Crompton Greaves Consumer Electricals Limited (CROMPTON.NS) Earnings Call Transcript & Summary

Hi, everyone. On behalf of Kotak Securities, we welcome you all to Q2 FY '26 Earnings Conference Call of Crompton Greaves Consumer Electricals Limited. We have with us today the management represented by Mr. Promeet Ghosh, Managing Director and Chief Executive Officer; Mr. Kaleeswaran Arunachalam, Chief Financial Officer; Ms. Shweta Sagar, Chief Business Officer, Butterfly Gandhimathi Appliances Limited; Mr. Rajat Chopra, Business Unit Head, Home Electricals and Pumps; Mr. Shalin Nayak, Business Unit Head, Lighting and Solar Rooftops; and Ms. Natasha Kedia, Head of Investor Relations and Corporate Communications. Now I hand over the call to management for their opening remarks. And post that, we'll open the floor for Q&A. Thank you, sir, and over to you.

Good evening, everyone. Welcome to the earnings call for Q2 of Crompton. And to begin with, I want to thank Kotak for hosting this call. And as you already know, Kalees, Rajat and Shweta and Natasha are joining me today. To begin with, I want to say that I'm delighted to announce that Euromonitor has -- Euromonitor International actually has certified Crompton as the world's #1 ceiling fan company. This is, of course, a reiteration of the leadership position that we have, not only in India and now across the world. It's very gratifying that we have been so validated by an international firm. Needless to say, this has many implications in terms of the scale of operations that Crompton has in ceiling fans, but that is something that we can discuss as we go along. Firstly, now let me get into the business itself. Many of you have seen that in the recent months, you have seen the step-up in our solar business. Initially, it was in the solar pumps business. Now solar rooftops has also joined the party. Since we announced our entry into solar rooftops a few months ago, there has been a flurry of activity. We are rapidly scaling up our presence. We recently secured our first solar rooftop order, which was INR 52 crores. Now that was followed by a landmark order of INR 445 crores. In aggregate, the solar rooftop business has already secured about INR 500 crores, about 50,000 units in the course of just a month or so. This, we believe, sets us off to a flying start in the solar rooftop business and actually positions us extremely well in the retail solar business also. This is something that I think we will -- you will see in the months and years to come. In the meantime, our solar pumps business has also been growing very fast, again, a business which is growing on the strength of the Crompton brand because farmers across the country are choosing Crompton pumps, Crompton solar pumps and which has resulted in our rapidly gaining a market share now, which is about 6% to 8% nationally, all within the space of about 2 years. This is a business that, as you are aware, we've been growing at 100-plus percentage year-on-year-on-year, right? These are 2 businesses that we are very excited about. We can talk about this at some length going forward. But we do expect that the solar business with its strong profitability, strong retail connect and strong return on capital will likely become possibly the second largest business for Crompton within the next 1 or 2 years. So lots of potential there. Both solar pumps and rooftops are high-ticket opportunities along with our core categories. They deliver, as I already said, strong unit economics, have great capital efficiency and high return ratios. Most importantly, they leverage of the core strengths of Crompton, which is the Crompton brand, which is something that consumers have great faith in. This is particularly important because in solar business, to give you a sense, this is a very -- this -- the amount of money that a family may spend on solar, let's say, if you set up a 3 kW unit solar rooftop, you spend maybe INR 2 lakh, 2.5 lakh, INR 2.25 lakhs. That is more than all the products that Crompton currently sells into the home. So if you put pumps and mixer grinders, Butterfly chimneys, kitchen products, all of them, if you put together, they'll probably add up to an expenditure of INR 1 lakh, INR 1.5 lakhs. This is a huge opportunity and people are asking for our product by name. So it's something that we are quite excited about. And it, of course, also leverages of the extensive distribution network that we have and the very effective sales service network that we have. Now to come back to our other core businesses. Before I actually get into reviewing the numbers, let me say Crompton 2.0 is continuing a pace. We have renewed our focus on consumer centricity. In this -- particularly in this situation, we have this in the previous quarter, completed a very extensive UNA study, usage and attitude study. Now as a consumer company, as you might imagine, this is really critical to how we are evolving as a company. This has also meant a considerable amount of expense -- but this to give you a sense of how extensive this UNA study was, 17,000 people across the various products that we manufacture and sell, 17,000 consumers were interviewed. Their detailed views about what they think of our brand, what they think of other brands, what they particularly take into consideration and buying various products is something that this study is thrown up, I have to say, very insightful for us. And I think what you will