Havells India Limited (HAVELLS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '24 Earnings Conference Call of Havells India hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital Advisors. Thank you, and over to you, ma'am.

[Audio Gap] of Havells India Limited. We have the management being represented today by Mr. Anil Rai Gupta, Chairman and Managing Director; Mr. Rajesh Kumar Gupta, Whole-Time Director, Finance and Group CFO; Mr. Ameet Kumar Gupta, Whole-Time Director; and Mr. Rajiv Goel, Executive Director. At this point, I'll hand over the floor to Mr. Anil Rai Gupta for his initial remarks, post which we can open the floor for Q&A. Over to you, sir.

Good morning, everyone, and wish you all a very Happy New Year. Thank you for attending the call today. I hope you would have received and reviewed the results by now. Sustained infrastructure spends lead the growth in the B2B category. We participated this quarter in several marquee projects through professional lighting. Proud to share that the lighting solutions illuminated at Shri Ram Mandir in Ayodhya were done by Havells. Lighting delivered a strong volume growth in this quarter. However, price deflation continues to be a significant drag, impacting the value growth. Small domestic appliances category benefited with festive demand. Higher base in fans led to a muted growth in the ECD segment for the quarter. The BEE transition now behind us, we expect normalcy in demand markets. And the summer season should augur well due to the low quarter -- low base in the last quarter as well. Lloyd is at 18% 2-year growth, approaches ensuing season with confidence to leverage on its strengths for further growth. Segmental contribution margins have improved. However, segment results are impacted due to high A&P spends. During the quarter, we have formed a subsidiary in the U.S. with plans to distribute HVAC in U.S. market. It is one of the steps forward forming a base for exports in the developed market. Despite muted consumer demand, we carried on with brand and talent investments, which remain the cornerstone for sustained growth. We can now move on to Q&A.

[Operator Instructions] The first question is from Natasha Jain from Nirmal Bang.

Sir my first question is on the Lloyd segment. So can you just throw some light on how the overall demand was in terms of volume growth?

Can you please come closer to the headset?

Yes. Am I audible, sir? Hello?

Yes, yes.

Yes. Sir, my first question is on the Lloyd segment. Can you throw some light as to how the overall demand was, especially in terms of volume growth? And was there any pent-up effect in the sales for third quarter? And also how the pricing pressure has been given the stiff competition there?

I think third quarter is not a very good representative because almost 65% to 70% of our sales come from air conditioners, which is not a consumption quarter for air conditioners. So I would say that we would be in a much better position to answer this question about the demand scenario, the pricing in the fourth quarter and especially the first quarter of the financial year. So we are quite satisfied with the fact that overall Lloyd, in the first 9 months, if you see over the last 2 years, we have gained market share. We have delivered a very strong over 30% kind of a CAGR growth, which augurs well for the upcoming season. I've also mentioned that last year, the season didn't do very well because of intermittent rains. So we're expecting, both for air conditioners and fans, a good quarter in the fourth quarter and the first quarter.

Understood, sir. And in terms of fourth quarter, how would you say the shelf filling has been, especially in the GT and MT channel?

At least for our brand, I would say that the shell filling has been lower than last year because, as I said, last year, there was a very high expectation of a very high season in the fourth quarter, but the trade didn't see that. So I would say there was a muted enthusiasm in the trade, and also the company's strategy has also been that we will be focused more on -- because of the 2 plants -- manufacturing plants that we have and enough capacity during the season time as well, that a lot of dependence would be on the actual consumer demand than this shelf filling.

Understood, sir. Sir, my second question is on the lighting segment. You mentioned that there was a strong volume growth. So was it driven by B2B or B2C lighting?

So we have seen strong volume growth both in B2B and B2C segments. But there has been a heavy price erosion in the overall last 1 year, which is now stabilizing over the last 3 months in terms of lighting. So if you see year-to-year, yes, there has been volume growth but value degrowth.

Sir, but then margins have improved significantly, I mean, by 153 basis points on a Y-o-Y basis. Can you just throw some light why that happened?

Overall, last year, our impact -- margins were impacted due to the fire that we had in the lighting manufacturing unit. But also the company's focus has been to take projects, which are not just based on pricing but based more on innovation as well as in the consumer sector. So we are seeing margin improvements but also coming back to normalized levels as well.

Understood, sir. And lastly, in terms of wires and cables, surprisingly, there has been a margin decline here. So why is that so? And if you could also particularly highlight which segments saw higher ad spends?

Well, actually, ad spends were spent on all the businesses. Overall, we are happy with the fact that product to product, we have seen improvement in contribution margins. It could be also because of the product mix that sometimes the margins are affected. But if you see contribution margins, we are seeing improvement in businesses. Overall, EBITDA margins are muted because of the higher ad spends in the quarter, which will get normalized in the coming time.

And sir, you said product mix has led to declining margins for wires and cable. Am I right?

I'm sorry?

Sir, for wires and cables, you said the product mix has led to declining margins, right?

Yes.

The next question is from the line of Rahul Agarwal from InCred Equities.

