IFB Industries Limited (IFBIND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. Welcome to the IFB Industries Limited's Q3 FY '23 Conference Call, hosted by Nirmal Bang Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prasheel Gandhi from Nirmal Bang Equities. Thank you, and over to you.

Thank you, Mike and good afternoon, everyone. Nirmal Bang Institutional Equities welcomes you all to 3Q FY '23 Earnings Conference Call for IFB Industries. On the onset of the call, I would like to thank the management for giving us the opportunity to host the call. From the management team today, we have Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO of Home Appliances, Mr. Arup Das, Head of Engineering -- Head of Marketing, Engineering Division, and Mr. Anand Reddy, CEO of Motor Division. I'd now like to hand over the call to management for opening remarks, post which we can take questions from the participants. Thank you and over to you.

Thank you, Prasheel. Good afternoon, everyone. I welcome you all for IFB Industries investors call for the third quarter FY '23. Joining me today are Mr. Rajshankar Ray, MD and CEO of Home Appliances Division; Mr. Arup Das, Head of Marketing, Engineering Division; and Mr. Anand Reddy, CEO of Motor Division. Now coming to the results, growth during this quarter was 4.5%. YTD growth for the period ending December was 26.9%. Growth during the quarter 3 was flat, mainly due to lower-than-expected revenue in Appliances Division, mainly during November and December 2022. The company has reported a total income of INR 981 crores compared to INR 938 crores during the same quarter last year. During the third quarter, EBITDA was INR 33 crores, which is 6% higher compared to third quarter last year. As a result of lower commodity price, material price reduced by 2%, material cost. Reduction of material cost and marginal hike in revenue resulted in higher EBITDA during the quarter. YTD revenue up to third quarter December was INR 3,132 crores compared to INR 2,468 crores for the same period last year. YTD growth in revenue compared to last year was 26.9%. EBITDA margin during the period was significantly higher at INR 145 crores compared to INR 75 crores for the same period last year. YTD growth in EBITDA was 93%. Major reason for higher growth in EBITDA was higher revenue. With this, I will request you to start the question-answer session, please.

[Operator Instructions] We have the first question from the line of Dhananjai Bagrodia from ASK Investment.

What is the -- asking about Home Appliances business -- what are we seeing? Are we seeing a general slowdown across the board? Or is the company losing maybe market share? What is the situation for Home Appliances? Did you get my question?

Yes, I got your question. Can you hear me?

Yes, I can hear you.

So if you see the market slowdown in November and December, this was across the board, affecting all companies. So the company has not lost any market share, but November and December, unfortunately, were 2 very bad months, as far as the industry is concerned.

So was it bad for the segment or for all?

It was bad across the board. The only thing that happened in the month of December, some very high billings of air conditioners by companies to the channels, but this is not customer offering. This was basically building up of stock. But as far as washers, microwaves, dishwashers, et cetera, were concerned, in general, the customer movement in these 2 months was very low.

And was it across? Or was it like rural or -- where are we seeing such an impact?

So we've seen the impact across. There wasn't any specific urban or rural bias to this. It was a general slowdown across. Now typically, what happens is that post Diwali in the month of November, there is generally a lull and there is some offtake in the starts from the month of December. But this time, it was an extended lull. As far as we are concerned, our focus remains on expanding our network and getting more out of our network. So IFB per se, even in a market like this, has enough levers to go if we execute on our levers properly. But the fact is it was across the board. Demand slowed down in November, December. There's no share loss. There's no market share loss.

Any idea what would our approximate share be in this segment, market share?

So can we give you those figures separately? Because what we do is that we estimate market share based on data from suppliers, what we understand their sales. So there is one index of GSK data that we use and there is an internal estimate to be made, because GSK doesn't cover all areas. So as far as front loads are concerned, our market share estimate is roughly in the range of 34%, 35%, considering all the data points that we have. And there has been an increase in that from the last year. And there is one segment in the front loaders, which is the 9 and 10 kg segments, in which we did not have models present, where IFB's share was effectively zero. So over the last quarter, we have begun the introduction of the 9 and 10 kg into the markets, and we expect the overall market share gain from that introduction.

Okay.

As far as top loaders are concerned, our market share is in the range of around 8 to 9%.

Okay. And sir, just to understand, let's say, in top load and front load, how much , 8%,9%, how much is it, let's say, 3 years ago?