see in the months and quarters to come, you will see us hopefully translating this into the premiumization brand premiumization road map, product -- consumer centricity road map of each one of our products. Our GTM revamp, again, a large transformation project that we've undertaken, which I've referred to, I think, from time to time, is also progressing well. We have a global consultant working with us. We have particularly co-created city level execution plans with field teams to run targeted pilots alongside with a very dedicated rural acceleration program. The pilot focus is selling more in existing regions, rain selling and premiumization. Early results are encouraging. We expect to see meaningful progress in our GTM plan also over the next 18 to 20 months. And we expect that this will further strengthen our distribution as well as penetration. Diving into our Q2 results, revenue performance has been steady, underpinned by a 3% Y-o-Y growth in underlying volumes. We have remained steadfast in being able to not only hold but gain market share across various categories despite difficult market conditions. Particularly as you are aware, weather conditions have not been favourable. This has led over a period of time to a stocking up, which -- with the entire channel, which frequently does lead to not only impacting one product, but a few other products are also impacted as a consequence of this. ECD has witnessed encouraging momentum across categories with market share gains. Y-o-Y margins have been impacted, particularly in the NDA and the TPW segment because of adverse market conditions. There is also the impact of commodity price movements, which, as you must be aware, is something that has affected a number of players in this segment. We have already started taking pricing actions in order to address some of these. In fact, we were the first company in ceiling fans to take -- to announce a price increase in prices, which came into effect about 24th of last month, right? So we are taking the lead as always in pricing action. And we think -- we believe that the rest of the industry, which has also been impacted by commodity price increases will also follow. Our BIBC fans now is coming off the launch of the nucleus platform, which I spoke about maybe 6, 9 months ago. This led to the launch of fully indigenously developed DC products into the market, and nuclear, they've well received by the market. Our BLDC products in this segment have been growing at very strong double-digit numbers, 50-plus percentage numbers. And we expect this momentum to continue and indeed strengthen as we go forward with further product introductions in the BLDC segment. Our pumps business delivered a mid-teens growth, supported by solar orders of about INR 92 crores that came in last quarter. SDA has continued to grow in strong double digits. We -- our kitchen business, which combines Butterfly, our SDA business and our large kitchen appliance business, as I've said before, is the second largest kitchen business in the country. And in that company -- in that business, we are growing at double-digit growth, which on that scale, I don't think any of our competitors comes anywhere near competing. On Butterfly itself, this was a standout quarter. Revenue growth. Now this is something that you guys would have seen already. Revenue has grown 13.6%, driven by strong channel execution and new product launches. EBITDA in Butterfly has grown at 21% growth in our -- in Crompton kitchen is comparable, in fact, a little bit better. So you can see how the kitchen appliance business, kitchen business in Crompton is doing. Further, Lighting, Lighting has demonstrated strong performance in both top line, which is about 3.1% Y-o-Y growth and EBIT, which grew at 50% Y-o-Y. EBIT margins in Lighting, which came in at 15.5% expanded by 4.8% Y-o-Y. Now with that, I hope you have had the time to look through the investor presentations that we put out. One last point I want to also flag to all of you. Our results this quarter also have an exceptional item. For the first time, we are actually calling out an exceptional item. largely because of the single quantity that -- single quantum that was spent on it. As you know, and if you don't, I'm happy to elaborate. we have been embarking on a transformation of various parts of the organization. One part of this transformation has been the restructuring of our Baroda operations. Now in the last quarter, we incurred a cost of about INR 20 crores in restructuring the Goa operations. Apart from the restructuring, there has been a big change in the way that the Baroda operation has evolved as a consequence. This has also an operation which started a few earlier being a lighting business. This is a legacy lighting product company. Over the last few quarters, it has changed dramatically. It is now not only a lighting manufacturing unit, it is a fans manufacturing unit. It is an LDA manufacturing unit and soon to be also a manufacturing unit for a part of our solar rooftop business. In addition to this, this is also the location where we have set up a significant testing facility. So that's just to give you a small glimpse of how the transformation, which is a part of Crompton 2.0 is evolving. And you, of course, heard of some of the other things that we can talk about, which is the UNA study and the GTM process. With that, I'll pause, and we'll take questions. We'll open the floor for Q&A.