Sir, 2 questions. Firstly, on consumer demand. Mainly on the residential real estate side, we see premium and luxury doing well in urban areas across the country. How far do you think we are before this should start contributing to Havells' top line? Of course, I'm sure that light, fans, switches are being bought by these apartments, and I'm assuming that factories, warehouses anyway are contributing better. That's the first question.

So I think overall, if you see, you're actually right that we are seeing good traction in the residential segment, especially on the premium side. But as you can see, that the premium side is more in the urban areas and where we are seeing good traction. We have seen, in the last 1 or 2 years, some slowness in demand from the B2C areas as well as residential area. We do believe that it is more because of the inflationary impact because the raw materials have been on the high over the last couple of years, which have now started abating. And I think the deferred purchases from this geography, I think, will start kicking in from the coming times. So overall, the residential business and the consumer business will also start having decent growth.

So we should expect like starting summer next year, obviously, the base is also in favor. Next year should look better for B2C versus B2B, right, purely from a growth perspective?

I think the B2B investments would continue to grow because we've seen high spend from the government sector. We have now started seeing investment in the private CapEx as well. So that also will have its own journey on growth. But yes, you are right, we will start seeing in the summer, includes B2C as well.

Sir, secondly, on new CapEx, all 3 segments, cable, lighting and ref, I think. So cable, we are investing INR 300 crores, 3.5 lakh kilometers. Just wanted to know what's the sales potential here? And how -- what's the gestation period to reach 90% utilization from the south plant?

Overall, in the underground cables business, we believe that we are increasing our capacity by about 25%. Domestic wires is also increasing, but that also is led by demand, and we are putting a facility to cater to the southern markets. So overall, but where there is a capacity constraint, which is underground cable, we are seeing a 25% jump in the capacity expansion. On the refrigerator side, the plan is -- for the manufacturing plan is still under evaluation. And we will come back to you when -- once it is formalized.

So that's not started -- the construction has not started at ref, is it -- is under planning, is it?

That's right.

Okay. Okay. And on the lighting side, what are the gaps you are filling on CapEx? What are we doing there?

Pretty much what we had seen after the fire, the CapEx, which was supposed to be done, has been done, and so most of the production has now come in-house.

Got it, sir. And lastly, just a small question on cable and wires. Obviously, in the last 2 years, we have seen abnormal demand. These growth rates don't look long-term sustainable. Your sense on how does the next year look like on industry growth rate? And based on your past experience, is there a possibility of pricing or margin pressure for the segment? Because there is some understanding that some capacities are coming up, including yours, over the next 6 to 9 months in India, and hence, that might have an impact. That's my last question, sir.

I think we've seen value growth in -- almost 60%, 65% of our business is domestic wires, which is more long-term structural in nature and because of the residential demand. And it is more brand and retail oriented as well. So there, we see that this sustainance in margin should continue in the future as well. And there, we also don't have much capacity constraints. It's more dependent upon the brand acceptance, the distribution and [indiscernible]. On the underground cable side, while we are impacted with the lower capacity, but I don't see a major structure shift for at least a few years because we do believe that the investments on the CapEx will continue and will help the cable industry in the coming times as well. But that is still a smaller part of our overall business, but we will see improvement there as well.

[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI MF.

And the question is on the switchgear segment, considering the low growth we have been seeing and especially the growth we are seeing in the real estate and the building materials segment, complementary segments. So question here is, are we losing market share in this segment? Second, if you could talk about the capacity that we have and if you anticipate the growth, would we be in a similar situation we are in the cables piece here? Because when I look at last 5 years, barely any investment has gone into this segment.

Sorry, I missed you. I lost you a little bit. Can you repeat the question?

Sure. So the question is on the switchgear segment, especially considering the low growth of 1% that we have been seeing for a reasonably long period and the growth that we are seeing in the real estate segment and the building materials segment, which is 15% to 25%. So the question herely is that, is Havells losing market share in the switchgear segment? That is one. And second, given the growth that you're anticipating in the real estate segment with a lag, do we have adequate capacity in the switchgear considering when we look at the segment CapEx, which has been very low for the last 5 years?

Well, we have been constantly monitoring our market shares in the switchgear segment also where we believe that we have not lost market share. In fact, if you see in this particular quarter, we have seen growth both in the project segment as well as the retail segment. There has been a decline in sales to a particular segment of the market, which is telecom OEM segment where we were very strong players, but we have seen low demand in this third quarter as well as the exports have been flat over last year because of some weakness in our strong markets of Middle East and Africa. But otherwise, generally, in the other market, which is the retail and the project segments, we have seen growth as well as market share improvements. And we do not have capacity constraints in the switchgear segment. We were constantly being added with maintenance CapEx. And there, we do not visualize any problems in the -- from the capacity side.

Sure. Just a follow-up here. Hypothetically, in case we do see a 25% growth in the demand next year as the demand comes with a lag, would we have enough capacity to service such level of high growth?

[Foreign Language] yes, we have the capacity.

The next question is from the line of Renu Baid from IIFL Securities.

I have 2 questions. One, broadly, the B2C demand and market uptake has continued to remain fairly soft now for 3 to 4 quarters. After some green shoots, which were visible September, October, again, that seems to have died down. So what has been your reading on the demand environment? And in your expectations by when can we see the demand turning positive?

