IFB Industries Limited (IFBIND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of IFB Industries Limited hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Natasha Jain from Nirmal Bang Equities. Thank you, and over to you.

Thank you, Yashashree, and good afternoon, everyone. Nirmal Bang Institutional Equities welcomes you all to the Second Quarter FY '24 Results Conference Call of IFB Industries. I would like to thank the management of IFB Industries for giving us an opportunity to host the call. Management is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO, Home Appliance Division; Mr. Arup Das, Head of Marketing, Engineering Division; and Mr. Anand Reddy, CEO of Motor Division. I now hand over the call to the management for opening remarks, post which we will take questions from participants. Thank you, and over to you, sir.

Thank you, Natasha. Good afternoon, everyone. I welcome you all for IFB Industries investors call for the second quarter FY '24. Joining with me today are Mr. Rajshankar Ray, MD and CEO of Home Appliance Division; Mr. Arup Das, Head of Marketing, Engineering Division; and Mr. Anand Reddy, CEO of Motor Division. I will now start with the result of this quarter. During the quarter, revenue was below our expectation and was marginally lower than the same quarter last year. The company has reported a total income of INR 1,074.12 crore compared to INR 1,101.92 crore during the same quarter last year. During the second quarter, EBITDA was INR 74.83 crore with a margin of 6.97% compared to INR 73.98 crores with 6.71% for the same period last year. Margin was marginally higher than last year. Despite lower revenue, gross margin improved mainly because of the reduction of material costs, but was partially offset by the higher sales promotion, staff and operating expenses. We have already initiated a number of cost-reduction actions to further reduce other operating expenses to improve the margin. For the first half of the year, company has reported a total income of INR 2,136.97 crore of revenue compared to INR 2,151.19 crore for the same period last year. EBITDA margin for the first half was INR 115.54 crores, 5.41% compared to INR 112.42 crores, 5.23% of same period last year. EBITDA margin during the period was marginally higher compared to last year. The improvement in margin is mainly due to the reduction in material costs. During the year, company's net position -- net cash position improved. With this, I will request you to start the question-answer session, please.

[Operator Instructions] We have our first question from the line of Manoj Gori from Equirus Securities.

And we went through the presentation, very detailed one, and what you have highlighted probably the cost savings that you would be doing during Q3 and Q4 on account of RM benefits and probably, if you're looking at secondly on the fixed cost operating expenses. So can you throw some light? When we say about COGS -- benefit of COGS of roughly around INR 44 crores in Q4. So what do we refer here? Is it basically from the lower RM prices? Or we are doing some value engineering? So can you throw some light over here?

Manoj, Rajshankar here. The estimate of the cost reduction on the material cost side is based on three factors. One is, of course, the lower commodity baselines. And the second and the third are the consolidation in the purchases, where, let's say, we had independent purchases from two different suppliers for washers and air conditioners, and we are combining those purchases. And the third is redesign, including VAVE. So the bulk of this estimate of INR 44 crores benefit is from the second and the third which is related to consolidation in purchases and VAVE and redesign. And about maybe 20% to 30% will be a result of the reductions in the commodities overall.

Yes. So the reason why I asked this question was basically, if you look at a competitive intensity moves on the higher side probably peer companies will also pass on the RM benefit. So that was the key reason just to understand, like where we would be saving on the gross margin side. Secondly, if you look at, we have also highlighted about INR 8 crore of savings on monthly basis on the fixed operating. Can you throw some light over here?

So these are on 7 or 8 heads, and these relate to areas of nonproductive manning. They relate to areas of freight, warehousing costs. They are in office expenses in terms of better organized travel. They are in terms of the cost of, let us say these, e-waste related area where we are having costs, and we put a different process in place in terms of realizing more from machines that we scrap. So, there are about 8 or 10 heads on the fixed cost areas and the work that we are doing on them, our committed target is to reduce INR 8 crores a month on that. This will be on the same level of sales as last year base March.

Okay. Okay. So here, we are not assuming any growth, sales growth just basis on the last year figure, we are expecting this saving?

Yes, that's right. The internal brief is on the same base level as March, these savings have to be made.

Right, sir. Sir, lastly, on the demand side. So even in the festive season, we have got a very mixed feedback. Like during the discount period sales, sales have been very robust. But during non-discount [Technical Difficulty] have dipped and accordingly, probably the entire festive season might not be as healthy as industry was expecting. Can you throw some light like what's happened in the washing machine category and probably on the overall categories that you are present into?