[Operator Instructions] The first question comes from the line of Aditya Bhartia.

My first question is on the ECD margins. While you kind of elaborated on it a bit, but the margin drop has been quite sharp and sudden and which is why I wanted to understand, is it largely only in the fans category and SDA category where we are seeing this margin erosion? Solar pumps and rooftop, I don't think we'll be having too much of revenues at this stage, but those are pretty okay in terms of margins. And also on the fans side, when do you expect these margins to be coming back with the pricing actions that have been taken? And is there a competition angle also attached to it?

Actually, I don't know how you kind of came to the conclusion that the margin drop is attributable to fans and SDA. Actually, the -- what I mentioned was that the margin drop is as a consequence of, one, the commodity price increases in our ECD businesses. Secondly, it's attributable to TP and the LDA businesses. Now as you are aware, the LDA business comprises our air coolers business as well as our water heaters business in the TPW business. Now both of these are significantly impacted by seasonality, right? And while the channel had purchased -- had stocked up some, that's impacted their ability to come back and purchase more. And I think there has been a considerable amount of competitor activity in that -- in these products. So yes, we do expect that the price increases that we are taking will help. To a smaller extent in fans as we go into the transition, which is 1st of January, we have also been obviously taking -- going into the last quarter, it's important that we are well prepared with our inventories in the Q3 because there's a cliff at -- on the 1st of January. So some of that has also obviously been acted upon. Needless to say that -- that is until the first of this quarter. But it's important to start working in advance and we have already started doing that. And so yes, so those are, I think, the factors which have gone into the -- substantially explain the margin in this quarter. There is another element here -- we have significantly stepped up our investments in -- also in transformation, which are currently not obviously giving the returns that come along with these investments itself. So for instance, we would have started spending money in GTM ahead of the impact that it has on sales. We have started spending on -- you can imagine -- these are only ones that I'm putting out there. There is -- we have also stepped up our investments in digital. Again, these are investments that you make first in various capital expenditures that you -- or whatever expenditures that you incur in transforming your operations. So it's above the gross margin level, I told you what the reasons are. Below the gross margin level, there is the transformation expenses that we've stepped up now for the first time because there was a combined expenditure last quarter of about INR 20 crores. We are also calling that out separately. But even outside of the restructuring expenses, there are other expenses which we've incurred last quarter. These are all, I think, very important for us because they will contribute, we think, to making Crompton 2.0 happen.

Sure. One thing that is a little surprising is that there have been times when we have seen sharp RM inflation. But I don't -- I can't remember any time when we saw margins as low as what we are seeing in the ECD vertical. And which is why it kind of -- I wanted to ask what exactly has been playing out? And by when should we be expecting these margins to be recovering? The segment used to have high teens kind of margins. What should we now start expecting as sustainable margins for the segment as well.

So Aditya, if you look at it, Promeet walked you through on the comparative to previous period -- previous year, which is why is the reason this is a combination of our seasonal categories not bringing in the revenue, which is on a higher gross margin. So mix on that has got adverse. Sequentially, if you look at Q1 to now, it's largely due to operating leverage. Q1 is a large seasonal quarter, and we don't have that scale. That is the reason for it coming down. Now looking at from a forward perspective, what are we doing to get the margin restored, -- as you would know that we did this just recently on ECD when we restored the margin back to its mid-teens level. That's our intrinsic margin, and that's a portion that we want to move. This quarter, we talked about the reasons. As we move forward, a price increase as we communicated for November -- there will be a few more initiatives towards that will be taken as we move forward. Punati is getting accelerated. So we look at further cost saving that needs to come in. Some of the benefits that we have seen on CD fans on cost initiatives, we may now start moving towards table pedestal and wall fans also. Coupled with that, there is also a mix that should help us positively on the premium side. Those are the initiatives that we are looking at. I would continue to say that from an industry perspective, when we look at it, yes, there has been a margin pressure across the industry, but we continue to lead on margin as we speak. And we are confident to restore it as we move forward with the actions that we talked about.