A good question, but actually, it's a little bit of a longish answer because we are seeing different things happening in the B2C segment. One, of course, there is slowness in demand in the B and C areas, rural areas. And hopefully, with inflation abating, I think this should start kicking in growth in the coming times. If you break it down, as I said, we have seen strong volume growth in lighting. It's not just because of the market but also our internal efforts. There, we see discretionary growth -- degrowth because of value erosion in LEDs. Even within ECD, we have seen a high base for fans over the last year because of the market. Otherwise, we've seen a stronger demand in case of ECD. It can be said that okay, for domestic appliances, this was the Diwali quarter, last year was not. But overall, we have seen better growth in other products other than fans. So it's a mixed bag. I said switchgear also, we have seen growth in the retail and the residential side. But we saw some degrowth in the telecom OEM side. So overall, it's a mixed bag. I think some green shoots we are seeing, and with a very low base for summer products in the coming quarter, I think we will start seeing improvement in the B2C side.

Got it. And secondly, how should we look at the pricing environment because that also is a function of the demand, especially for seasonal categories like fans as well as air conditioners? Both these segments have seen a change in energy ratings and [indiscernible] [ table chain ] because of which cost structures were a bit elevated. So where are we in terms of absorption of the fixed overheads? And are there any impending price hikes, which you think could be passed on in the forthcoming quarters?

I think at least for Havells and Lloyd, we have been able to pass on the price increase or cost increase due to the energy rating changes. And we don't anticipate it -- we don't anticipate any further price increases in these 2 product categories. In fact, we have seen margins improving over the last 1 year. And that is something which will also happen because of improved economy of scale in the fourth quarter and the first quarter.

Sure. And lastly, if I can, on the RAC side, where we have had some arrangement from Middle East market and now also looking at distribution setup for U.S. So what kind of incremental investments you think we'll have to deploy for distribution as well as product modifications for the developed markets?

So as far as the product modifications are concerned, pretty much it already happened, and that's where our certifications are happening. U.S. market, some of the products are under development, but these are not very large investments even for brand building or distribution. These are ongoing operational investments, which will happen. But this is, again, the way we are treating export market is more of brand building and distribution reach rather than just looking at going for volumes. So it's a longish-term play. It will take its own time. Unlike in India, where we have a very strong distribution channel of brand where we can grow faster, but this Middle East, U.S. markets will be a long tail.

Sure. And just a clarification, these would be all for Lloyd brand and not a kind of white labeling arrangement the way we had for the switchgear segment for overseas market?

We are more focused on Lloyd brand, but we are not closed to white labeling as well as long as it satisfied the margin needs and the volume needs for the [indiscernible].

The next question is from the line of Fatema [ Hatim ] Pacha from Mahindra Manulife.

Hello, sir?

Yes.

Yes, sir. Sir, just a macro question, do you think at the margin -- we've seen this in FMCG. But even in durables, do you think a lot of new brands because of the entire online space have entered and at the margin, they're chipping away as the large [ guys' ] market share, do you think that is the reason that the margin our B2C franchise in a way is not able to grow as much? Like even if there is 6%, 7% growth in the market, you are able to grow at 3% something like that, would you say?

I would say the electrical market only -- in the electrical market or consumer durable market, we have actually seen stronger brands grow stronger. We have -- if certain brands have entered the market, it is also at the cost of some brands going out of the market and competition as well. In fact, if you see the air conditioning industry, we have seen consolidation of market shares towards 4 or 5 big players as against having a very long tail of small players with low market share. So now the competitors are also weakening there. Even in fans, if you see that certain market shares are being replaced with certain brands, more electrical brands are launching products that is also increasing. And over a period of time, we've become large businesses, and then investments have to be made into those businesses also where sometimes we have seen the large electrical players who specialize in 1 product are not able to increase market share beyond a level.

Agreed. So I think the 5% market share they reached.

I'm sorry?

So what I've realized is they reach the 4%, 5% market share and then they stall. But that 4%, 5%, if there are 10 players, then they take away the growth for the others, right, in a way?

Yes. But I would say that, that is what I was saying that it's also being replaced by some players going out of the market as well or stalling their growth. So I don't think this is really impacting the market share of the bigger brands or stronger brand, national brands in any meaningful way.

Okay. And second question, sir, like if you're going to see the entire durable industry, both white and brown goods, the last good quarter we had, I think, was post COVID, December 2020 quarter, right, the Diwali of 2020. Post that, we've seen 2 years of absolutely not much volume growth. We've had revenue growth in between because of the price increases. But volume CAGR would have been miniscule in terms of a 3-year CAGR. So what is your sense? Like is this that -- is that absolute apathy for the product? Or how would you ever signal a turnaround or any -- because like you've seen it in 2-wheeler, right, first time you've seen 2-wheeler growth, at least recover from the bottom, but we're not seeing anything in our space. So how should one read this market?