So I will answer this with three points, Manoj. The first is that your feedback is right, the sales that happened during the events period of e-commerce, I wouldn't call that a discount period, but there were an online event, let me put it that way. The sales were actually very good. But post that, in terms of general sales over the, let's say, the last 3 weeks or if I can add up, let's say, October and November together, even though they have been better than the initial period of, let's say, the end of Q1 and Q2 middle, the sales are still being subdued. It's not typically what you would expect in a season. Those are the first two points. The third point is that how we look at it internally is that we still feel that given the network that we have, we are not doing a good enough job as far as sales is concerned. So in terms of our performance on the AC category or what we can get out of washers given the network and position we have, we still feel that we have a lot of headroom for growth, but we're not just doing simply a good job on the sales side as we should be doing. So in terms of restructuring the sales force, making the changes that are required, we think that on point three on the plus side is much more than any market-related conditions on point one and point two. Have I been able to explain this?

Yes, yes. And sir, all the efforts that we are taking for better extraction, so probably by when should we see this flowing into our revenues?

So Manoj, our internal commitment is that we have been doing this for about, let's say, 2, 3 quarters now and in a much more intense manner over the last 3, 4 months in terms of changes in the sales team restructuring. There is a lot of effort we are making on the distribution network that we have in terms of rationalizing distribution, changing distribution, and also in terms of the large account extractions, et cetera. So our internal commitment is that we will finish whatever we have to do by end of this quarter, so that starting the fourth quarter, ending this year and full benefit next year, we need to complete whatever is on the agenda in terms of the sales effectiveness.

Right. Right. And sir, one last question, if you look at in the refrigerator, probably we have highlighted in the profit and loss from associates of -- which was more than INR 7 crores. So can you throw some light like what should be the normal steady run rate that we can expect here? So in this quarter, it was roughly around INR 7.5 crores, INR 7.8 crores. So what should be the steady rate that we can expect over here?

So I'll sort of give you a market view on this, and then Mr. Chatterjee can sort of answer the financial side of it. IFB Refrigeration Limited, the company with servicing some markets directly and IFB Industries Limited is servicing some markets. Both combined, the estimate that is there is that we will reach a sales of roughly about 50,000 a month from the Q4 in the first phase. And as far as IFB Industries Limited is concerned, that figure will be in the range of 15,000 to 20,000 refrigerators a month. That you could call as a Phase 1 lever. As far as the commercials around this are concerned, I would request Mr. Chatterjee, if you could please answer that.

Yes, Manoj, during this quarter, actually we sold around 11,419, revenue of [ 14.62% ] and we made a PBIT of INR 0.94 crores. And the -- for IFBRL, I think revamping the products and other things. It will stabilize over a period of next 3 to 6 months.

We have our next question from the line of [ Mr. Nisarg Vakharia from NV Alpha Fund Management, LLP ].

At the outset, let me just say that this is one of the best corporate governance standards that we have seen across companies in the market on how firmly the company wants to walk the talk and has given in extreme detail on the cost savings that the company will sort of do over the next 2, 3 quarters. Never seen such a guidance in any consumer company for that matter. Sir, I have a slightly broader question, that we have had effective sales growth for the last 10 years, but I've never focused on sustainable margins. Just want to understand the broader thought process on why there is a certain emphasis on margins now? And were there so many cost inefficiencies when we are sort of drilled down into why we were not making margins? I hope I sort of expressed my question clearly.

Yes. And I will -- this is Rajshankar here. I will try and answer that, and then Mr. Chatterjee can also add in. The third quarter of FY 2021 was when we actually registered a very healthy financial performance. And then from the fourth quarter of that year onwards, when the material cost indices really went up and we couldn't pass the input side increases on to the market side. Since then, actually, the financial performance was well below whatever we would have been happy with. Now given the investments that we have made, for example, on the air conditioner-related area, IFB Industries Limited, the investment it has made in IFB Refrigeration the new company and also investments that we are making in terms of range overhaul on the washer side. The need for us to be sustainable in terms of profit margins and the need to ensure that we get the market revenue right, I will not say that we have not been doing this earlier. But yes, definitely, over the period of the last 2-odd quarters, the focus on getting the material cost profile to the best level possible and getting the sales side right where we are actually quite unhappy with the kind of revenue side that we have been registering for some time. The amount of detailing focus, regularity of internal reviews will definitely mean much more before that. Have I been able to answer the question that you asked?