See, you don't ask us to give you specific guidance, B, but I will just give you a further another indication, right? The last time I was asked these questions was what the March 2024, right? March 2024 was the March 20 March 2024, where margins had impacted. And as you know -- you know the trajectory of margins, right? So don't ask us to give you forward guidance, but we do believe that there are particular factors which have gone into the margin, particularly the unseasonal impact on LDA and TPW as a consequence of which we have seen what we have seen. And we have -- we are taking the lead in addressing this, and we are the first company in the -- in fans to take a price increase.

The next question is from the line of Siddhartha Bera.

Sir, my first question is on this price hike, which you indicated in the fans portfolio. So possible to highlight the quantum, how much has been taken? And is it for the entire portfolio? Because we have seen like about 80 bps sequential gross margin drop in this quarter. So just wanted to understand, is it good enough to offset this drop? And second is at a portfolio level, you have talked about solar being a INR 2,000 crores type of revenue in 2 years. How should we think about the profitability of this portfolio? Will it be at par with the ICD sort of margins which we have? Or how should we think about this as a margin over a period?

Sure. Let me answer both those questions. We have taken a price increase of about 1.4% in our fans business. This -- that's what we have started with. I think we will see what happens as we go along. So that -- hopefully, that addresses the first part of your question. I don't think we are in a position to particularly take price increases in the business just yet. In so far as your -- the margin and the return profile of our solar business is concerned, the solar business has a very similar margin profile to the rest of the company in terms of the EBIT margins. To be clear, the way that we are -- this business is not the way that the other businesses work. This is a business in which much of the gross margin flows through directly to the EBIT business, right? So the margin profile of the company is very similar to the margin profile of the solar business. It is at that same time, a very high ROCE business, right, especially the rooftop business, where much of the payment comes in pretty much with the installation. Now I don't need to get into what this thing is. I've talked to you about that before. If you want, I'll get into it. But this is a high-growth business, high ROCE business. This is going to supplement our core businesses -- sorry, this says Internet. This is going to grow our supplement our core businesses where, as I said, we are gaining share in fans. We are significantly ramping up our BLDC position. And in pumps also, we've gained share. That leaves our SDA business, which is growing in strong double digit and like I said, is the fastest growing kitchen business in the country.

Sir, I just had a follow-up on the solar pumps. You indicated a strong order pipeline. Possible to highlight the quantum. We had talked about this in the last quarter also. So this quarter also, if you can just highlight the quantum of the order pipeline will be helpful.

You want to talk about the order pipeline?

INR 200 crores... INR 25 crores.

The current order pipeline is INR 255 crores as we speak. just to be clear, that's the unexecuted order -- and that business is -- I mean, again, not to get into particular numbers, that is growing at 100-plus percentage Y-o-Y.

The next question is from Renu Baid.

[Technical Difficulty] So just one question circling back on the solar rooftop portfolio that we are having since essentially it will be an outsourced business model for us. And you mentioned ROCE are very high. How would your view be the net working capital intensity and the risk on the execution side obligations required on the performance of the panels.

I just -- if I just put on the questions, you are asking what the working capital requirements in that business are? And two, what are the commitments that we are making on warranty?

On the performance of -- as typically for rooftop, there are also performance-related warranties which are required in terms of the efficiencies of the panels. So to what extent would be back-to-back covered with the panel supplier and on our books, what could be the liabilities related to these?

Yes. So do you want to talk about the back-to-back this thing?

Yes. So we are completely covered on the back-to-back as far as the panels...

