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

Good morning, ladies and gentlemen, and welcome to the Q2 FY '23 Earnings Conference Call of Crompton Greaves Consumer Electricals Limited hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.

Yes. Thanks, Michelle. On behalf of ICICI Securities, we welcome you all to Q2 FY '23 results conference call of Crompton Grieves Consumer Electricals. We have with us senior management represented by Mr. Shantanu Khosla, Managing Director; Mr. Rangarajan Sriram, Managing Director of Butterfly Gandhimathi Appliances Limited; Mr. Kaleeswaran Arunachalam, CFO; and Mr. Yeshwant Rege, Vice President, Strategy and Financial Planning. Now I hand over the call to the management for initial comments, and then we will open the floor for question-and-answer session. Thanks and over to you, sir.

Thank you, Aniruddha. Good morning, everyone, and I wish you all and your families a very, very happy Diwali. We have today out here, myself first Shantanu and Yeshwant, but I'd also like to introduce Mr. Kaleeswaran, who is our new CFO, who was -- who came in about 3 months ago, after an extremely successful stint in Asia. We also have joining the call today Sriram who, as most of you would be aware, used to run the Fans business in Crompton, and it's now assigned as a Managing Director of Butterfly Gandhimathi. Unfortunately, Matthew could not join us today because he's traveling overseas. I get right into it and talking about the overall performance. The one context I would like to provide before I talk to specific numbers is given all the variations in the base period because of COVID, high levels in the previous past quarter due to the COVID, post-COVID, pre-buying, et cetera, we do think that it is important as you look at the results, you look in the context of both the overall half 1 performance and also a more longer-term CAGR as we try and assess the performance given the variations in the base period. Moving on. The consolidated quarter 2 revenue for the group was -- grew 23%, representing a 3-year CAGR of 17%. Stand-alone revenue for Crompton declined by 3.8%. However, this represented a 3-year CAGR of 7% to 8%. Stand-alone Crompton business grew a healthy 21% in half 1 of this year. ECD revenue contribution is in excess of INR 1,000 crores, INR 1,062 crores. Fans business did decline for the quarter. However, as I mentioned earlier, if you look at it from a slightly longer perspective, the 3-year CAGR for the Fans business over this quarter was a healthy 10%. After -- as you're aware, given seasonality at very high inflation, our pumps business has been challenging for the last few quarters. However, we're starting to see initial signs of green shoots of recovery there, especially this quarter in the specialty pumps business, which grew by 20%. The appliance segment continued, albeit of a small base to really have consistent strong growth. And even in this quarter, with the high base last year, delivered a growth of 12%. More importantly, it had a 3-year CAGR of 27%. This has been driven by a continuous program, which is now stretching over a couple of years of portfolio refresh and addition of new product categories. Mixer grinder, where we're now putting in a number of new products and also strong marketing support grew by 15% across the quarter. And now these that are really a landmark crossing 400,000 units, which we sold this quarter. Lighting revenue was INR 269 crores. This business has continued to be a challenge due to the rapid decline of the conventional lighting business, was declined by 35%. For the quarter, the B2C LED business was essentially flat. Competitive intensity of this business has also been extremely high. On a rolling 12-month basis, we continue to improve our market share and improved it by 5% at premium fans, whereas on an overall basis, it has moved up marginally. Over the last 2 years, we are the only company that has consistently gained retail offtake market share quarter-on-quarter both in the premium category and the overall fans categories. Moving on to a few comments about margins and profitability. Very encouragingly for us, in spite of the high inflation and the relatively challenging macroeconomic situation, this quarter we have essentially recovered our material margins and our gross margins. In fact, our material margins at 31.3% are very close to our all-time high material margins of 32%, which we delivered last year in the same quarter. This has been a reflection of the continuous strategic work, which we have been doing on cost reduction and efficiencies. Also, of course, including the price increases have been passed on in the past 18 or so months to handle the extremely high inflation. Mix and product mix improvement as has consistently been the case, has also been a key here for continuing to help us maintain in this extremely challenging situations, material margins and continue to outperform the industry in this area. EBIT margins, however, while steady versus the previous quarters and also continuing to be best-in-class across the industry have declined versus the previous quarter -- sorry, have declined versus same quarter previous year. There are really two reasons for this. One is last year, in this quarter, we had a record high EBIT margin as we came out of the COVID pandemic of 15.5%. Secondly, more importantly, we have continued, in spite of the challenging situation, our long-term strategic investments in building our organization, our capabilities and our brands. This investment, we believe, is right. It's right to make and will continue to pay dividends as inflation settles down and volume growth comes back in the marketplace. These are investments which we have made in advertising and promotions in our entire new R&D innovation center in