Sorry. Could you just repeat the question?

Market share [ 34% ], how much would it be like 3 years ago?

Our market share over a 3-year period, I think, has reduced by roughly around 4% to 5%. And that reduction primarily came around 2 years back. If we look at the last 2-year period, our market share has been more or less constant. But if you take a 3-year period, then the market share reduction in front load would be a 4% to 5% reduction. And the top loaders would be an increase by about 1.5%.

Okay. Okay. Okay, sure. And so what about the other segments?

Sorry.

What about the other segments?

So if you look at microwaves, the IFB share has been constant and it is about 22% to 23%. And the position sort of rotates between LG, Samsung and IFB in terms of who comes in as #1. If you look at dishwashers, our market share is about 35%, 36%. In air conditioners, our market share has been very low. It is in the range of around 2%, 2.5% only.

In air conditioners, with more and more competition coming, what would be our strategy now to grow the segment? Would we look to -- how would we look to compete with others?

What we have done is that we -- if you look at the introduction of the manufactured range that we had in 2020 and the 2 years of the pandemic and the associated problems with that, we are actually quite unhappy with the way the overall air conditioning business is on data. And we've also reported that we've made significant PBT-level losses after the investment on this segment. Now there were 2 major agendas to profitability and also to revenues on this segment. One was the material cost. And that exercise, we had started about a year back. And starting this January, the material cost reduction program is almost complete. So the effects of that will start showing from this quarter onwards. So this was the lever #1. The second was that in terms of placement of our products and all the channels where IFB is present in the areas, where we need to penetrate more through our distribution network, et cetera. So all the learnings that we've acquired over the last 2, 3 quarters where we didn't make much headway, from this quarter onwards in terms of the placement strategy and the strategy around how to handle the channel mix or basic SKU structure or the commercial structure in the channel, all that has been sorted out. And we are quite hopeful of good volumes on that segment from this quarter onwards. So currently, these are the two important elements for IFB on this segment. Does that answer your question?

Yes. I just had a follow-up on the part. Like how are you [ tuning ] so that every ], every same thing? Would we look at more movement in terms of going online? Or could we see limited shelf space in also our stores? So how we break that?

Yes. So the fight for the shelf space is a real fight. But what we have done is that we have stayed at a, let's say, premium mid end to a slightly higher end position consistently, and we haven't lowered that position for the last 2 years. And in the areas where we have made sales taken counter share, the product feedback has been very good. The channel retentions have been healthy. Now based on that experience is where the expansion of the placement and the shelf space enlargement is taking place from this quarter onwards. So are we going to be present everywhere? Definitely not. That will take more time, because our price position is also more towards the higher end of the price range, basically. And we believe that it is right because of the performance and the features that we have. But in terms of getting what we want to ensure that our factory is fully utilized, that volume, we are quite hopeful that we will start delivering from this quarter onwards, based on all the work that has been done on the placement side.

Sure. So would we have been target -- would we look like to focus on the mass segment pipelines there, any change in our strategy?

Sorry, could you just repeat that question?

You mentioned that our price for the AC is on the relatively higher side, would we look to like maybe focus mass segment now?

No, right now, we are not looking at any reduction in prices or a change in the model range per se. The pricing that we have versus the features and the value, there is a settled approach in the market that is now building. So at least for this quarter and the next quarter, we will stay focused on what we have. And at the end of maybe the first quarter of the next fiscal year, then we will look at the future developments that we need to do.

[Operator Instructions] We have the next question line of Aviral Jain from SG India.

Sir, I have a couple of questions on the Appliances business. One is if you could just help us understand the gross across product categories. So you have front-loaded, top loader as one, you have dishwashers and you have ACs as a separate category. What sort of gross margin are you -- is the company realizing across? And a broad understanding would be helpful. And how much the fixed cost expense has increased because of AC plant coming in? It is now a full-fledged division versus earlier it was purely a trading strategy in terms of fully built units being imported from China and being sold.

Mr. Chatterjee, would you like to answer that?

The first one is that do we normally do not talk about the product price margin, number one. And the AC -- because of AC, some fixed cost has gone up. But that is more towards AC plant. And AC is being able to absorb.

Yes. Sure. So okay, what I wanted to understand was, say, for example, if Appliances Division as a whole was operating at, say, a 45% gross margin before. Is AC sustain -- what we understand is AC gross margin is substantially lesser. So is that right? I think we do not want to know the exact numbers, but just...

