Bajaj Electricals Limited (500031) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Bajaj Electricals Q3 FY '25 Earnings Conference Call hosted by AMBIT Capital Private Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Yash Jain from AMBIT Capital Private Limited. Thank you, and over to you, sir.

Thank you, [ Rutuja ]. Hello, good evening, everyone. On behalf of AMBIT Capital, I welcome you all to Q3 FY '25 earnings call of Bajaj Electricals Limited. From the management side today, we have Mr. Shekhar Bajaj, the Chairman; Mr. E.C. Prasad, CFO; Mr. Vishal Chadha, Chief Operating Officer for Consumer Products; and Mr. Rajesh Naik, the Chief Operating Officer of Lighting Solutions. Thank you, and over to you, sir.

Thank you. This is Shekhar Bajaj here. Good evening, ladies and gentlemen. Thank you for attending our Q3 earnings call and wish you all a very happy new year. We have delivered a good set of results for this quarter owing to good festival demand. On the macro front, while the headline CPI inflation eased to 5.2%. In December '24, it remains above the RBI target range. Due to a depreciating rupee, the Central Bank is likely to maintain a tight monetary stance. I believe the interest rates will continue to remain elevated for a few months potentially curing private consumption and investment. Consumers' preference is moving towards premium and feature-rich products. I would like to assure you that Bajaj Electricals is working hard to commercialize its premium offerings. We saw signs of positive traction in Q3, and I'm sure we will have more success to report in succeeding quarters. Coming to financial updates, we delivered a good quarter. The company has achieved revenue from operations of INR 1,290 crores as against INR 1,228 crores, a growth of 5% over the third quarter of the previous year. For the quarter, the company made profit before tax and profit after tax of INR 45 crores and INR 33 crores, respectively, against profit before tax and profit after tax of INR 50 crores and INR 37 crores, respectively, in the corresponding quarter of the previous year. It should be noted, however, that in December 2023 quarter, we had onetime impact towards warranty provisions of INR 23 crores, and income tax refund interest income of INR 36 crores. Hence, on a like-to-like basis, profit before tax of December '23 quarter is INR 37 crores, against which we have delivered INR 45 crores for this quarter, which translates into a growth of around 21%. Consumer Products business has shown momentum by delivering revenue growth of 8.5% on a year-to-year basis, mainly due to good festival demand in the month of October 2024. We have crossed INR 1,000 crores revenue threshold for consumer products after 2 years and are very encouraged by this achievement. The Lighting Solutions business revenue contracted by 7.5% due to price erosion. We've launched our Built to Shine campaign for our vertical in this quarter and have invested around INR 11 crores, that is around 4.3% of the Lighting Solutions business revenue towards brand building. I now hand it over to the CFO for detailed financial and operational highlights. Thank you.