the introduction of our new business at the premium end of large kitchen appliances in alternative channels, rural, e-com, et cetera, which are continuing to show robust growth and our program of building manufacturing excellence. Our focus on our long-term programs continues, and we believe these has remained the right areas to focus on. As we talked before, these are the brand excellence, in Q2 specifically, we kicked off our in-store retail transformation project to improve overall consumer experience and Crompton brand experience at doors. We have invested resources to create awareness and garner extensive coverage for our new built-in kitchen segment. Also, we are fully leveraging our Saathi influence the loyalty program to drive plumber registrations. We've also collaborated with well-known influencers on YouTube to communicate the product benefits. Television remains a critical investment area for us. In fact, over this last period, we have launched and have invested in a new advertisement for mixer grinders, called "The Secret of Fine Taste", which we believe is one of the key drivers behind the continued mixer grinder growth. Second, of course, is portfolio excellence. We have continued to invest in developing products driven by consumer insights and future technology, ensuring superior quality and performance. Our investments in R&D have contributed to our increasing market share. We are investing in processes, people and automated equipment to improve new product development. In this quarter, we have strengthened our BLDC, band range, introduced a new range of mixer grinders and water heaters and a new category of rice cookers and toasters. Go-to-market excellence remains a sustained focus area driven by efforts on people and process capability, especially on automated channels, which grew by 26% versus last year, driven by reach improvement and leveraging technology for improved productivity. CSD and rural channel led the growth quarter-on-quarter with a 45% growth versus year ago. Briefly on a new segment entity on large appliances, this continues to track very much as for appliance. We have opened close to 300 counters. Our average sales per store is significantly ahead of our going-in objectives. We have also designed and introduced 22 dedicated signature studios where consumers can experience the full range and the benefits of our premium appliances. Moving on, just a briefly update on Butterfly. First is, as most of you are probably aware, we sold 6% of our stake in Butterfly through an offer for sale route. Earlier, we had having 81% stake in Butterfly as of August 22, out of this, 55% of the shares were purchased from a share purchase agreement in March, and we acquired the balance 26% through an open offer on June 22. Pursuant to the minimum public shareholding compliance, we sold 6% stake through an offer for sales route and completed a transaction in September 22. Our current shareholding of Crompton is above 75%. The erstwhile promoters of Butterfly Gandhimathi has sought reclassifications from promoter and promoter group to public category. Briefly on the performance of Butterfly in the past quarter, the Board of Directors of Butterfly Gandhimathi approved the results for the quarter ending 30th September. As for the results published, Q2 sales down by 5%, but growing at a robust growth of 20% in half 1 versus last year, maintaining its strong position in especially the e-commerce segment. As part of our long-term strategy, the company is driving a change in the channel mix in favor of retail versus online. While online continues to be the important and growing channels, historically, the Butterfly business has been overly skewed to online. This has actually resulted in significant growth coming even this quarter in the offline channel, while we continue to maintain our leadership position in the online channel and also as pricing, therefore, becomes more stable and consistent across channels, an improvement in the gross margin by 60 basis points versus Q2 last year. This renewed approach had delivered double-digit growth in retail during the quarter across all three categories, the mixer, stoves and pressure cookers. Going ahead, we have a strong focus on new product launches, driven by innovative products behind meaningful consumer advantages, reach expansion and adding and driving programs with regional chain stores. The business comped revenue of INR 368 crores, gross margin stood at 29.8% and EBIT margin stood 11.2%. Briefly on working capital, in Q2 consolidated net working capital increased by INR 120 crores versus March '22 levels. This, however, was essentially due to reduced trade creditors. Our inventory and our debtor days continue to be on track and on target. We took a conscious choice given the uncertainty in the market, the upcoming Diwali season and the challenges that some of our vendor partners are facing in the inflation environment to help our vendors over this period with -- has resulted temporarily in this increase in trade creditors -- sorry, increase in working capital. Consolidated cash and cash equivalents stands at INR 1,080 crores for the period ended 30th September. This includes INR 161 crores received out of the OFS of 6% stake in Butterfly. While there is still uncertainty as we look at the future, and there's still a certain amount of uncertainty as to when exactly volume growth will begin to recover, we feel confident that we are very well poised with our material margins, wallet control, commodity inflation have been currently leveled off and our continued investment behind the fundamentals, behind both the Butterfly brand and the Crompton brand, to drive our share and top line as we look forward. With that, I'd like to just stop and pass on to any questions that you may have.