During this time, a couple of things have happened. We've had 2 bad seasons because of the COVID as well, including last season was marked by unseasonal climate because of rain. So we've seen that. As well as during this time also, unprecedented raw material prices were increasing. And hence, when you were trying to pass on -- the industry was trying to pass on that cost increase to the market, it was facing headwinds in terms of consumer [indiscernible]. I think with things stabilizing, we don't know what the climate will be, but at least, we can be hopeful about that. And the raw materials are now stabilizing. We do believe that whatever we have seen muted growth in the last 2 or 3 years, we should be seeing improvements in the coming years.

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

Sir, 2 questions. One, the lighting and even switches segments are moving from basically functional categories to lifestyle or fashion kind of products. And this transition may continue over the next decade also. So now Havells is more of a functional or a high trust kind of a brand. So how do you see the brand transitioning in both the segments? And also considering there are a whole lot of smaller players who do not really have any ability to move towards or achieve the brand perception also to some extent, so how should we read about Havells' efforts in these 2 categories? That is question number one. And question two is, what is our real right to win in Middle East and U.S.A.? These are really absolutely premium end of the market with very high per capita GDP. So Havells -- Lloyd, which is more of a mid-price brand, so how do you -- how do we understand the winning strategy for Lloyd in these markets? Yes.

Your first question [indiscernible].

Sorry to interrupt, sir. There's a disturbance in your background, sir.

Okay. Is it fine now?

Yes, yes, sir.

Okay. So I think to your first question, I think this is more structural in nature. I think you are right that from the functionality, it is also moving more for convenience. And I think this is still in transition. And I think these are very sort of higher end of the market, what we call the premium end of the market. So I think in a market like India, you have to address across the spectrum. So I think our both lighting and switches, you see have this functionality of what we call the automation, which you have through IoT. I think in that segment, we are already addressing. And I think if you recall on this call, this was asked how the margins are improving in lighting. As a part of the reason also is attributed to a lot of innovation, which is currently, I would argue, more pronounced in B2B, but it's moving towards B2C as well. So I think in ancillary switches, the automation is gradual but surely now taking a larger share of the overall switch sort of category. So I think these are the things which augur well for a trusted brand because as you move premium, people want to stick to the more premium brands, if you can address there, not only [ niche ] but also see the anxiety is there when we move to the new technology. So this is something we believe will continue to grow, but this will take some time to reflect into the overall numbers because more of the [ marketing ] is still sort of transitioning to those levels. Second, on the Middle East, you asked the question. You see, if you know the Lloyd is the market leader in Kerala. And Middle East is a very large market. It is also -- you see the -- some of Kerala and the NRI population is there. So that is something what we start with. And it's not -- it is -- if you look at the market, there are a lot of Chinese players as well in that market. So we have positioned ourselves, you see what we call the mass premium even in the Middle East. So there is a market for all the brands, and we believe we are, I think, the first Indian brand who has launched in such a serious manner in Middle East. I think this is something we will gain, and we will invest behind the brand like we have been doing in India. So we have never claimed that we will just go there and acquire the market share. But I think Middle East is also a showcase to the world these days. We see there's a lot of buyers, which come from Africa, the CIS and the larger sort of -- you see Middle East cohort. So this is something what we believe is the brand building towards the international business, which we want to take in the right earnest as far the Lloyd is concerned.

Okay, sir. Sir, just on the first thing. So should we continue to model market share gains as the category keeps transitioning more towards the top end? So will that be a -- is that also the [indiscernible].

But yes, I think what you're saying is right. Now how fast that transition happens, I think that remains to be seen because as I said, India is a very diverse market. So I think you have to play for all kind of consumers. Havells is known for mass premium. I think this is something what we will continue to strive for.

The next question is from the line of Siddhartha Bera from Nomura.

Sir, first question, again, on this margin side in Lloyd, we have seen a good improvement sequentially. Can you just highlight if it was purely due to the lower commodity cost which you have now? Or are you looking at any sort of pricing action or mix, which has also led to this improvement?

No, I would say these are the cost saving initiatives you see which we have been taking for quite some time in Lloyd. Part of that definitely is commodity, but also, we all agree when we [indiscernible] inefficiency, and gradually, the efficiency is kicking. So I think the process of efficiency, which we are very hopeful, will only continue to gain ground. But there is no change of strategy of Lloyd per se. These are things which in any business after establishment, the efficiencies should start from getting factored in. So this is a part of that process.

Understood, sir. But sir, if I look at a slightly longer term now, it's been like nearly 3 years when we have been reporting a sort of loss in this Lloyd entity. Going ahead, like you are saying that summer season is expected to be good, can we expect some pricing actions so that next year, we probably come back to that sort of breakeven type of levels because of these efficiency initiatives also which you are taking?

Siddhartha, I think we have -- I know everybody is very eager to get this question answered. In various forms and [indiscernible], this question keeps coming back. We believe this is a very large opportunity to consumer durable as a whole. I think if there is one category where India is least penetrated, it's the air conditioners. I think we have established good credential there. We are now part of the top 4 in this as our Chairman just sort of elaborated that the market is getting consolidated in terms of the larger players. I think this journey will continue. Let's not measure them in few quarters here and there. You see we are here for long term. I'm sure our investors are here for long term. This country is for long term. Let's just focus on that. Let's not just get mired in this quarter or that quarter. So I think as we grow, as you progress, I think everybody will be testimony to that. But we are very focused on our long-term commitment to India, which we believe is a strong growth credentials available to us.