Good evening, ladies and gentlemen. This E.C. Prasad. Thank you for attending our Q3 earnings call and wish you all a very happy New Year. Coming to the overall performance outset, let me reiterate that we had a very good set of numbers going to a good festive demand. We delivered a strong profit before tax of INR 45 crores as against INR 50 crores on a Y-o-Y basis. However, like Chairman explained, we had a onetime impact towards warranty provision of INR 23 crores and income tax refund interest income of INR 36 crores in the corresponding quarter of the previous year. Hence, on a like-to-like basis, the profit before tax of December '23 quarter is INR 37 crores, against which we have delivered INR 45 crores in this quarter, which translates into a growth of around 21%. Coming to the consumer products. The Consumer Products business registered a strong revenue growth of 8.5% on the back of a good festive demand and trade business revival. Appliances, which had shown slower growth in the previous quarters have grown strongly by high single digits. Within appliances, the domestic appliances have shown strong growth going to categories like coolers and heaters, which showed high double-digit growth. Kitchen Appliances continue to remain under stress even at the industry level. But with the demand uptick, we are hopeful of better performance in the coming quarters. Morphy Richards continue to register high double-digit growth, probably this is the 5 straight quarters that Morphy Richards has just been registering a double-digit growth. Fans remained flattish. Our CP EBIT margins are at 5% as against 1.7% in the corresponding quarter of the previous year. While the margins have increased 3x, it is necessary to know that quarter of the previous year had a onetime warranty provision of INR 21 crores, which translates to around 2.2%. Hence, on a like-to-like basis, we still have delivered a 5% EBIT margin vis-a-vis 3.9% in the corresponding quarter. The increase in margins are predominantly due to an increase in gross margins of 2% which has been offset by our continuous investments in R&D and various other projects for improving our operational efficiencies. The brand investments were at 3%. Our transformation journey to address our product portfolio gaps, including premiumization of our portfolio is underway and is showing good traction. We continue to improve our logistics and manufacturing efficiencies by a few basis points. We are glad to share that we have regained market shares in certain appliance categories on a Q-on-Q basis. Over the next few quarters, our focus will be to increase the top line and improve the market shares while continuing to spend heavily on the brand and other initiatives like revamped GTM, VAVE, digitalization, manufacturing efficiencies, et cetera. Coming to Lighting Solutions. The Lighting Solutions business degrew by 7.5% due to continued price erosion during the quarter, which also had an impact on the operating leverage. However, under our revamped GTM initiative, we have identified 167 focused markets which registered double-digit volume growth and mid-single-digit value growth. We have also observed pan India volume growth in our focused categories like ceiling lights and battens. Our EBIT was at 2.1% as against 8.4% reported during the corresponding quarter of the previous year. Again, here, it is necessary to know that we have invested in Built to Shine campaign and have invested around INR 11 crores in brand building activity, which translates to around 4.3%. Hence, on a like-to-like basis our EBIT margins are at 6.4% vis-a-vis 8.4% of the previous quarter of the corresponding year. However, on a Q-on-Q basis, we have held our EBIT margins after crossing of the mapped brand investments. The brand investments for this vertical will continue to be high for the next few quarters in our endeavor to increase our market shares. Coming to professional lighting, the order book stays healthy at INR 231 crores, and we are committed to growing this business. Coming to balance sheet and financial metrics. The balance sheet of the company continue to remain very healthy and strong. All the balance sheet ratios continued to be at optimal level. We continue to generate positive cash flow from operations. This quarter, we generated about INR 83 crores of positive cash from operations, and we ended up the quarter with a surplus funds of INR 423 crores. That's all from my side, and I'll hand it over to you now for taking the questions.

[Operator Instructions] The next first question is from the line of Nattasha Jain from PhillipCapital.

My first question is on the consumer products side. Firstly, congratulations on a good set of numbers. Sir, third quarter is a seasonal quarter for domestic appliances and Morphy Richards as well. So, I understand the double-digit growth here, which is appreciated. Now coming to fourth quarter, we've observed that on the ground, there is demand moderation across consumer goods. So given 4Q will be a bigger player for fans and for Bajaj fans is a comparatively lower revenue contributor. So how does 4Q look like to you? Are you seeing demand softness across electricals?

This is Vishal here. Our endeavor will be to do better than last year in the same quarter, and that's what we are hopeful for.

Got it. And sir, which category products have you taken price hike for? Can you quantify it is possible?

We have taken price hikes across almost all categories, be it mixers, be it water heaters, especially in 2 channels irons, whether it is national format retail or is in e-commerce. So across categories, not just one.

Got it. And sir, my next question is on the ad spend. So you mentioned that in Lighting, you have spent INR 11 crores and your EBIT stands at INR 5 crores. So can you just tell us what this huge ad spend was on in terms of Lighting, where did we spend this precisely?

So mostly, this is Rajesh here. Most of that was on the ATL. We created the first phase after almost 2 years, we went to market like in terms of investing into the brand, and that was mostly ATL.

So what would be the percentage of -- I mean, ad spend as a percentage of total revenue in 3Q?

It's 4.3% for lighting business.

For lighting. And overall, sir, anything apart from this...

Overall 3.3% Nattasha. So CP ad spend is 3%. Lighting Solution is 4.3% and overall 3.3%.

And we will maintain this run rate going forward also?

Yes, as we mentioned, so we'll be continuing to spend heavily on our brand in our endeavor to get back the market shares.

Got it. And sir, just one last question, if I may. So given that summer season is coming. Now can you just talk a little bit about scaling up of your next portfolio as to what products can we see coming into the markets, which weren't there earlier?