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

I have a couple of questions. My first question is on Butterfly. If you can help us understand, last quarter, we had taken some price corrections as well. But looking ahead in this quarter, when we saw gross margins are broadly flattish on a sequential basis. So if you can help us understand how do we look at the gross margin improvement going ahead in line with pricing changes and portfolio mix change? And also an update on how has been the broad revenue mix across the end channels?

Okay. Let me take the first one in terms of how we're thinking of margins in Butterfly, and then I'll pass it over to Sriram to talk to your second part, which is how we're looking at it across revenue mix across channels. See, on the first part, frankly, Renu, we have had already, in our first couple of quarters a significant improvement from the traditional levels at the EBITDA level, which is from 8%, now being at about 11% for the last 2 quarters. We do believe that we are now confident about the base level of EBITDA margins being at 10%. And now we will continue to work over time and see how much closer we can get to best-in-class. Our approach is really to continue, just like we've done in Crompton to drive costs that become more efficient. However, at the current gross margin level, we believe this is a growing gross margin level. So the savings we get in costs will largely be reinvested in investments to drive market share, top line and innovation as opposed to looking at further increasing the gross margin. So cost savings will be generated. We are already seeing good initial progress on that, but that will be used to invest in the business. And as we build this overall scale and share with those investments, we believe that over time, this would also lead to a directional improvement in EBITDA margins. Sriram, on the channel mix revenue?

Yes. In terms of online and e-comm, I mean, e-comm and the retail channel contributed close to 85% till last year, especially and Q2 being a seasonal period and online, it is slightly dominant. So in this particular quarter, we now try to strengthen the retail channel with improving mix of new products, adding more chain stores and adding retail outlets. We see a shift in retail going up, specifically in this particular quarter in Q2 compared to the last year. So I would say that the retail is now slightly becoming dominant in our revenue contribution out of the 85%.

The only thing I'd add to that is as you look at the business, historically, if you go in the past for this -- for the second quarter, online sales used to contribute about 40%, 45% of Butterfly revenue. Now as compared to this industry revenue was only about 25%. So if you look historically what was happening, all the growth was being driven by online and in fact, over the previous 12 months, offline actually declined. What has happened now in this particular quarter as we brought more price stability into the market, what we have seen is that the online contribution has come down from about 45% to 35%, still significantly higher than industry. But the offline channel, which was roughly declining in the past period at about 8% has now started delivering double-digit growth.

Sure. So then coming on Crompton, I have two questions. First, your comments on the market share in Fans did mention that while there were shared gains on a TTM basis, they were marginally higher. Now this if we compare until the previous quarter, we were having almost a 1 percentage plus point shared gains. So have we seen that because of the transition -- the interim phase of transition to BLDC, some of the newer players with BLDC portfolio have become aggressive and some of seasonal share of the market share or incremental shares that were witnessed were there in the market? That's first on Crompton.

Not really. The dynamic which has happened a little is while we are continuing to grow share at the premium end. We are seeing that there is a certain leveling off at the lower end of the marketplace. So it's not that the slowing down of share growth is linked to losing share at the premium end of the market.

Sure. And lastly, when we look at the overall margin profile in the ECBs and Fan segment, they seem to have obviously come up from the previous highs, but even compared to normalized EBIT levels of 18%, 19%, they seem to be lower. So how should we read this in terms of the investments, which have been committed for the new large appliances and the core profitability of the fans and the appliances portfolio for us?

The way you should look at it moving forward is the difference in the margins versus historical, is really at a below gross margin level, like I mentioned. We've recovered it at a gross margin level, and it is because we have continued to make the investments. Now as we move forward, we do believe inflation will begin to settle down and growths in terms of real volume growths will come back, if not this quarter then the quarter after that. As that happens, automatically the bottom line margins we expect to come back to historical levels.

[Operator Instructions] The next question is from the line of Siddharth from Nomura Holdings.

Sir, my question is on the near term sensitive demand. As in Q2, we have seen an impact on the ECD side from both destocking as well as weak growth. Any sense -- can you give us how the festival has gone? And in the second half, do you expect some recovery on the revenue side for the ECD or it may take longer to sort of for us to see that book coming back?