Yes. Broadly, sir, yes. I mean I was looking at your sales growth right from 2015, '16. We have never delivered more than 3.5%, 4%, 5% operating margin in any single year. And now within 2 quarters, we are sort of guiding towards almost 9%, 10% sort of operating margins. So I'm just trying to understand how has this shift sort of happened overnight? Of course, not taking away from the fact that you have worked really hard in sort of these cost efficiencies.

I think when sometime around mid of last year when the material cost detailing had really reached a mature level in terms of what is possible for us on the cost side simply by consolidating resourcing, renegotiating, that figure was a very large figure. So we delivered part last year, which you can see in the gross margin improvement this year. But there is still a 50% plus to be delivered by the end of this year. And we've also detailed the fixed cost side, which definitely is something that we've done only over the last, let's say, 3, 4 months. Getting our cost profile right for the same level of sales is priority #1 right now within the company.

Okay. Does this also mean that now going ahead, we will have base case high single-digit EBITDA margins and sustainable margins that we have guided for over the next 2, 3 quarters as we build on the organization in the future?

Yes. Mr. Chatterjee, would you like to answer that, please?

Yes. Depending upon the consistency of the revenue and our efforts that -- our action that we have initiated in terms of operating expenses and the material cost, we are expected to do well, and with the increase in the revenue in all products, especially in the AC in the fourth quarter.

Okay. My last question on this is that have we employed some consultants to sort of work on these efficiencies for us? Or have we done all these things internally?

This is all done by internal teams.

In-house.

We have our next question from the line of Sumil Sethi from Siguler Guff India Advisors.

Congratulations for a great set of numbers. I have questions across three categories. One, I wanted to understand a few things on the gross margin side. So you mentioned that you are doing cost improvement to the extent of INR 12 crores and INR 46 crores in the respective quarters. I just wanted to understand what's the base which we are referring to while calculating this improvement? Is it on the expected sales that we are about to do in Q3, Q4? Or is it on the sales that happened over last year?

So all the savings targets which are given here are on the base of March '23.

On the March...

Yes, so these are on the same level of sales. Whatever is additional by higher sales is separate.

Okay. And this cost improvement will be largely from a particular product, let's say, ACs or it's kind of blended across home appliances?

They are coming across all products.

Understood. Sir, till last quarter, you used to give a cumulative PBT loss for ACs. Any sense of what that number is this quarter?

Mr. Chatterjee, would you like to answer that, please?

Overall, till -- this thing is around 50 -- INR 45 crores during the first half.

Okay. And do we have numbers around what depreciation or interest cost we allocate to...?

Yes, yes, we have actually. Interest for the this thing is INR 5.51 crores for the quarter, and the depreciation is INR 6.75 crores for the quarter.

Understood. This is as allocated to air conditioners, Mr. Sumil?

Only AC.

AC. What about the half year?

Half year is INR 11 crores is for the interest and the depreciation is INR 13.49 crores.

Understood. And sir, what I understand from the previous call as well that we have been giving slightly higher sales promotion for air conditioners versus the home appliances. Can I get a sense of what that differential is, is it a 10%, 12% kind of a differential or is that a 20%, 25% kind of a differential? Just an indicative range?

So in the first half of the year, in terms of promotions, we invested behind two categories: one was the air conditioner and the second was a new range of front loaders under umbrella platform called Deep Clean that we had introduced. And in the first half, in terms of what we've invested in newsprint, in digital, et cetera, it is an incremental expense of about INR 11 crores to INR 12 crores for the year so far. In terms of the results, we feel that in air conditioners we've still underperformed. So the investment hasn't really returned results for the company so far. As far as the new front loader platform under the umbrella Deep Clean, we feel that, that campaign or that investment has had an impact in terms of the traction that we are seeing in September, October and November, and we have to sustain that kind of growth that we're getting from this new platform.

Understood. And do you think we are getting good realization of our ACs on our market operating price vis-à-vis competition? Or do you think there's still some gaps regarding that?

So we are more or less -- the market is segmented in two sorts of categories: one could be the entry or the lower level of pricing, which is operated by some players, and the other is the set of players who we benchmark, which would be BlueStar, LG, Daikin. So vis-à-vis them our price in the market in terms of customer price is more or less benchmarked.

Okay. And sir, just one last question. We witnessed a significant degrowth in our front loaders over similar -- over H1 of last year in sales terms, so some 6%, 7% of degrowth. I just wanted to understand, is this because of a delay in the festive season by 2 or 3 weeks? And consequently, is the entire industry affected here? Or are we losing market share in this category?