So to answer who is the -- so to answer your question, these are back to back. This is not very different from many of our other businesses. As you already know, we have a pretty healthy mix of products that we outsource and products that we make in-house. Crompton does a splendid job of ensuring that the quality of the product that is put out into the market regardless of whether it is made in-house or outsourced is -- meets the Crompton standard. Now insofar as the working capital is concerned, as I've already told you, this is a business in which ROCs are high, right? So the working intense capital intensity of this business is low. So it is many of our businesses, we operate at very capital-efficient businesses. That's the case with our fans and pumps business. And this is also a business which is high capital -- high ROCE business. I don't know if you can give some more color if you want. as I recall, in this business, on the retail side of the business, solar rooftops, 90% of the -- 85% to 90% of the payment is made in advance.

Got it. And on the panel side, would it be possible for you to elaborate on who our partners here would be in terms of sourcing partners...

Typically, if you don't mind, we will not disclose who our partners are. Obviously, when we have gone and got these bids, we have made arrangements for sourcing the solar panels. But I want to make this point here, and this is a question that you haven't asked, but has been asked of us.

Because panel availability is a constraint at what price. So how are we covered on that aspect? Do we have annual rate contracts with some of the larger suppliers here in the market? Or how does the...

Okay. So the solar rooftop business, we have clarity of what price we are going to get the panels at, okay? So that's point number one. Point number two, now because we have such a large scale in solar pumps as well as in solar rooftop that enables us to get well negotiated prices in the solar panel business, as you might imagine. In fact, one of the very key things that this order allows us to do is to get scale on our sourcing, both on the solar pumps business as well as on the rooftop business and also outside of -- not only in these orders, but outside these orders as we go out and implement orders directly on individual -- take orders from individuals. So the product is exactly the same, right? If you have 50,000 units that you have a scale already in, that obviously significantly steps up your ability to get better prices for these products as well as will help us step up the execution of these products because that is also something that you need to do. One of the reasons why we've managed to get a sharp uptick in solar pumps is because we've done the execution well.

Got it. And sir, lastly, a question related to fans where obviously, we have a table rating change coming through from Jan. So last time I remember, Crompton had been absolutely low on inventory upstocking of the older inventory. significant destocking ahead of these changes. This time around, do we have a strategy in place? You're already in November. So would we be on the board with other industry peers to upstock on the older rating products ahead of the change or we would go low on inventory, channel inventory and then push the new product range from Jan?

Clearly, we've learned our lessons from the last time. I'll leave it at that. And also there has been 2 projects which have been running in Crompton for the last 6 months. they are called Utkarsh and Utkarsh 2. Uttkarsh is how the stocking and destocking of current B-rated fans is going to work. And Uttkarsh 2 is how we are going to start manufacturing new B-rated fans right? And I dare say that we are pretty well prepared as far as we can tell today. Hopefully, you will start seeing some of these fans sooner rather than later. So there is -- we made this point earlier. We are technically preparing ourselves not only for B2, but also for B3. That is why I went and announced to you now 9 months ago that this is the -- gave you a glimpse of the technology that we were using. So yes, there -- I think we are in a reasonable state of preparedness. The extent of upstocking in the industry, I can tell you, the extent of upstocking is not going to be probably similar to what happened last time. That's not in any way Crompton related. That is because I think the industry -- the channel partners last time had upstocked across board other than in Crompton. And they -- I don't think felt that served them particularly well. So our sense is that the channel will -- the levels of upstocking in the channel will be more moderate across the industry, but we are well prepared.

Our next question is from the line of Achal Lohade.

Two questions. First on the lighting. If you could help us understand, we have had a record margin. How sustainable are these? What has driven this margin expansion? And b, mid-teens volume growth is pretty encouraging. How do you see that playing out going forward? What is driving any particular subsegment, which is helping in terms of the growth?