Got it, sir. Sir, lastly, on the ECD segment now, if we see contribution margins are probably back to that earlier 2022 levels, but EBIT margins are still lagging a lot behind. So going ahead, if we see pickup in this category like you are expecting to sort of see in the coming years, can we -- with the overhead costs also normalizing, can we sort of expect to see those 16%, 17% EBIT margins, which we had reported some time in the past? Or do you think the mix now as the competitive intensity is somewhat different and we will not go back to that earlier levels of margins?

Look, our focus is on contribution margins because ultimately, EBIT, these are all derivatives. And sometimes quarter-to-quarter, they got distorted. Like this quarter, there has been disproportionate A&P. But I think you would see in our entire ECD, in fact, across Havells categories, I'm sure you would have already observed that there will be an improvement in the margins as we move forward because of what we just allocated both on the cost savings you see and also the premiumization. There is a lot of trust on the Havells side. I think this will continue to improve from there.

[Operator Instructions] The next question is from the line of Sonali Salgaonkar from Jefferies.

Sir, my first question is, again, on Lloyd EBIT margins. We understand that there has been a good and notable improvement in the contribution margin. But the EBIT margins have sort of remained almost similar year-on-year. So should we assume that we will continue to spend more on the A&P and promotion as a part of our strategy behind the brand investment of Lloyd? And when do we expect this to normalize?

No. I think, Sonali, as we have said, A&P this quarter has been disproportionate. So I'm not sure you should read too much into that. And as far as the -- while A&P, all other costs, as you see will be gradually getting normalized in Lloyd also. You see when you start a business, you [ normally ] disproportionately invest in the business. So I think all these initiatives, which we are taking, you will see further gradual but sure sort of normalization of all the expenses in percentage. But some percentage of the sales will -- definitely is the requirement of the consumer businesses, which we will stabilize in some time. So that's something we'll be all -- reflect in Lloyd as well and in Havells.

Got it, sir. And what is the current capacity utilization of Lloyd and the volume market share also, if you could just let us know?

So I think let's not go to market share because the people have different views on that. But we are part of the top 3 and top 4 in the country. As far as the utilization is concerned, we have kickstarted our Sri-City facility. We are now balancing the production, both in Ghiloth as well as Sri-City [ depending on the regional ] requirements. So I think our CapEx utilization will be close to some 50%, 60% on -- across both these facilities.

Got it, sir. And my second question is regarding switchgears. So we understand that the housing demand and the CapEx demand is very strong -- has been very strong over the past 1, 1.5 years. Is there any particular reason that we are showcasing just about a mid-single-digit growth in switchgears for the first 9 months?

So as actually, we just sort of elaborated earlier that there is a growth we are seeing both in the B2C as well as the project. But there has been a lot of growth last year on the OEMs for telecom, which for some time, we have taken a pause. Hopefully, it will probably resume next year again. So I think you are seeing just the deceleration on that. But otherwise, on both the projects as well as the B2C side, we continue to sort of do well.

Got it. And just last question, we understand that your demand focus is more domestic, but any issues that you fathom because of that Red Sea logistic issues, mainly for the procurement of raw material, if any?

No, nothing, nothing. We have no -- either on the supply chain incoming or outgoing, we have not seen any significant impact from Red Sea.

The next question is from the line of Abhijit Akella from Kotak Securities.

So INR 40 crores provision [indiscernible].

Your voice is breaking, Abhijit.

Yes. Am I audible now?

Better.

Yes, yes.

Yes. Just if you could please just help us understand what this INR 40 crore provision write-back within the segmental results pertains to?

Yes. So you are aware that on the -- government has brought out the E-Waste regulation, particularly in consumer, there was some time back -- before a few years back. At that time there was no clarity on how that should be taken. So as out of abundant sort of conservatism, we started making ad hoc provision on the sales, and it was largely applicable on the Lloyd products at that time. Yes, on the best estimate we did that. And once the -- now the government has come out -- CPCB has come out with a lot of clarity and we have submitted all the sort of data, all the industry players. So they have come out with a specific number, which everybody -- every company needs to comply with it. They said we need to either pay that or we should take that number of materials. Now that we have a clarity on that, we have taken provision based on that clarity. And that's why our best estimate has been adjusted against that, which has resulted in the one-off reversal of the provision.

Okay. And on the P&L, this would have sat within other expenses, right?

Yes, that's right.

Okay. The last question I have is actually [indiscernible] to the [indiscernible] market. We just wanted to seek your perspective in regards to the...

Sorry, Abhijit. Just come again. Again, we just -- you are sort of losing.

I hope I'm audible better now.

Yes, sir.

Just on the cable market in light of the recent [ developments ] that have been there in terms of the [ income tax], [indiscernible] and that sort of thing. Just better to seek your perspective on whether you think these developments might potentially impact that category lasting way on a structural basis and whether that might open up opportunities, new opportunities for someone like Havells. So would appreciate your thoughts there.