So we had lost market share, and we specifically lost market share in two places: one was that the capacity segment of 9 and 10 kgs is a segment that has been expanding. And that was a segment till last year, we had no representation in. And this year our -- when we sort of introduced models for the 9- and 10-kg segment, and they have now ramped up to a volume of roughly about 12,000 to 14,000 in a month. Our agenda is to take it to about 20,000 in a month. And the segment size right now is about 25,000 a month. We expect it to go to about 35,000, 40,000 a month. So that is one area we've lost share. And we till about, let's say, September, we had also lost share in the 8-kg capacity in front loaders. And that was because there was a price undercutting which was being done from LG and Samsung. And we have answered that now sort of in terms of rejigging the range and ensuring that the price differential reduces. That segment, we still have to regain the share. So the degrowth that we are having is because of loss of share in these two segments. Also on the overall point that I said in the beginning to Manoj that in terms of sales effectiveness, we are quite unhappy with what we are delivering to the company as on date. So given the network we have, even though we may have, let's say, issues on 9- and 10-kg, we should be doing far higher numbers overall. That we have to complete during this fiscal year. We'll work on that.

Understood. And sir, the -- and we're really impressed to see the improvement in margins in your engineering division and it continues to show profitability on a quarter-on-quarter on an annual basis. Just want to understand, is this margin growth -- is this margin profile stable for the quarters or years to come? Or is there a onetime kind of an impact?

Mr. Ray, will answer that.

Yes, please.

This is Bikram Nag here. I think the margin thing, as far as the company is concerned, we are very clear as far as engineering division goes, we should be operating at a higher margin than whatever we have achieved in Q2. We are not happy with Q2 numbers. The reason we're not happy with Q2 numbers, you will see there's hardly any like growth in Q2. And on the sales front, we have not done well at all. And we have taken up this point. And margin growth is one thing. Sales growth is equally important. Anything sub-20%, the Board is not at all happy with, and the Board is absolutely clear on this. And we have spoken to the division. And by end of Q4, our numbers have to be in place. And getting those numbers in place on top line will like further expand bottom line. If you see the stamping business, the stamping business also, our internal target is to do about INR 7.5 crores or so a month. And we have done like below that. So we are not happy with that as well. Engineering and Appliance division, we are very, very clear. The Board is clear. We need double-digit margin which means 10% at least we should hit. And AC has to hit a certain number, which is 300,000 plus. Washing machines have to be at a certain number also, which the Board is clear on, which is about 65,000 per month. Top loader has to be at around 35,000, 40,000 a month. Our sales team is being rejigged in order to meet these immediate ambition goals. And as I said last time, the sales team is being thoroughly rejigged. And Mr. Ray is doing this state by state wherever requirements are there. The states are being looked at district-wise to see where are we weak in a district and changes are being made. And we will do this meticulously in order to achieve our ambition. These questions are coming up quarter after quarter. The fact that we've not kept pace with requirements is something that the management and I are not happy with. And we will deliver as per street expectations. That is what we need to do. I'm also saying on this call now, I'm in Singapore because my father has been very unwell. He is in the hospital, I'm in the hospital here now. So at some time I may just log off. He has been in the hospital since the 23rd of July. It's been a long time, he's in HDU, which is a high dependency ward. He is like stable, but his condition is serious. Having said that, company has to perform and nothing is stopping. And whatever we need to do in order to put margins and sales back on track, we will do.

We have our next question from the line of Vivekkumar from Bestpals Research and Advisory LLP.

Am I audible?

Yes.

Sir, my question is regarding the same thing that you've been repeating quarter-after-quarter, so pardon me because the sales and extraction from the channel is what you're using that you're not able to get the sales. So my doubt is, as customer enters the -- any big retail shop where these are sold, every category has a fixed number of brands. Like if you take AC or washing machine or microwave or whatever you take, 5 to 6 brands are there. And retailer also beyond a point will not just put your products just for the discount that you give because he has to have the turnover, asset -- retail asset turnover for him, that inventory turnover. So where are we lacking in the terms of product-wise because retailer can't definitely have 20 brands like which can happen in small FMCG products. So definitely, there is a room for 5, 6 products because of the space constraint and all in every retailer. So how do you go and take space for yourself with such a huge competition across categories? And how are you thinking from a product perspective and ability to extract from the channel, able to convince the distributor that you really can generate sales for him? So what are the steps you are taking, if you can go in more detail so that we can understand? I don't -- [ you don't missed my question here ], sir?