Yes, the margins are lower than the other products.

And by what quantum sir? Is it 10%, 5%, 15%?

Do not please ask me about the quantum. But I'm saying it is lower, compared to other products that we manufacture. It is lower, but it has improved over the past because we have done a lot of localization and other things. So gradually, margins are going up. But even then it is lower than the front loading and other products.

But -- and say, before the plant came up, there was a substantial INR 300 crores of the AC revenues that the company used to do or had gotten to a scale. Was the margin comparable back at that time and margin actually is lower now when you have your own plant?

Yes. I will say it is lower now because in that point of time, we were losing even more, number one. And the models were limited because the -- when you were buying it from OEM source, you never had so much of flexibility, number one. And the fluctuations in the -- while we are reporting the price increase, we had no control on those things.

Yes. No, I understand that. All I'm asking is, say, on the 4-year rolling average basis, your AC gross margins pre-2020 was -- is it true that it was higher than what you have been able to deliver, say, in FY '21?

No. The current position is better.

Okay. And fixed cost expenses because of the plant, the whole manufacturing overhead, how much will that be on a yearly basis? Because I see a number being called out of PBT loss in the -- because of the AC business in your investor report. So just wanted to understand, what is the fixed cost annual addition that has come because of AC plant?

The fixed cost, you see there is some increase in the manning and other related expenditure, which is related to this thing and recovery of which has to come from AC only. But otherwise, if you see the result, manning cost probably quarter to quarter, even last year if you compare, it has 9% increased, which is mainly because of addition of manpower and increment given to the employees, number one. And in operating expense, there is not much impact quarter-to-quarter, if you compare, there is a reduction. And operating expense, like I said, around 80% to 85% is variable in nature. And the fixed cost is very minimum there. I don't think we have impacted much, and we have reduced some fixed cost. There is a further scope for reducing it. But of course, AC-related fixed cost, if it is there, it has to be recovered by higher revenue.

Broadly, I keep asking this question every quarter is, what does -- and given material cost reduction program is mostly complete. You have worked on the BOM. And pricing is something that you would like to keep at the premium side. So what sort of steady-state Appliances Division margin that you would want to work within, which is achievable in the short term, both at the gross margin level or maybe at an EBITDA level? Because we've seen quite a lot of fluctuation around gross margin and EBITDA margin in the appliance business, which were for genuine reasons of raw materials, supply shortage and high commodity price inflation. But I'm assuming -- a big assumption is that things are settling down now. So what is achievable in the near term in the next 2, 3 quarters? And what is the steady state that you would be gunning for?

Rajshankar?

Yes, Rajshankar here. If you look at what we have also stated in many investor calls, our internal target is to be able to deliver a double-digit EBITDA margin. Now the areas where we have not been able to deliver, as far our own internal targets, one has been the material cost side, which is in a lot of trouble since the commodity prices moved up from Jan '21 onwards. And that exercise we have now stabilized, and it will -- a lot of the pressure will come off from this quarter. And the second has been there is a certain network that we have. There's an extraction, which we should get out of it. The progress on that is not in line with our own expectations. So if you see up to the period of the second quarter or even up to October's end, we did have a healthy growth rate. But even we believe -- I mean, internally up. is the reason that what growth we should have can be much more than what we are delivering. So if you are able to do on the revenue side, what we are supposed to be doing, which is to be able to get extraction out, for which a lot of work is being done internally to be able to ensure sales extraction, and the combined effect of the material cost work, which is 99% complete. Both put together, we wouldn't want to give a specific forecast on this, but we can be very close to a double-digit margin, is what we have also said in previous investor calls. Does that answer your question?

Yes, it does. One clarification I need. And all this pertains to AC per se. Rest of the divisions or product categories, there is no margin or volume challenges, so to say. I'm fair in saying that?

Yes. So if you see our financial results, the fact that we are losing money on the AC segment has definitely affected the overall P&L. And what we internally have targeted is that in quarter 4 and in quarter 1, we need a specific improvement on the AC segment. When the AC improves, it has an automatic positive effect of a significant degree on the overall [ stickiness ]. So you're right in this.

And there would be a very, very high salience of Q4 and Q1, given it's a summer product, any which way?