Two things, I'll just separate my response into two separate parts, because our ECD business is really never been festival seasonal business. That has been more driven by seasonality and summer seasonality. So let me respond to the festival question because a better way to look at the festival question is really to look at how the Butterfly business trends, because the Butterfly business has -- is definitely a Diwali seasonality business, as you can look at from the past trends. Now as we look at the Butterfly business right now, as we're moving in through the early days of this Diwali period in October, we are definitely seeing a positive trend for Butterfly in terms of statutory sales, a product moving out from offline stores into the hands of the consumers, which looks encouraging. On the flip side, we do see that given the -- let me call it, temporary COVID spikes, which happened in online in the past, relative to the past online is not at that spike level. It is continuing to grow, but not spiking like it has done. So it's not a part of our tax historical levels. So we see festival demand coming in for that business and coming in reasonably okay with the improvements month-on-month. Now when you come to ECD, which as you're aware, a lot of our business is fans. On fans, again, as you folks are probably aware, we are going through over the end of this quarter through a BEE transition. Now to clarify, our understanding of the requirements is that we can manufacture and sell till December 31. Trade can continue to sell any stock it happens to have on hand, which they bought or was produced back to December 31. Now as we get into this transition, we do expect there to be potentially some uncertainty in the trade, as we've seen in other regulatory transformations. On the flip side, again, as you're aware, at various levels, when the BEE products start coming in, there will be a price increase from January 1 across the board. This may create for some creditors an opportunity, they believe to stock up. So it's kind of a put and call which we have to watch closely as we move through the transition. As we then move into the summer season, currently looking forward, it's very difficult to predict. By that, inflation hopefully would have settled down and volumes will be back to normal and then you build the volume growth on top of the pricing growth. I'm sorry for that long answer, but with all the ups and downs in the past, it is a little complicated.

Understood. That's helpful. But would you have any clarity about how much will be the price input required for the BEE Rated Fan? Or it's still early? And the second part of the question is on the premium kitchen appliances rollout which we have in cities. Can you share some color on the traction in terms of inquiries and order books, which you are getting on -- from these stores? And so that -- just to understand how should we build up the ramp up. I understand over the longer term you have a 10% market share target, but just some color on how the scale-up will be.

Let me start with the second question. Like I mentioned, right now, we're focused as -- our ready to launch plan is always focused on top 10 cities. We stay focused right now on the top 10 cities. We are very close to having hit our distribution in store whole. Remember, these are premium stores, et cetera, and is the premium product. As I mentioned, hybrid sales to stores is significantly higher than what we had planned. We have also begun talking to consumers who have purchased our product. Obviously, it's very early days, but some consumers have bought and we're going to talk to them. And the feedback we're getting from them in terms of our products and our innovation is very positive. So the anecdotal feedback right now is all positive. We expect this ramp-up to just gradually keep continuing. Our marketing programs to create demand have only really kicked in towards the back half of September. And sorry, I forgot your first question.

Sir, on the price increase required for the BEE Rated Fans?

Yes. Of course, we worked it out, right, impacted a little of transition and all rating industry. It is first -- roughly about 60% of our business needs to be consulted. About 40% of our business is either already consulted and compliant or the regulations don't require anything different to be done. It's looking like it's going to be in the range of, call it, around 8% on an average versus 8%, 9%. So this could vary and will vary by different segments.

[Operator Instructions] The next question is from the line of Keyur from ICICI Prudential Life Insurance.

The question is regarding -- so first, I think you well described the uncertainty on the refined portfolio. So what has been the demand situation [indiscernible] in digital segments, namely other appliances, pumps and the upcoming season of water heaters? It is first. And second is lighting. If you can just break up how lighting is doing into various segments? And what steps are we taking to turn around the slowing core part of the portfolio in the lighting?

Okay. First question was?

Non-bank ECD.