Yes, Rajshankar here. I'll try and answer this. As far as IFB is concerned, you will see this action that we have to complete in two parts. So as far as washers is concerned, we have the placements. And here, it is not an issue of whether the channel will place us or not. We are placed, and we need to ensure extraction. And this extraction has to be on two heads. One is this point about the capacity segments that I just spoke about a little while back. And the other has to be in terms of manning. So you spoke about this point of entering a counter. So when you enter a counter, there are salespeople who assist the customer to arrive at a decision. And our completing the manning gaps we have in those counters where we don't have a person to meet and reach a customer has a direct bearing on our market share overall for that counter. So as far as washers is concerned, we just have to do a better job at ensuring that our manning is right and that we don't leave any gaps in segments like it happened to us in the 9- and 10-kg. And as far as ACs and Refrigerators are concerned, we think that the two will actually help the aspect of distribution. So if we look at distributors that we've had, largely the products on which they have had to have sustainable revenues have been the washers. And on air conditioners, where we are still to get a proper market presence. But what is happening to the same distributors with the arrival of the refrigerator is that the ability to reach a dealer with a basket has actually improved so in terms of being a company that has a product range basically across both washing, cooling and cooking segments. The range actually with the investment the company has done is quite complete now. So with this range, our need to finish action is that much more urgent, but it is also becoming easier because we are offering a full basket to our dealer. Now we just have to complete the job. You are right that we have been speaking about this for many quarters and we failed to actually deliver whatever we have been discussing. But this is the main job to be completed, and we have completely committed to this. The range is actually going to help the sales team more than anything else.

So this you say -- because, sir, my doubt is every category has that occupies -- like, let's say, refrigeration, so you will have a limited space to put up 5 to 6 brands. How will we convince him because ultimately, the customer decides what will move because beyond a point, discounts will not help because retailer will not put up just because you're giving more discounts. So how do you win that customer? And is it just that where like a range of products that will help, just placement is enough with the distributor or something else to be done from a customer angle so that we start building a brand and growing? So I was not able to understand that...

It's a good question because the doubt is a correct doubt to have. Now if you see as far as washer is concerned, the product and the position is accepted in the market. Like I said, it's just our efficiency on how much we can extract. The experience we've had with the Refrigerator introduction is that the product has been very well accepted. And why somebody should buy an IFB Refrigerator, vis-à-vis, the three major brands, that argument is quite clear on the floor. This point that you said about why IFB should be giving space is a point that we are really having to deal with as far as the air conditioners are concerned, because the product at the end of the day is like a box. And even if you have a very good air conditioner, people don't necessarily give you the realization that you want. And it's a problem that we have faced right since the beginning. So the problem that we have to solve as far as why should I place IFB is true for air conditioners. But for the rest, actually, it is purely dependent on our efficiency and how much quickly we can move into the market. So what I was just trying to explain to you is that the AC can actually ride on the other products as well. That is the basic thing that we think is possible in the market.

No, but his point is correct, Mr. Ray, it also depends on how we are going to communicate and educate the customer as to why they should buy either ref or AC. That communication has to be improved further.

Correct.

No, no, sir, I was asking because ultimately, distributors will not keep products which don't move for discount so, and there is a limited space for every item which dominate...

Yes, correct, absolutely right.

Distributor will not keep product, so we have to improve on this part.

When will we see the results, sir? When do you hope to see the real numbers flowing in, in terms of sales across categories like ACs and Refrigeration and also increasing your share in washer? How many quarters or years do you think we will be able to see at least we are in the right direction?

I think we should be ready by February, March in like totality because I think the sales rejig will be done, and we should be ready by then fully. We believe we are on course. We actually believe that by -- is it January, Mr. Ray, that we should hit overall ref sales of around 40,000 to 50,000 a month, January?

Yes. Yes.

And so we have to see whether we are on course or not. As far as AC goes, we sincerely hope that by January, we'll stabilize at about 30,000. We are nowhere near that, but January, we hope to do it.

We have our next question from the line of Aviral Jain from Siguler Guff India Advisors.

Sir, first of all, there's been a lot of discussion around the revenue growth and what needs to be done. At a fundamental level, what is the share of the direct customer sales, which are, say, large-format stores versus a distributor to dealer-driven sales. So what is the current breakup like for the company for Appliances division as a whole? And how is it different or similar in the AC segment?

So the distribution that sales overall for the company as a whole is about 25%. This will increase when we do well on air conditioners and refrigerators because a lot of that sale is distribution led. And if you look at the percentage to consumers directly, you could look at the sales from our IFB points which are -- hover between 14% to 15%, or you could look at the e-commerce sales, which is also essentially direct to consumers. And that percentage, depending on the month of the year varies between 15% to 20%. Is that the detail that you were looking for, please?