So next, coolers are the ones which we will be bringing into the market, but the ramp-up will be gradual; fans, as you already know are already existing. So it will continue to remain a premium offering from our organization.

The next question is from the line of Aniruddha Joshi from ICICI Securities.

You have indicated in the presentation regarding MFI impact in lighting. So just more -- seeking more clarity on MFI overall. What is the overall contribution and at the overall company level also? And what was the impact, if you can quantify it or share more qualitative details on that? Also, is MFI impact still continuing? Or do you see probably the peak of the impact is already seen?

So Anirudh, E.C. Prasad here. So MFI used to contribute about 5-odd percent in our total offerings. And MFI has been impacted since RBI came down heavily on the MFIs, and that issue still continues. So 2 areas of concern for us are the MFIs and the government channel, which has actually underperformed during this quarter. We hope that the government channels will start picking up, but MFIs will still continue to struggle for some more time.

Okay. And means 2, 3 quarter also, we can continue to see some impact on MFI channels also?

Yes. MFIs, yes. But the government channels probably will pick up.

Government channel means CSD types...

Yes. Yes. CSD and CPC. There again, for the various reasons, the demand was slow, but I think in the quarter, we see a demand coming back from those channels.

Okay. And the 5%, 5.5% you said is of the total sales number, correct?

Of the total sales number, yes.

Okay. Okay. Sure. Understood. Second, on Lighting, we're still seeing the price erosion continues to be there, means -- what will be in a way the end game here. Do you still see the prices continuing to get eroded or even now? Or is there any -- in a way full stop to that? Or how should we think about this business then?

Rajesh here again. Price erosion has been done in a few categories in consumer products. I think one of the category, which is ceiling light, it has to still hit. So I feel that next 1 or 2 quarters, it will continue for the price erosion. And it can come into the professional lighting also in some time. I think price erosion game is not completely over, until the DOV technology is completely set across product categories, it will continue to have price erosion for the next few quarters.

So the price erosion is not yet over in consumer products also and it is yet to begin in commercial products, means B2B elimination products?

For lighting it will be less because there it is more of performance driven. But yes, it will have some impact of price erosion in professional lighting also.

Okay. Okay. Surely, sir. Understood. And sir, third question in terms of -- now we have seen consumer products doing well. So you mentioned about some of the focused market or change in GTM strategy also. So if you can elaborate a bit more on this change in GTM strategy, distribution expansion or like that, that is the last question from my side.

This is Rajesh again. Because whatever we discussed about focus market for more of consumer lighting initiative, where we wanted to have the faster growth. And that's where we launched project [ Vriddhi ] and we started with first pilot of 5 towns. And after success -- we saw the success there in high double-digit growth, we expanded that to 167 markets. And there, we are saying -- we are continuing to see high double-digit growth in volumes and single-digit growth in value as well. So that is a 167, we will be expanding that in next 2 quarters to all India level.

So Anirudh, you asked what is this initiative about? It's about focusing on the WD that is the weighted distribution rather than the numerical reach to be on the relevant counters, doing the BTL activities properly, all of that stuff in those focus markets, which has actually started yielding results for us.

The next question is from the line of Rahul Gajare from Haitong Securities.

Some of the questions asked earlier were helpful. So I have some other questions around new products. Can you throw some light on the product gaps which are there, both on Consumer and Lighting, given that there is a focus on premium products at this point in time?

So from a consumer products point of view, we feel that some of the product gaps which we are hoping to address in the coming quarters are primarily around the area of fans. Other than that, in the remaining categories we obviously keep looking at white spaces, which I can't comment too much about at the moment. But from a high level, for the big categories, fans will be our focus to fill the gaps.

Talking about Consumer/Lighting to be specific, because professional it is like back-to-back when we do the customization of the products for the specific job. But Consumer/Lighting, we had gaps earlier almost 3 -- last 3, 4 quarters, we were able to bridge all the gaps which were there as compared to the competition. And as we wanted to grow much faster in ceiling lights, we are focusing on bringing more and new products into that particular category.

Okay. So product development on the Lighting side, especially on the Consumer side is behind us now, we can say that?

Yes, almost 27 products were launched in the quarter 3 only in the ceiling category.