Got it. Okay. First, let me talk about what we call the appliance business, right, in our non-bank. Now the appliance business really consists of 3 top segments, geysers, coolers and kitchen appliances of either sites. Firstly, if you look at the simple numbers. Either by each independent segment or a totality adding them up, that is also very strong. Right? The quarterly growth for small appliances was 12% in spite of the high base period. And the CAGR was, I think, about 26%, right? So the numbers are strong, and this is kind of consistent across all 3 segments. Now that being said, obviously, coolers is very small in this quarter, right, because it's really summer. So the growths are very high. Geysers, the growths are high, but we're just really going into the season. So the real performance of geysers for the year will come in the quarter to be. So we are actually in this quarter, the most encouraged by the growth we're getting on mixer grinders and other small kitchen appliances, where this is actually the big period of sales. And that's been our investment focus largely in terms of introduction of new products. We've had a couple of new items in the mixer range. We innovated on the iron. We brought some rice cooker range, et cetera. And importantly, for the first time ever, we are bringing in advertising support behind this idea of the secret of cooking is in the fine grinding. And that's helping to really drive our mixers. So the mixers, we feel positive, and we actually believe though we're coming off a small base, we are performing better in terms of growth than most other competition, the numbers at least we've seen over this period in this segment. Pumps, like I said, has been a challenge over the last 18 months, as you've seen in totality, right? Part of it is because, obviously, because the season, the monsoon, this affects pumps, but part of it is also because of the fact that pumps is probably a more price-sensitive segment for us. And as we take pricing on inflation is what challenge the most. And we see that as we look at various other pump only competitors in terms of their business. However, as they're focusing on certain segments, like in this case, the submersible segments as opposed to the normal residential segment, we are seeing strong growth there. So again, we're hopeful with some innovations we have done on pumps, specifically in terms of developing a range of products that provides greater reliability by modifying the nature of our winding. So you get net fund jams, which is a key reason for failure and consumer concerns. As we start moving into the season, we should have start seeing stronger performance on pumps. Lighting was, I think your last question. Lighting, I think there's really -- it's not a new story and it's not a new plan. If I look at B2C, one of the challenges we have, obviously, is that we had a meaningful size conventional business. And this conventional business is declining rapidly. Like in this quarter, that declined 35%. So that is a drag. On this drag, obviously, we don't have any plans. This is going to die. It's now about, I think, about 10%, about 8%, 9% of the business still, but it's come down from a 15% to 20% over the last 18 months. On the LED, which is the focus, as I mentioned before, out of the three segments of bulbs, battens and panels, we are the most standard developed on panels. And also, for the last 6 months, we have been bringing a stronger innovation and also investment programs behind building the panels, and we're seeing the panels respond in terms of market share. And a lot of our growth is coming from the panels. Now this is very good because that's where the market is moving in the future. It is also the highest revenue part of the market. It's also the highest margin part of the market. In fact, if you look at it right now, we have about a 9, 10 share in bulbs, a 9, 10 share in battens. We started the 3, 6, 8 months ago at about a 4 share in panels that's already moved to 6 share in panels. As step one, we need to get that also up to the 9, 10, which we are in the other segments. And the way we'll do that is innovation, invest in advertising and invest in driving quality distribution.

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

Just a couple of them. One is with respect to the lighting business. You just elaborated on that. Can you help us understand, earlier we did talk about the project business was driving growth earlier. So can you help us, what was the mix in terms of this project and the retail or non-project business in this quarter and, say, 2 years ago? And b, in terms of the conventional business, while other companies are already down to some 5%, what is driving this slower decline in case of conventional business given the cost reductions in the LED, we have seen until in the last quarter 4, 5 years?

Achal, Yeshwant here. So I will -- first part of your question was on the project. I think you referred more to EESL. So now EESL obviously business has tapered down to zero levels. And 2 years back, this business used to be approximately 10% of our overall Lighting business. And so that is kind of now going out even out of the pace, which is year-on-year slowly. So in coming quarters, we will obviously not have EESL in the pace as well. Second part of your question was on conventional. Conventional. So yes, it has been steadily declining. This business as we mentioned earlier, used to be in steady and slow double digit. It is now at about 8% of our total Lighting business. Obviously, bulk of it is incandescent bulbs, which still continue to -- in terms of the economics, not replace that -- do not get replaced by LED bulb and also with respect to voltage levels in different parts of the country. And there are some in terms of the B2B side, where specifications are for the conventional product, which will also gradually move away. So I think it's only a matter of next 2 quarters, but we are not far away from that 5%, 6%. We are at 8% now of conventional business here.

We are doing and we have been doing nothing for quite some time in terms of trying to drive conventional.

Understood. And just one more question I had was with respect to the cost reduction. What is the extent of cost reduction? And how much price reduction, effective price reductions from schemes discounts til now is passed on? I mean, when I say till now, it is still till today, so to say. Is it 3%, 4%, 5%? Have you seen the prices getting passed on?

We have continued to drive cost reduction, as we always do with the same objective of generating about 1.5 points odd savings every year. And then deploy the savings in whatever is the best way for the business. We have not done any significant rollback of price? We don't price up to cover for the inflation. Obviously, the pricing was less than the inflation because the balance was covered by cost reduction. In this current quarter, we did a little bit of -- to stay competitive in some SKUs in some areas, we did some tactical temporary price reductions, but there was no significant price rollback. Those temporary price reductions were, call it, 1.5 to 2 points. But they were purely temporary, there purely tactical. They will purely there to ensure that competition does not get ahead of us in any area. We have not seen a situation right now because after all commodity prices are not really comes down to anywhere near where they were. It's a better way to think about it is they're stabilized. So we don't see any price increases in the future. But unless -- except a cost for the BEE driven changes. But unless there's some really new significant trend in commodities, which, frankly, to be honest, we're not forecasting in the immediate few quarters. We don't see any fundamental rollbacks in pricing.

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.