Yes, Q4 and Q1, for the AC segment, are the 2 main quarters, you are right.

And so what we also -- you had said earlier was the OEM part will also help you increase the utilization of the AC plant. By now, you would have significant visibility on the OEM volume. So is it per expectation of what you've guided?

Yes, yes. Whatever we have been given in terms of orders for Q4 and Q1, what we need to ensure that the plant runs to capacity, it is in line with that. You're right.

And obviously, a part of the BOM reduction, the pricing improve -- sorry, the improvement in terms of lower cost must have been passed to the OEM customers as well?

So with the OEM customers, there is an indexed pricing mechanism, which is based on commodity fluctuations every quarter. The pricing also adjusts every quarter. So we have a quarterly understanding with them.

Okay. Because all I'm assuming is -- I understand the indexation part, for seekers, for key components. But you would have been engaging, at least broadly, in terms of pricing, with the OEM customers. And given you've been able to achieve the material cost reduction program. So does that sort of improve your envisaged margins from the OEM segment at all or it stays the same? Whereas in your pricing to them was always keeping in mind that you'll be able to achieve the targeted material cost reduction.

So yes, you are right to the extent that the material cost reduction programs versus the price expectation from OEMs will help the profitability on the OEM segment. But the larger part of the profitability on the AC segment is the brand sales and the cost structure on the brand sales side. So yes, there will be an improvement on the OEM side, but the AC P&L per se improves if we sell to our target. And the material cost exercise from this month -- from this quarter onwards will start showing benefits.

We have the next question from the line of Manoj Gori from Equirus Securities.

My question here is if you look at the employee cost, on a sequential basis, it has increased by roughly around INR 9 crores to INR 10 crores. So Mr. Chatterjee just highlighted like there were increases. But normally, what I assume is or probably what I understand is that normally the increments happened during Q1. So why is it this time during Q3, any reason specifically?

No, the appraisal and other processes took a little time. And that is why it was given a delay. It was effective April only. There is no other reason actually. Normally, if you see that even in -- normally the effect of which comes late first quarter or in second quarter. But this year, it is late.

3Q. Yes. Okay. And sir, when we see about incremental employee or headcount that we have added during the quarter, so those headcount probably, if you look the factory, has been running for AC. So probably, those new employee count would be for which category? Can you throw some light over that?

This is not so much in factory, mainly in marketing and other areas to increase the network and other areas.

So, Rajshankar, this question is for you. So probably when we say, like you just highlighted, like we have not been able to get the desired level of extraction from the channel. And still, we have been deploying new headcounts. And obviously -- and in fact, one compliment that I would like to give is if we look at the product quality and the product expectation, IFB definitely has an edge over competitors. So whether we talk about the industry giants as well, I do believe that products are relatively better. So what are the major challenges that we are finding on the extraction side? Because this thing is something we have been aspiring for long now on the extraction part.

Yes. So you're 100% right. And we are also internally quite unhappy with progress per se on this. And if you ask me, there are -- a primary channel is that there is a large part of the network in India, which is a fed through distribution, which is the indirect retail network. And this was a network that we sort of were not present in at all. And over the last 2, 3 years, there has been a lot of focus in getting the network right. But in terms of having the right set of distributors, ensuring that the KPIs in the system probably settle down well and everyone knows what they have to do, which is either the distributor or the IFB employee, that we have the product placements properly done, et cetera, it is taking us some time to really do this way. And we are also not very happy with the pace. But in terms of the extraction increase from the network that we have, the largest area of improving yields is through the distribution network. Now, to some extent, the distribution network is dependent on products that are more mass in nature, so lets say, the top loader or air conditioners. Now the air conditioner story is still taking us some time. I believe that from this quarter onwards, the distribution network will really see the way that we should have years back. The top loaders, et cetera, range is still positioned high. So even though large parts of the distribution network are able to sell it, but 100% of the network is unable to sell it because our price points are higher. So to some extent, it is the product market that we have, but more it is to do with how we are running the distribution channel effectively. And that is the work that we have to complete, Manoj, basically. So if our progress is slow, it is slow because on that area, we are behind our own internal targets. Does it answer your question?