Okay. Now in the PPT, you've talked about double-digit growth in [ MR around ]. Any specific products that you would like to call out in terms of exceptionally strong growth that...

Sorry, could you please repeat?

Any specific products that you would like to call out in terms of growth. You already highlighted, I think, that you had double-digit growth in Morphy, but besides that -- is that the highest growth that you've seen in the third quarter?

No, we have got segments within Morphy, which are growing faster than the overall Morphy growth, obviously. And those include segments like coffee makers, food processors, and so the personal care segments. So these are some of the segments which are growing faster and doing well for us.

And how much would Morphy be in the first 9 months in terms of revenue?

Yes, it's around 7.5% to 8%.

It's 7.5% to 8% of the total CP business?

Of the Consumer's yes, Consumer's, of course.

In this particular quarter? Hello?

Yes, sir.

So firstly, congratulations, we've seen margin uptick in the business, specifically on the consumer coming closer to 5%. I want to know from here, what are going to be the key levers for margin expansion? Now the backdrop of this is, we've probably reached about 30%, 31% gross margin, which is probably best in the last 10, 15 years. So which are the areas which essentially will drive margin expansion from this level?

So Rahul, we're doing a lot of things. One is the VAVE exercise that we are doing is expected to realize about 3%, 4% more margins, some of which might get passed onto the market, but there is a potential lying there. Second is, as I mentioned even in the last call, we are still a lot to do as far as the operating leverage is concerned, because we have created a structure to deliver about INR 6,000 crores plus of revenue, which we have not reached. So as we reach that milestone, the operating leverage will kick in, and we will have about 2%, 3% coming from there. Two other areas that we are focusing on is on the manufacturing and the logistics costs. There, again, there are a lot of improvements possible, which we are -- so logistics, we are aiming to get down the logistics probably by 1 percentile point and manufacturing also by a percentage point.

The next question is from the line of Achal Lohade from Nuvama Wealth Institution Equity.

Can you help us understand this quarter is seasonally the best quarter in terms of the product mix. If I understand correctly, given the water heater is the high margin, room heaters, et cetera. So, first of all, how do we see -- so you've explained these drivers for the margin improvement. But if I were to ask you in terms of ballpark range, can we move to 7%, 8% kind of a margin in next 2 years. Do you think that is doable and does that assume a reasonably good healthy demand or even with the current lackluster demand, you can still aim for that kind of a margin?

So some of the VAVE benefits will start coming in, in the next year. So we can expect that about 2%, 3% to kick in. Operating leverage obviously depends on the volume and the demand. So I hope both of them start kicking in together. Probably we'll be reaching 7% sort of a margin.

By FY '27, have I understood right, sir?

Yes, 2 years.

I'm Shekhar Bajaj here. Just as a size, I'm mentioning that luckily, Vishal has come from not our industry. And also, we have a sales head also, he is not from our industry, so they don't have the mindset problem, and therefore, we can easily improve our margin by 1% or 2%.

Understood. Second is in terms of the premium mix, if you could just give us a sense in the consumer products and the lighting. What is the mix right now? What was it, let's say, 3 years ago? And how do you see it over next 3 years? Some sense, some direction, some quantification, if you could?

In our case -- in the consumer lighting space, we were not in line with the industry in terms of mix. We were more driven in the lamp segment because our distribution was large, and we will reach into most of the counters and the lamp category has contributed to almost 50% to 60%. And our ceiling was -- ceiling category, which is supposed to be premium, in this particular consumer lighting segment was at low single digit. Now in last 2, 3 quarters, we have improved that to almost 17%, 18%, and we are continuing that journey to bring it to the level of 25% to 30% contribution coming from ceiling light. And even in terms of battens, we are trying to bring more innovative products in terms of inverters, battens and even the high-voltage battens, which will take that to the premium category and where the price space will be much lower. So we are working on adding feature plus products in all the categories, including lamps, where we had inverter as category and we were the first to launch high-voltage inverter lamps into that category. So we are building on premium in all the 3 categories where we are having the focus product segment approach.

And how about Consumer products?