So there, I think, frankly, we don't have much comments to offer. And I think these are still things, I think, which they are, I'm sure, best managing. So we will, frankly, just refrain from commenting on it.

The next question is from the line of Praveen Sahay from PL India.

The first question is related to the cable business. As you had already mentioned that the product mix led to the margin contraction. So can you a bit elaborate on that -- this, like a product mix like towards the cable sales is on the higher side for the quarter?

Yes. So between cable and wire our wire has better margins than cable, so in this quarter, the cable growth has been slightly higher than wire. That's why this is a product mix. But in terms of contribution improvement, there has been improvement in both the categories as well as from the last year.

Okay. Is there any number to quantify, sir, how much contribution of cable [indiscernible]? Usually, 60%, 65% is the wire. So this quarter is usually unlike, right?

Yes, yes. That's right.

And the second question is related to your -- the commentary given in the press release, also in the call you had mentioned that one commentary is the recent trend suggests some recovery, also the comment you had made of a green shoot in the B2C portfolio. Is there anything to quantify in that or to -- number to support your commentary?

No, I think this is a feeling we have. At least, let's not make it too specific because it's very difficult to put a number. What we believe that there has been some degree of muted performance by the industry as a whole on the consumer side, we believe it is coming out of that flat. And there's a feeling we're getting maybe in the last sort of couple of months. So we're just hoping that it should translate into some tangible results. But as of now, I think we'll keep it there, and let's see how it pans out.

The next question is from the line of Bhavani Kumawat from PhillipCapital.

Hello? Am I audible?

Yes, yes. You're audible.

Most of my questions have been answered. Just one question, sir, if you can just share the advertisement spend in the Lloyd category particularly for Q3?

We think your voice is breaking.

Hello? Am I audible now, sir?

Yes, yes. No, I think we got the gist of your question. So we give the advertisement on the whole. So again, I think we will not go into further breakup of the same.

The next question is from the line of Lovish Soien from Phoenix Advisers.

My question is related to the RAC business. We are seeing that new capacities are coming online for all major brands and contract manufacturers. So how do you think this will impact the overall industry supply along with the industry demand? So just wanted to have your thoughts on how this industry supplier and with the industry demand over the next couple of years.

So I think everybody, these are all seasoned players. Everybody is anticipating that the potential is -- India offers is unparalleled. And I think everybody wants to be ready for that. And I think I'm sure the long-term players do not look at what they can achieve in 1 year or 2 years. There are -- these CapEx are very long-term plans. And I think, we'd argue, these do justice to the potential we have considering the underpenetration related to -- there's other developing markets, not just developed markets. So we believe -- look, one can't really look at what will happen in next 4 quarters or 6 quarters. But I think longer term, I think these are aligned with what everybody perceives as a growth potential in India for the RAC market.

Sure, sir. And just one follow-up. So does this mean there is a possibility that we could see a price war in the coming quarters given that all these capacities and the PLI Scheme that there would be a need for all these players to produce and sell to get this incentive?

No. I think the price war is [ similarly ] like a war cry you are mentioning. But we do not believe -- I think everybody is positioning their product [ you see with the ] consumer on a certain basis. And I think that's something we continue to believe will happen. So no, we are not expecting any significant price wars on that.

The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.

First question is just an observation on the employee cost. Year-to-date, employee cost up around [ 19% ]. So I mean just some gaps, which you identified and have filled up the positions or just if you can clarify since last 2 years, we are seeing more than mid-teens kind of employee cost growth. So first question on that.

Yes. No, I think this has been sort of investments in the people, in the talent across the categories. I think we are investing for growth. Sometimes the growth may not appear in the time frame you look at. But I think there has been a lot of categories in Havells which we are disproportionately investing into because we see a lot of potential for future growth there. So yes, I think this has been partially which is organic. I think which is some growth will always happen in the employee cost in a year. And some are -- obviously, there has been a lot of latent hiring and acquisitions in the company, which is primarily investment for growth.

Similar growth should we see going ahead also next 4, 5 quarters?

Well, I think it will stabilize. There will be growth. Growth will not -- it will stabilize, but growth in this -- and will continue to be there.

Of course, yes. Second question is on both AC and fan, more summer-centric products. So how has been the general stocking situation? I mean AC had a weak summer, and fans had this -- start hitting production. So if you can just clarify how you see the channel inventory situation?

Compared to last year, definitely, channel stocking is much lesser. And last year, as you know, in the fan because of the transition to the BEE, there was a significant uplift by the channel. This year, clearly, this has not been the case. So if you look at then the -- compared to last year, the channel stocking is lower. And we see also because last year, there was some challenge with the channel because of unseasonal rains and all. There has been slightly conservatism on the pickup in this quarter.

[ I mention ] channel inventory levels in the system are at normalized levels? Or they are still above normal level?

At normal level, and I would say that from last year, it may be a lower level. That's what I meant to say.