No. My question was more about -- so sir, there is a channel which is distributor led, which goes to the dealer and in turn so it's a 2-tier distribution there, where, as you mentioned, the distributor once you have a bigger basket of products, the ACs and refrigerators could ride on washers as well as on microwaves. But there are direct sales to large format stores, where there is no distributor where there is actually a fight of -- fight for space, which are direct customer sales from IFB, which in turn, so it's a single-tier distribution structure. So I'm not talking about e-commerce or IFB points, where there is no middleman, so to say, or intermediary. But between a distributor dealer-led sales and a direct customer to consumer sales. Customer, I would mean as a chain.

Understood. So if you look at multi-brand sales directly serviced by IFB, which includes the large chains. And from our total sales, you take out distribution, which is 2 tiers and IFB points and e-commerce, then roughly around 45% to 50% of sales is what is going through the directly serviced -- hello?

Sorry, there was some...

Yes. So the multi-brand sales directly serviced, which includes the chain counters and the large format retail stores. But from our total sales, if you subtract distribution, IFB points and e-commerce, then roughly around 45% to 50% of sales is to this channel, which is direct from IFB to a retailer and retailer to customer.

Sure. So there, it's far more challenging for a newer product, say, ACs or a refrigerator to create that space and to create -- and manning is that more important in this channel. And is this the channel where we are under indexed versus competition for ACs and -- refrigerator is a new product as such, but is there where ACs is sort of not performing to your plan? What then...

Yes, you're absolutely right. You're absolutely right. For air conditioners, specifically, the market segment or the market or the percentage of the market that this channel has versus what we are getting out of it, we are severely under indexed.

Okay.

Now also, I think Mr. Ray, you can just talk to him that there are about 50 of these retailers, and we've now made a team to actually go out and target all of them. Out of 50, I think we've already got through to 15 for ACs, and the balance is in [indiscernible] can we just expand on that, Mr. Ray?

So these are the -- we call them key accounts. These are accounts which have multiple counters, and they could be within the same state or across states. So the identified number is 50. We have put a process and a team in place to actually go and ensure that we get extraction. And the discussion with them is that look at IFB as a full basket player. And like Mr. Nag just shared, we have sign-offs with about 15 of them done. And by end of this quarter, we would expect to be in at least 75%, 80% of them with all the product categories.

And how many counters do these 50 key accounts have approximately...?

These 50 accounts are about 2,600 to 2,700 individual stores, counters across the country.

And would it be fair to say that -- and I'm just trying to get -- that we are -- with ACs, the presence is let's say 20% or 30%, and in the kind of quantities or stock-wise that you would be happy with till now, which is what you're changing?

Can you just repeat that? I didn't understand the question.

So my question was out of these 2,600 individual touch points or counters, the AC penetration would be 20%, 30% while washer could be 80%, 90%. Is that the kind of gap we are talking about here?

Yes. So effective presence in AC right now would be only 10%, 15%. And washers is, yes, it is 75%, 80%.

Okay. But on the other direct-to-consumer channel, which is IFB point e-commerce you mentioned and distributor-led. There, we are -- the AC salience of sales is much better versus washers, fair to say?

So the salience in an IFB point for ACs has improved from last year. In e-commerce, till now, we have kept the ACs away from e-commerce. Our main concern is where on whether we'd be able to control pricing. But the decision we've taken is that in this season, we will be having effective presence of ACs on e-commerce. ACs, there is also a significant opportunity in terms of direct sales, which is in terms of institutions, direct to customers, there are lots of sales and service channel partners that we can sell to. So we've begun to put a team on this. We've had success this year, but the numbers are still very low. That is also a segment for air conditioners that has to be expanded.

Sure. And this loss of market share on the washer side, that -- given IFB is the market leader in front loaders, that is what our primary research had suggested. That's temporary in nature, as in this is more indexed to primary. But effectively, there is no change in, say, offtake percentage, given the MOP, market operating price, for the end consumers or end purchasers, this is still pretty much well indexed. I mean there could be higher channel promotion, so to say, which is what led to some loss of sales in the first half. Is my understanding correct?

No, so the loss in share came from product segment not represented, which was the 9- and 10-kg higher end segment. And in terms of 8 kgs, we had a particular price position. But LG, Samsung specifically undercut by a significant amount. And that was a price reduction, effective price reduction to consumers. That problem we have addressed last month by introducing a new product, which is appropriately priced. As far as IFB is concerned, there have been no reductions as far as the market operating prices are concerned. That position we still head. We have not discounted.