Yes, absolutely. Sir, one more observation has been, even in the washer when we look at, so even in the West or in the North, when you visit the stores or any of the large format stores like Croma or Vijay Sales or Reliance Digital, we are able to see your front-load washing machines. What is missing is your top-load, fully automatic washing machines are not even in display. So if you look at revenue when it comes to pricing, we are very near to the largest players in the industry. But still, we are not able to see that washing machine. And the one feedback that we are receiving, especially in the West market, is that IFB should normally should be preferred as a front-load washing machine, not for the top load one. So what's actually like this negative perception upon the channel or probably what's happening over there? Because now if you look, we have done our in-house manufacturing since many years now. It's more than 4, 5 years, if I'm not wrong, for top-load washing machine, but still we are not able to see even in the large-format stores.

Yes. Your feedback is right that the placement of the top loaders in the larger stores is below par. And in fact, from this quarter onwards, in terms of the expansion of the placement of the top loaders in, let's say, Reliance or Croma, we have taken that as a primary target in terms of the large key accounts, how to increase placements of the products that we have. So that is the agenda to be completed in this quarter and the next quarter, but your feedback is absolutely right. The top loader needs more placement from our side because it's a good product. And the expansion in the placement itself will give us a significant rise in volume.

Right. Because see, I personally use it, and I am very comfortable with the product quality. So probably I think it is a low hanging fruit for us, because it definitely goes well with our front-load washing machine.

Yes. Yes. Yes. You are absolutely right. It is a very low hanging fruit, and we can get much more out our revenues quickly on this. And the increase in the placement is something that we have taken as a specific task for this quarter, especially with channels like Reliance, Croma, et cetera.

Right. Sir, one more question on the gross margins. You have answered a lot. But when I look at the gross margins in last quarter, if I'm not wrong, you highlighted like we have taken some pricing actions. And also then, if you look at the commodity prices, have also hold off significantly. But when I look at the sequential gross margin improvement, probably if you look at the gross margins, probably those have declined on a sequential basis.

I think the effect of the reduction in the commodity prices or the material cost action that we've completed comes into full effect once the pipeline inventory clears off. So this impact of the material cost on the gross margin, you will start seeing from this quarter onwards.

from Q4 onwards?

Yes, so in Q3 for example...

In Q3, we have got, in Appliance, around 2% reduction in material cost.

Okay. Okay. Understood. Understood. And sir, last question on the room AC side. So obviously, when you look at the current scenario, so it has intensified competition. Like most of the brands have been going very aggressively in pricing. So I would just like to understand your strategy. Obviously, you gave a brief description about the product portfolio, but on the channel side when we look at, probably there would be something which even channel would be positive on because of the higher schemes or margins that they would be able to generate on the MOPs. So what sort of margins we would be offering to channel as compared to other players in the business?

This varies tremendously across India. And typically, you might find that channel operates ACs in many places on a margin of, let's say, 500 to 1,500. Because of the excessive presence of some of the mass brands, there is a lot of discounting that happens. Now what we have understood, based on our previous season's experience, because we sort of pursued this idea of proper pricing based on our conviction about the product, then the additional retention, because of the lesser discounting that people made, was a figure anywhere between INR 1,000 to INR 2,000. Hence, I was saying that as far as the IFB retentions are concerned, the experience in the channel has been good. And that is also helping us to increase the channel size from this quarter onwards.

Right. And we have our service network in place as compared to the other players in the industry.

Yes. We have a very wide and a very well-present service, equal to the best in the industry, I would say.

And it is also expanding.

Yes, yes. And sir, lastly, if you look at it, temperatures have definitely been picking up over the last few days. And what we hear is South has been witnessing some demand uptick. Are we seeing any green shoots of probably any revival in demand, whether in rural or in urban markets or anything that's a...

So January was better than November and December, definitely. February seems to be similar to January, but we have to wait a little bit. But the excessive downward hit of November and December has definitely reversed in January.

But we are witnessing on Y-o-Y basis, at least we are seeing some growth in Home Appliances.

Yes, Y-o-Y growth in October was much higher.

YTD growth is around 26%.

But again, so probably, if you look at it, majority of the growth has come from the Q1 because obviously it was based on a COVID-impacted period. But when we look at the Q2, it was 10% growth and Q3 was roughly around flattish on Y-o-Y basis. So I'm just asking like whether in Q4, at least so far, we have been seeing that growth momentum.

So if you see, we haven't seen it as yet. But based on what is happening in the market in January and February and the end of the quarter, yes, we should see it.