Okay. Okay. And just last question on the AC side, so probably Lloyd-specific. So since RM prices have stabilized, now the levers for the profitability are more on the pricing side. I mean do we have to take price hikes? Or do we have internal cost levers to improve the profitability and if there are any, if you can just give few examples basically of the cost lever that we have?

No, I think the cost initiative, as you said, and RM is just part of one of the cost initiatives. We have set up 2 plants. As I said, we need to set a new plant wherein certain [ degree of ] inefficiencies. So just because RM is stabilizing, let's not conclude that the cost initiative now [indiscernible] sort of potential. So I think that will continue, and there will also be a product which sort of improvement would also be there, no premiumization there as well. So I think it will be -- profitability will be a [ culmination ] of a lot of effort. It's not just a single arrow. I think there are a lot of arrows there, which we continue to shoot.

Basically, I just wanted to understand if pricing is an external factor, which depends on how the competition also behaves, whereas the cost is one internal factor which is more in control of the company. So on the cost side, which are the levers? I just wanted to understand that part.

So as I said, RM is one of the levers. Efficiency will be other levers. There will be multiple levers.

The next question is from the line of Amit Mahawar from UBS.

So I just have one question. I think in 9 months ex Lloyd, growth in volume is definitely more than the value growth. You've shown 8% plus. Lloyd in 9 months, 16% value. Of course, volume is definitely higher. So I don't have a question on growth. My question is more on the Lloyd supply chain. As you build your brand gradually, that's a journey. On the supply chain part, is my understanding correct that in the next, maybe, say, 3 to 5 quarters, yes, you optimize your current expanded capacity manufacturing, you will have a significant sourcing of compressors and motors broadly around 50% higher than the last year roughly? Will that period in that be the period where you're -- you'll be able to get the cost right? Because only when you get the cost right, can you get the price right. So I just wanted to have some qualitative colors [ Anil ji ] here. That's the only question.

The next -- sorry, sir?

No, I think does he need an answer?

No, sir. The next question is from the line of Latika Chopra from JPMorgan.

I have 2 questions. The first one is specific to the key ECD segments of fans, geyser, kitchen appliances. And let me also look in Lloyd, and you can answer separately for them. What is the salience of e-commerce channel now in the revenue mix versus pre-COVID? And are your market shares and margins for this channel lower versus the off-line channel?

So this is around 5%, Latika. And on the e-com side, only some categories, it could be higher, but on the AC side is around 5%. Like for instance, you see the [ SDA ] as well as the [ personal grooming ], normally these tend to be higher. And on the net-net, margins are not very distant from the offline because you see our pricing is pretty much similar to across the channels. So on the net-net, the margins are not very different.

But what about market shares on the -- from this channel versus the offline channel?

The market share also is, I think, we are top 3 in online, which is, again, reflective of what we have in the offline.

Sure. And the second one was on -- just trying to get some color on how is the salience of consumer financing behaving for the Lloyd portfolio. Are your competitors more aggressive on this metric incrementally versus you?

I think everybody is -- some [ thought ] here and there are similar. [indiscernible] being offered by similar players. Nobody is manufacturing them themselves. These are being offered by same players to everyone. So I think on the salience side, everybody is on an almost similar platform. But yes, the saliency is increasing. As we get more [ formulary ], as we get more MFR, large retail chain driven, there, the propensity of financing is higher than on the stand-alone network.

And what roughly it would be for you now for Lloyd?

It will be around 30%, 35%.

The next question is from the line of Amit Mahawar from UBS.

No, sir, I just wanted the answer. That's it.

Actually, that's why we got confused, Amit. Sorry, your voice was feeble. You were talking about the compressor supply chain?

Yes. No, I just -- the same question is very simple. This year, you will have a very significant procurement, right? Last year, Lloyd had a 2x increase in the raw material purchase of traded goods, right, from 7 billion to 14.5 billion. Obviously, we are advanced sourcing here. So this year also, when you start servicing the 2 million capacity, you will have a significant procurement of compressors and motors. So I just want to understand, is this period the first period where you'll be able to get the cost optimized in the next maybe 3 quarters? And because of that, you will be able to maybe price it better than you could have been. So I just wanted to understand qualitatively, are we in this period heading toward a significant cost rationalization?

Correct. So I think your sort of prognosis is correct, Amit. And that was -- that's what we meant to get. It's not just a raw material. It's also a lot of efficiencies, which we are building in. And I think procurement efficiency is definitely one of them. And I think as our volumes grow, we were also able to negotiate better terms with the supplier because compressors also tend to be very sort of consolidated industry in terms of the supplier. But I think now we have what we call the right sort of seat at the table, which is where we can have a better negotiations with them, both in terms of the cost but also in terms of the supplies. Our inventories also, it can be much more efficiently managed now. We don't need to gauge everything ourselves because we realize we have a better prediction on the supply side. So I think all these things, this is what I meant when I said there will be multiple things we are working on, on the cost savings, which hopefully should start reflecting in ensuing quarters.

Very, very helpful. Maybe I will just add to this question, if you allow me. Is there any reason for your supplier sitting in China for compressors or a supplier sitting in India for motors because others everything else is internalized in Havells as we understand it, right? Is there any reason that supplier has not to give you the same cost sheet vis-à-vis the #1, #2 -- that it gives to #1, #2? I just wanted to understand that. That's it.