So if we talk, say, volume-wise, the overall market would have probably still grown by 10-odd percent from last year first half value wise probably much more?

We don't have market figures per se. But our understanding is as far as front loaders are concerned, it is flat or slightly less this year so far.

And your first half numbers take into account the festive season delay by 2 weeks this year, did the -- had it had any bearing on the reported numbers? Or if we were to take, say, primary till October end or first 2 weeks of November, is the fall still as stark? Or has some bit of recovery in terms of percentage decline in sales being addressed?

So October plus November together will definitely be a recovery. But we have still 2 weeks to go for November and normally post Diwali, the channel replenishes, et cetera. So we will know by end of November. But if we look at last year base, October plus November will definitely be better.

What my question was April to November this year versus April to November next year?

We'll have to wait for November to be able to answer that.

Sure, got it. Okay. And what you mentioned is you'll have to increase manning because the obviously AC sales are only 10% of the counters as you mentioned. And one of your points of fixed cost expense reduction what you had mentioned was, you are also focusing on unproductive manning. While I understand there is a big difference between productive and unproductive manning but how much of this unproductive manning is constituted by sales staff not being able to deliver the kind of volume numbers that we would expect them to deliver on the counter? Is that a big number because these are 2 counterintuitive points that you've laid out? You need manning to improve sales and you need to cut manning to cut fixed costs.

So that's an interesting question and there are two parts to do this, one is that there is one manning, which is the in-counter manning, which is when you walk into a store as a consumer, somebody meets you and explains the product to you, we call them counter sales representatives, and we have gaps there. So if you see in terms of these 2,600 key account counters that we were speaking about. Currently, we are only present with our representatives in about 75% of those counters. So 25% counters is effectively empty. And -- because if you don't have someone present, you cannot sell. That is what happens on the shop floor. So this manning is inherently a variable manning. There is, of course, a salary, but the component is that if you do well, you earn an incentive. If you sell more, you earn more. So we have not -- we have only focused on making this manning productive. There is no focus on reducing these numbers per se. In fact, this is an area that we are investing in. As far as the other manning is concerned, which is the fixed manning in terms of people in the plants, people in sales, in service and warehousing, in logistics. So there, we think that there is definitely scope to reduce based on restructuring. So for example, we would have people in warehouses. But when we move to [ CNX ] arrangements, the cost becomes variable, and it's negotiated well, the cost is actually reduced. So that is the agenda that is being pursued on the manning side.

Okay. Sure. I understood it very clearly. And one final question is what's -- you mentioned about -- and AC -- sorry, we've repeated this question many times. There's always been a big differential between the realized gross margin on AC side versus appliances as a category ex of ACs. So how is that looking like? I mean, obviously, you've given a certain fixed or gross profit or -- sorry, material margin improvement numbers, which is INR 12 crores and INR 44 crores for the next 2 quarters. But is ACs coming in line with the appliances in general or how do you -- at a steady state, maybe 3 -- 2 quarters from now or 4 quarters from now once all the older inventory is flushed out and you will have the ideal cost structure from a sourcing, efficiency or design perspective, what the steady state gross margin profile would look like? The biggest point that we are saying there is no pricing action or adverse pricing action in the market, which the company will have to match.

If you look at the first phase, if I can use that word, when we have finished the material cost reduction within the fourth quarter, the gross margins on the air conditioner will improve, but they will still not be in line with the washer segment because the washers are also improving. So as far as the company is concerned, between the average gross margin of the company to the air conditioner, there will still be a gap. But this improvement in the air conditioner from where we are today to what will be completed by Q4 will improve the overall profitability of the company significantly. Now once we've completed that, essentially, the largest job is in getting the sales that we should get. And this is an area that we've failed in for many quarters now. Even though we have been internally talking about it and it's also been something discussed quite frequently in these investor calls, we have just failed to deliver the results and we just have to go out and prove it and show that in quarter 4. So if we get the sales right, the figure that was mentioned a while back was roughly to a level of about 300,000 a year and the material cost work should be completed within Q4, I think both put together will give the company level double-digit margins that we are committed to. I hope that answers your question.

We have our next question from the line of Viraj Mehta from Equirus.

My questions have answered.

We have our next question from the line of Amish Thakkar from SG India. Since there is no response, we'll move on to the next question from the line of Keshav Garg from Counter Cyclical PMS.

