odd percent [ last May]. This Q1 has been 6-odd of which we've taken 3%, so 9 plus 6, about 15%. So about 15% till date, of which we passed on about between 9% to 12%. Yes. Because that's been a moving target, while we are passing on, that lag has been building -- the negative lag has been building into our margins. But as that costs are now flattening out, you will see the catch-up take us back to normal margin.

Understood. And just a clarification. You did talk about changes in the credit count. Was it for the consumer products business? And if yes, what is that change?

So for the change has been entirely for the Consumer Products business. While we don't put that out publicly, we were, I think, to my mind, suboptimal and out of line with industry in terms of the credit period. It was shorter than what industry offers. So we've normalized that now in our industry and created financial structures to enable more better working capital for us.

And if you make [Indiscernible] financing, is that understanding is right for the offline [Indiscernible] carry forwards.

That's on the sales side. I'm talking on the purchase side. So the sales side remains same, on the purchase side vendors, we had, are very generous, which is short credit period that we were enjoying versus industry. So we started normalizing that, and that is now releasing working capital for us. And that is here to stay, that's not going to go back. So that's one-off, now this will be the trend. And therefore, this cycle will continue as is.

We have the next question from the line of Amit Mahawar from Edelweiss.

I have 2 quick questions. Too many explanations on margins. And thank you for clarity. But typically, if I take EPC, is it fair to assume that FY '22 might still be in red for us because a lot of -- despite your tracking rigorous framework, a lot of things might be out of control. So first question is FY '22 largely EPC will be red. Is that a fair assumption?

So Amit, I've always maintained the full year will not be positive. We'll exit the year on a positive run rate. You have the visibility of a breakeven, so that we are confident FY '23 will be breakeven. Some of that gets pushed back and forth by quarter because, again, Q1 was not planned for the EPC whatever has happened because we lockdown not getting Q2 is a monsoon quarter. But you will see light at the end of the tunnel at FY '22, while full year annualized aggregate cannot be positive. You so that you would have visibility in Q3 -- FY '23 will not have any losses from EPC.

Fair point. And just a question. Any learning from -- so we basically provided for some INR 10 crores in receivables. But how do we assure ourselves that sort of thing does not repeat or -- because that can be a bigger because the retention is a large number still. So any color on that?

Yes. So as Anuj mentioned, not actually cash outflow. We have made a provision based on prudent view taken. Actually, we have already INR 16 crores on this in the month of March, but that was reflecting as a part of the gross margin, not as a part of the provision. Now what we have done is, since we are closing now with [Indiscernible] this provision from the margin levels into the provision for doubtful debts. So that is the net impact of [Indiscernible]. But having said that, it's not that we access as we continue to fight with our customers, but on prudent basis, we have made this.

I'll add to this. Our total exposure continues to come down, let me share the receivables from our PD business. So it was INR 1,388 crores as of March '20. It was INR 972 crores as of March '21. It is now INR 778 crores as of June '21. So number 1, on a cumulative basis, we continue to bring it down. Number 2, the biggest questions for all of us has been retention money. And with that -- and now we started seeing it's early days on certain projects. We started seeing that at least a couple of projects, we've got the retention money, which was last 10%. That was a very important proof of concept for us than having to go through that process of being able to complete all the documentation paper work, audit and release from all the agencies in the state or central level to get the last 10% in. Once we've got that, while we don't some of the smaller projects, we are more confident that the balance 10% of other projects will also come in the due course. So we do not see any significant large risk coming because of this, whether that is noncash in nature.

Second question is on Starlite. So typically, in FY '22 and '23, how much will we commit in investment? And how are you are able to assure us that the returns on these businesses might not take more time?

So again, first, let me address Starlite, Amit. Factors, like I said earlier, Starlite has only moved from being a JV outside to becoming officially in our balance sheet, because we have writing their debt and therefore, have been funding the losses in the past, also pretransaction. Now that this transaction has done, we've made that more visible and transparent to everybody and it allows us to actually streamline that better and faster. If at any point the debt of Starlite refinanced that with much cheaper debt using the BL balance sheet. So actually, the consolidated effect on that, real impact on that will be borderline basis will be better than before, number one. Number two, it is allowing us to move better faster on the operational side of Starlite. We, for example, given our best ever output in July month on the Starlite production, et cetera. And that's what will settle, operating synergies become much better and faster over the coming months on Starlite. Number three, on Hind Lamps subsidy, while that was not directly impacting us in the past, Hind Lamps where we had this VRS and retrenchment of people, that factory as on date is not operational. It is a shutdown. We are not sure whether that factor will restart unless it is viable. That's one of the reasons that we had to go for a retrenchment of people. As a result of these, as these are one-time costs, we will result in reducing operating losses from the Hind Lamps factory in the future. Lastly, we do not share details on that. There is bank value and there are tax assets sitting in both Starlite and Hind Lamps on a consolidated basis and post transaction over the coming few years, we are confident that we've in building up exit cost, both property and debt, we will overall do beneficial position factoring in the purchase price also.

[Operator Instructions] We have the next question from the line of Aniruddha Joshi from ICICI Securities.

So sir, on the VRS, is the VRS completely over? Or there will be more VRS related expenses in Q2 and maybe Q3 also? That is question number one. Also, first reason I joined call late, sorry, but what was the first reason you indicated for the one-offs. So I missed that. So if you can please indicate again. And so -- and lastly, what was the growth in Fans and Morphy Richards that you indicated?