Hopefully, we said that will converge. You see we have a learning someone has to go through. One -- firstly, when we want to move up the value chain -- as I said -- when I say seat on the table, that's what I mean, that's what you asked. And hopefully, that will happen. Things take time, but we are in for the long haul if you just stay put.

The next question is from the line of Chintan Shah from JM Financial.

So I just had one question, and it's slightly longer term in nature. So about 4, 5 years perspective, do we think the Lloyd's or more specifically RAC segment can deliver margin, so to say, similar to or close to what we do in other segments? And if yes, I mean, if you could just help us understand what could be the levers there?

No. Other segment is -- I'm sure you're not comparing them with switchgear, basically.

No, no, no. Not -- I mean, on overall basis, excluding Lloyd's.

It will reflect what the industry structure is. And I think what gives that Lloyd sort of optimism is that this industry is -- on a whole, is making a decent amount of margins and return on capital. So as we said, and we have been seeing this for quite some time now, this is a journey. I think we are investing behind the product, behind the brand, behind manufacturing, behind A&P. And in the journey, there will be disproportionality to begin with, but then I think things start getting normalized. Therefore, we [ exceeded ] all the businesses since Havells has been born. So I think this journey will continue here. And there is no reason if we are like coming the top quartile in margins in all of the categories as far the industry is concerned. I think Lloyd will also have the similar journey, and we'll reach there. So I think that path is very clear. Obviously, everybody wishes to reach there early, but as long as I think we keep walking, I think we'll start running also in some time.

Okay. Got it. That was helpful. And secondly, sir, right now, we have enough capacity, say, for 1, 2 years, but say, 2 years down the line also we'd like to add capacity in the RAC segment? Or we'll, again switch back to going more towards outsourcing?

No, I think as our internal working on any CapEx is once we reach 70% or 75% of capacity, we start putting up the new manufacturing, this has been -- we have been doing for fans, we have been doing for cables and wires. The similar philosophy will be applied to Lloyd as well.

The question is from the line of Pulkit Patni from Goldman Sachs.

Actually, most of them are answered. Maybe one question and sort of a repeat of what different people have been asking in different forms. But -- and again, slightly longer term. So a few years back, there were 5, 6 players in each of these segments, and margins used to be much better. Today, thanks to how capital markets have been abundant, capital available, a lot of the ODMs now have raised cash, which means they also have capital. How do we get comfort on how margins move for everybody? Or are we looking at maybe in a few years, a situation like China where effectively margins compress for everybody as a sector? And this becomes relevant in the context of the kind of commentary that has been coming from most companies in the last 2 years. I understand demand has been weak. But how does margin actually as an industry go up from these levels? So that's the only question I want you to answer.

You're assuming RAC or you're talking in [ general ]?

Generally. I think across -- I mean, today, lighting, there are 20 players. Today, fans, everybody is there, and more people are entering. It's not -- I'm saying across the consumer durables electrical segment, how do you look at margin in context of ample capital available, everybody wanting to do everything, ample CapEx being committed now, thanks to PLI and multiple other things, so generally, is what I want to know.

Yes. While your analysis is right that there is ample capital available to players coming in, I -- also sometimes, you feel that players are coming in, some also going out. But if you would ask a few years in every industry, there's no meaningful player who has come up to the level of being #2 or #3 player in that industry. And that also means that we have not seen -- in fact, if you see our all product segments, cables and wires have actually seen improvement, but in switchgear, lighting, consumer durables. Overall, structurally, the margins of businesses have not gone down, at least for Havells because switchgear continues to remain at a similar level. Wherever there has been a dip, those have been temporary, maybe for a year or 2 because of the raw material volatility and we have maintained that sometimes it becomes more difficult to pass on the entire cost to the consumer because it's not just because of competition because the consumer also you don't want to -- like last year, there was a 25% increase in raw material of [ cooper and ] aluminum. So there is -- we see some contraction there. But now you see these margins are coming back. So while over the last 5 years or so, if you see purely Havells as a whole, overall, margins have not really made a difference. In fact, they are now improving and coming back to levels of what they were earlier. So generally, the prognosis is correct, but brands -- strong brands, strong companies would try and maintain their margins despite the industry structure through innovation, through brand recognition. And during this larger, longer period of time, brand investments and technology innovations also keep happening. So I think overall, the fact that Havells' P&L without Lloyd has actually maintained if -- or dipped only for -- during certain periods of time, gives us confidence that we'll be able to do that in future as well.

Got it, sir. So based on what you said, I understand that leaving aside Lloyd, it is fair to expect that even from these levels, margins will inch up slightly over the next few years.

Yes. And Lloyd definitely has a much better runway to improve the margins.

Ladies and gentlemen, due to time constraint, that was the last question for today. I would now like to hand the conference over to Ms. Bhoomika Nair for closing comments. Over to you, ma'am.

Yes. I would just like to thank everyone for being on the call and particularly the management for giving us an opportunity to host. So wishing you all the very best and look forward to a better calendar year '24. Thank you very much, sir.

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