Okay. So I'll -- let me take the first crack at it, and I'll ask Shalin to step in if needed. Lighting, as you know, comprises 2 parts, B2B and B2C. In our case, the growth has been similar in both B2B as well as B2C, right? So this is not -- we have not particular believers that we should just do lots of B2B businesses, which are kind of, as you know, very low-margin business otherwise. So this is -- we have done in B2B as well as B2C, our growth has been consistent. In B2C, we have been calling out for some time that we are significantly reorienting our product mix. Our product mix used to be lamps and battles, right? Our product mix today is panels, lamps and bats. Some time ago, our lamps and bats used to be more than 65% of our product mix. Today, they are about together probably 40% -- 40% of our product mix. We have added a lot of both panels as well as other products like flood lights, et cetera. All of these are going towards a material uptick in the margin in our lighting business. In our B2B business, also, we have been working towards improving the quality of our B2B business. One of the -- without taking specific numbers, one of the objects of our B2B business has been to reduce the kind of government exposure because they have tended to be in our B2B business, increase our industrial part of our business. And that is also something that we are managing to do. The largest contract that currently -- I don't -- I think we've disclosed it, the largest contract that we currently have is with an industrial company, right? That disclosed JSW Steel, we have -- so it's fully disclosed, right? So there are a spade of activities that we have done in our lighting business, not the least of which is also addressing the manufacturing cost of our lighting business. Now the lighting business had 2 manufacturing units. One was in Baddi, the other was in Baroda. In Baddi, we have changed that manufacturing unit and now it is a fully dedicated fans business, which is a 50% increase in production capacity to what we used to manufacture in Baddi before. There is no more lighting in Baddi. In Baroda, as you've already heard, that one, that manufacturing unit has gone from being a dedicated facility only to lighting to many other PLs. And in this last quarter, we have also undertaken significant restructuring, which, by the way, will come now. The benefits of that will come now to all the PLs that are now based out of Baroda. So if we spend INR 20 crores, typically, the payback of these expenditures tends to be about... 2 years. Yes, less than 2 years, right? Obviously, we've not spent it just like that. So what you are seeing in lighting is the benefits of both front end as well as back end improvements.

So is it fair to say that this is now the new normal margins? Would that be a fair assessment?

From a forward-looking perspective, Achal, as you know, we don't give guidance. But having said that, the idea is to also reinvest back to get lighting on growth. So we also look at opportunities to step up our A&P in this...

Got it. The second question I had was with respect to the solar piece. If I look at solar pumps and also rooftop, both are dependent on the government schemes. So if you could help us understand what is the visibility you've got, particularly on the PM Kusum. -- there was expectation that it should come through the PM Kusum 2.0 any time now. So just wanted to check any update on that?

Okay. So actually, let's step back for a second. Let's -- both the businesses are not government dependent. I'll explain why. Firstly, insofar as solar pumps is concerned, as you are no doubt aware, as Kusum 1 is expiring, Kusum 2 has already been announced. September -- in the month of September, the son of Kusum 1 has already been Kusum 2.0, okay? And that has -- while 15 lakh pumps have been, I think, implemented in 1, the aspiration is 3 lakh 36 lakh pumps is the aspiration in Kusum 2, okay? So clearly, the government has every intention to continue to grow -- to continue to invest in Kusum 2. In fact, from our point of view, -- we see opportunity in other states where today, we are not as present. We have already, as you know, got -- as I mentioned earlier, got a market share of about 6%. That is working in a restricted number of states. Basically, we've been in Maharashtra, Rajasthan and Haryana. We think there is opportunity for us now that we've done so much work to also expand into other regions and with that will come further increases in our market share. Insofar as the solar rooftop business is concerned, the first orders are from the government. This is a huge business in the retail market, right? Huge business in the retail market. What these orders do is that, that gets our business off to a flying start, right? Basically, it gives us scale in terms of installation, in terms of procurement. But also most importantly, this is a business where you can imagine the strength of the Crompton brand where you want to spend 2.2 lakhs on a product and Crompton goes and says, look, by the way, we've also installed 50,000 units. There is nobody else who can easily make such commitments to the people. So this is a INR 20,000 crore market. Today, I'm not talking about future. The INR 20,000 crore market, where this so this is a large business. By the way, simultaneously to implementing the solar rooftop business in Andhra and Telangana, we have also launched our retail presence in a set of states. And as that picks up pace, I will keep you informed about it. So this is -- we do believe that going forward, we'll have a healthy mix of direct to retail. By the way, this is different from B2B and B2C that we do in other businesses. In other businesses, B2B is a different product. a different product, entirely different product, right? It's a made-to-order product. Here, this is exactly the same product that we install in any home. We put up a 2-kilowatt product in any home, this is exactly the same product, exactly the same installation, exactly the same survey and therefore, very similar supply chain. So I hope that answers your question.