In Consumer Products, as far as mixes are concerned, we are close to 40% of our premium offering, and it will -- we hope to continue to strengthen it in the 750 watts and above space. In case of water heaters, we are between 20% to 25%. And the fans at a YTD level, premium as well as BLDC, we are close to around -- between 20% and 25% also, which we will hope to keep increasing as we go forward.

Understood. Understood. And in terms of the logistic costs, we've been hearing for some time in terms of the changes, right? So where are we in that journey. You've kind of hinted in a passing remark with respect to operating leverage and the logistic cost savings. But I recall the previous target used to be fairly steep, 200 to 300 basis point improvement. Is that still intact? Or do you think that was -- that is now not possible anymore?

That is intact. We have actually reduced our logistics costs over the last 9 months or so by about 1, 1.5 percentage point. And there is still a scope of 1 more percentage.

Okay. Can you give us some sense what is the cost now in terms of logistic costs?

So the benchmark that we're targeting is about 5%.

Okay.

That 5% to 6% will take another couple of years according to me. At this moment, I think we are around 6.2%, 6.3% which I think we should be in a position to bring it down, but it will take a couple of years now, every 0.1% reduction takes its own effort, but that's our objective. Shekhar Bajaj here.

Yes, sir. And just a comment in terms of the replacement of the CEO position, where are we -- how soon can we expect? Is there anything -- any update on that?

Do you have problem with me around?

No. Not at all sir. It's just that -- we were earlier having, so.

I was CMD for many years, and I became [indiscernible] temporarily. Now I'm back to CMD. No, no, I'm just joking. No, we've got already -- we are working on that. Hopefully soon, we'll have a MD around. But until then, I'm very much now -- my wife is much happier to see me away from home, advise she was getting tired of me. So I'm fully involved now, so there's no problem.

[Operator Instructions] The next question is from the line of Nattasha Jain from PhilipCapital.

Just one data, if I may have missed. Can you please call out the mix between professional lighting and consumer lighting?

It's 60%-40%, Nattasha. 60% Professional and 40% Consumer Lighting.

Got it. And you mentioned that in Professional Lighting also, we can see a slight bit of erosion going forward, right?

Yes. It is there as of now also, but it was happened in the Consumer Lighting. In Professional because it is given through specifications, it is little less. But yes, it will continue to have some price erosion.

[Operator Instructions] The next question is from the line of Achal Lohade from Nuvama Institutional Equities.

If you could give some broad sense in terms of the demand situation. Sorry, I missed the initial part if you've already commented, could repeat in terms of urban, rural and specific -- category-specific comments, if you could? Like what we heard is in this quarter, the delayed winter seems to have had some impact on the water heaters. Has that the case been with us as well, et cetera?

So Achal, we remain cautiously optimistic about the next quarter. During the previous -- this Q3, we have done pretty well as far as the retails and the coolers, et cetera, are concerned. Even the room -- the water heaters, we have registered our growth in spite of the delayed winter. And we expect the domestic appliances to do pretty well. Kitchen appliances, we feel will remain muted for some more time, because this discretionary spend is still not kicked in. And I think with the stimulus given by our Finance Minister probably in the next 2, 3 quarters, things could start looking up. But having said that, the inflationary pressure still continues to be pretty high. The interest rate still continues to be high and we don't see that cooling in the next 1 or 2 quarters. So that will have an impact on the demand. But I think the cooling -- the seasonal products should do well in Q4 and the Q1 for next year.

Understood. And is it fair to say that we are more indexed to urban and rural? Or if there is any inaccuracy in the understanding?

So we are actually more indexed towards rural. But having said that, with the launch of all these new products, we are also addressing a lot of urban markets now, which we are not addressing earlier. So that also helps in our way.

Understood. Understood. And if you could comment on the market shares, any ballpark range in terms of various categories? I know it's hard to give out, but in a broad sense?

We don't give that out Achal on the call, but...

Let's say -- even for FY '24 is -- if I were to ask for?

It is -- in some of the categories over Q2.

See, one other problem. In this case one of the problems that we have is that, there is no proper system by which the market shares are known officially. Unofficially, we can find out and keep having our guesses, but there is no body by which we can be sure that automobile and scooters and 2-wheelers and all have their market share, which is exact because it is something which is monitored. Unfortunately, in small appliances and all there is nothing like agency or organization which keeps a track. Therefore, everybody can keep saying we've got high market share, but we don't know really. That's why we don't want to make that statement.