Sir, my question is regarding sir I want to know your thoughts about contract manufacturing that we already have some contract manufacturing plans for our AC division. So, what about the rest of verticals? Sir, can't we ramp up our capacity utilization by contract manufacturing and exports so that our fixed costs can get distributed? And -- so sir, that was the first question.

So it's a very correct point. And as far as exports is concerned, we've really didn't look at it the way we should for quite some time. And 2 quarters back, we put a formal structure in place and specifically for the air conditioners and also the washers, we are looking at opportunities for export markets. And there is a lot of work happening on that. And we are setting targets which we will also present to all of you from the next financial year onwards. As far as contract manufacturing is concerned, we are still talking to the same set of players. There is a projection we have on the air conditioners, which will help in terms of capacity utilization. On washers, we've really not discussed this option in terms of contract manufacturing. It is being evaluated, but we haven't reached a conclusion as yet. With the new investments that we are making for the new platforms for a product like top loaders, for example, there will be an opportunity for contract manufacturing, but we have to still evaluate it internally and conclude.

Sir, and secondly, sir, I wanted to understand, sir, that why are we trying to get into modular kitchen which is not even clocking sales of INR 5 crores. It is not enough to move the needle for the company as a whole, but it is diverting the management bandwidth and our time and efforts. So instead, will it not be better to focus on the major categories like AC, which can have a meaningful impact on the company even if we succeed. Wherein in -- whereas in modular kitchen, even if we succeed, I don't know how much on a overall company basis will it move the needle for us?

It's a good point and the way we are thinking about it is that we have a lot at stake as far as the IFB points are concerned because that is the only channel where we have a complete range representation and there is a dedicated customer base we have and we have a need for them to see IFB and all that it offers in an IFB point. And it's a segment on which we've been very serious in terms of building a right retail presence. Now if you see the markets where we have the IFB points with modular kitchens, it actually significantly increases the way you represent your products to the consumer which is the modular kitchen itself and the products that go with the modular kitchen, so kitchen appliances because when someone does modular kitchens, they change a lot of the products in the kitchen. So, we think that the modular kitchen business actually has a great impact on the overall IFB point presence and in the markets that we are in it also contributes to the profitability of the various state level branches that we have. Because even though volumes may be small but realizations are high and it is very helpful to the gross margins. The point about we have not been -- it not having a significant impact on the company overall is a correct point. It may not be the case today but in future definitely this can be a segment which can grow quite significantly. That's why we are still committed to it.

Sure, sir. And sir, lastly, all said and done, sir, your aspiration about reaching 10% margin of the home appliances business. Sir, by when do you foresee us reaching there? There must be some time line in your mind that maybe in the first half of next financial year or second half of next financial year?

Our internal commitments, which we've given like it was discussed just a little while back on the call is to finish whatever work we have to do for these sustainable margins within Q4. So our internal commitment is to be able to show these sort of sustainable margins when the new fiscal year starts.

We have our next question from the line of Sumil Sethi from Siguler Guff India Advisors.

Just a follow-up question on contract manufacturing of air conditioners. Can you throw some light on what percentage of AC revenues are from contract manufacturing of AC versus our own brand?

Mr. Chatterjee, would you like to answer that?

Sorry, I couldn't follow the question. Please, can you repeat?

Sir, what percentage of our AC revenues are from contract manufacturing versus our own brands at this stage?

It is now 25% as of now up to first half.

And this is for the first half?

Yes.

Understood. And what's the -- what's kind of the volume split between the book?

Total, we have done around 105,349.

Okay. All right. Just one question on refrigerators. So last time you mentioned that since the refrigerators are being manufactured by your associate company IFB Refrigeration Limited, you are sort of finalizing the terms of transfer pricing arrangements with them, now that the commercial production has started to happen. I think there are roughly INR 20 crores of sales of refrigerators sitting in IFB Industries' book. I just wanted to get a sense of what the commercial terms are with regard to transfer pricing arrangement with IFB Refrigeration Limited?

Mr. Chatterjee, would you like to answer that?

Mr. Ray? Mr. Ray?

Yes.

Hello? So that is all done on arm's length basis as per norms. I don't think there is any like issue there.

And are we making a similar kind of a gross margin on refrigerators compared to...

Refrigerator margin will be higher than ACs.

It will be higher than ACs?

Yes, yes.

Understood.

Mr. Sethi, does that answer your question?

Yes, that's fine.

As there are no further questions, I would now like to hand the conference over to the management for closing comments. Over to you.

Thank you, everybody, for joining the call today.

Thank you. Yes, on behalf of Nirmal Bang Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.