The next question is from the line of Yash Jain from AMBIT Capital.

Just a small question. Any guidance on CapEx or what we are planning to do here?

So CapEx will continue to be in the same range...

That will be any number, sir?

So it should be in the range of INR 100 crores to INR 150-odd crores for the next year.

The next question is from the line of [indiscernible] from Oaklane. I'm sorry, we are unable to hear you clearly.

Am I audible now?

Yes, please.

So I'm relatively new to tracking this company. So I just wanted to understand in terms of lighting solutions, what are the factors that are driving this price erosion? And in your experience in terms of looking -- working in this industry for so long, what are those factors that could stop or restrict this kind of price erosion?

So this is Rajesh. The price erosion was mainly because of the high volumes which are coming in. As you know, in electronic industry as the volumes go up, the prices comes down because of the production leverage. Second is the technology change itself. It was earlier a driver technology, which has now gone to driver or good technology with which almost 15%, 20% price reduction with the same features is possible. And that continues from one particular product category when it gets implemented to different categories. And that was the only reason why the price erosion continued for our last 2 -- almost 2 years. And now it may also go in professional lighting if that particular technology stabilizes for industrial environment.

Okay. Okay. So how could we stop? I mean, what measures could be taken to stop this kind of price erosion, if any?

So in my view, this particular price erosion will get stopped once its durably stabilizes across all product categories, because there is no new technology as of now inside in terms of -- in next 1 or 2 years, which can again destabilize the pace of this implementation.

The next question is from the line of Rahul Gajare from Haitong Securities.

I just had one question. You talked about price hike being taken across categories. Is it possible you can quantify it in the consumer on a broad segment level at consumer level and the lighting level?

Rahul, it's about 2% to 4% across categories.

In consumer, right? Okay.

Yes, in consumer. Yes.

The next question is from the line of Prasheel Gandhi from Anand Rathi.

Sir, just wanted to double check. You highlighted that you are targeting 7% EBITDA margins by FY '27. Is that correct?

Yes, that's right. So internally, we are targeting much more, but this is -- we are hopeful of reaching that in the next 2 years.

See, let me clarify, Shekhar Bajaj here. That the CFO is always very, very ambitious and very positive. We have to be a little careful. The markets are very tough. So that's our objective. But what will happen only time which shows, so don't keep putting that every time in every meeting, you don't say where is your 7%. So please don't do that.

Sure sir, secondly, could you just highlight the demand trends that have been in this January month. So could you give a bit more flavor to that?

No, flavoring is only done after the quarter is over.

The next question is from the line of Anirudh Joshi from ICICI Securities.

Yes. again. Sir, now with MFI and CSD channels getting impacted, is company thinking about the new channels, which are emerging like quick commerce, et cetera. So any strategy [indiscernible] on quick commerce that you can indicate? And secondly, what is the industry level sales in both ECDs or consumer products as well as lighting -- consumer lighting at MFI channel as well as the CSD channel or overall CPC plus CSD both put together channels.

Yes. So government -- so you wanted to know the industry or our share?

No, sir, industry level, what is the share of MFI? And industry level share of...

Now that, Anirudh, [indiscernible] the industry share. But going by our past, we are definitely stronger in those 2 channels. We had a significant share both in the government channel as well as the MFIs. Government channel for us contributes about 9-odd percent. And as I mentioned, about 4% to 5% in MFI. And we were one of the strongest players there. And your second question is on the alternate channels. So we have the early mover advantage in Q-commerce. We are already there in Q, but as of now, it's a very small share, but I think gradually it will pick up.

[Operator Instructions] There are no further questions from the participants. I now hand the conference over to the management for closing comments.

Thank you very much all of you who have participated. We are very, very positive about what's happened in the third quarter, and we are looking for that the fourth quarter should be strong so that we end the year very strongly, and we want your continuously support and best wishes because we are working very hard. We've got a very good team in place, and we are very, very positive. We've started the month well, and we are hoping that the quarter should be strong. Thank you.

Thank you. On behalf of AMBIT Capital Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.