V-Guard Industries Limited (532953) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the conference call with the management of V-Guard Industries hosted by Nirmal Bang Equities. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Chirag Muchhala from the Nirmal Bang Equities. Thank you, and over to you, sir.

Thank you, Vikram. Nirmal Bang Equities welcomes you to the conference call with the management of V-Guard Industries to discuss the business updates amid the COVID-19 challenges. The management is represented by Mr. Mithun Chittilappilly, Managing Director; and Mr. Sudarshan Kasturi, Chief Financial Officer. Thank you, sir, for taking time out from your busy schedule and doing this call and sharing your insights with all of us. I now hand over the call back to you for your opening remarks, post which we can take questions from the participants. Over to you, sir.

Yes. Thank you, Chirag and Nirmal Bang. A very warm welcome to everyone present, and thank you very much for joining this call today at a very short notice. I would like to say that the world faces unprecedented challenges over the last few weeks. We all hope that the situation return to normal very soon and people's lives that are currently disrupted move back to usual activity. Meanwhile, based on advisory issued by the government and local authorities to prevent and contain the spread of COVID-19 virus pandemic and to ensure the safety of our own employees and workmen, V-Guard has temporarily shut down the operations of our plants situated in various states and also closed down all our offices and warehouses. As a part of social distancing protocol, we have provided employees with office-based roles, the facility to work from home in the interim period with communication tools and other software and all ERP systems working remotely. This will ensure us to enable business continuity. As the current situation has evolved and the virus has spread from China to most other parts of the world, this has ceased to become just a supply side issue to one that has wider business impact. At V-Guard, our reliance on import is quite low, as imported SKUs contribute to just 7% of the total turnover. Even this will reduce going forward as we are moving more manufacturing to in-house. On the demand side, given the lockdown across the country, all the markets are shut, causing loss of revenue. We expect the situation to remain unchanged over the next couple of weeks, at least the next few weeks until things start to normalize and the markets reopen once again. While there may be a short-term impact of these developments on global and domestic economies and as a part of that, general business activity in the country, we believe that V-Guard has a robust and reliant business underpinned by a strong nationwide brand and a very, very strong balance sheet. This should allow us to bounce back relatively fast and continue on our path of delivering to strategic business plan. On that note, I would like to thank you once again for your participation and would like to hand over the floor to the moderator for question and answers. Thank you.

Thank you very much, sir. [Operator Instructions] We have our first question from the line of Nitin Arora from Axis Mutual Fund.

Thank you so much for coming out in this situation and doing the call with the investors. And so I don't want to gauge anything on the growth per se. Just if you can throw -- elaborate highlights on how you are tackling this issue with respect to your fixed cost for the company. How you are handling the fixed cost with respect to your 2 aspects, one is the labor and all; second is with respect to your plant fixed cost? How much provision you need to do? How much cash support you need to do over the -- I'm not talking with respect to this April 15, I'm just -- if you can elaborate a little bit from at least 1 or 2 months' point of view -- at least 2 to 3 months' point of view, how much support do you think you have to support from a cash per se -- from a cash flow perspective to the organization? And second thing, how you want to support your dealers and distributors at this point in time, during this tough time? Those are the 2 questions.

Okay. So first of all, let me say that our first and foremost priority at this time is ensuring the safety of our people and ensuring the safety of our channel partner, ensuring safety of the supply chain partners, ensuring safety of our vendors. So this is the first and foremost thing because I think saving lives at this point is the most important thing more than anything else. Let me put that out first. Second, you asked about our ability to weather through this very adverse situation. V-Guard as on December 31 had cash balance of close to INR 250 crores. Our fixed costs are something like 15%, 16% of turnover. So you can do the math. I think we have cash balance to guide us at least for a few months, even assuming that no collections come in. Sudarshan, I would like you to maybe exactly tell the numbers. I don't have the numbers with me. Sudarshan?

Yes, no, what you said is fine. That was the December-end position. That's okay.

Yes, December-end position was INR 250 crores. So we have more than enough cash to -- like I said, we have a very, very strong balance sheet, probably one of the strongest in the industry, and we -- even worst-case scenario that's assuming that no sales happen, no collections coming and we're all stuck and we have to continue paying all the salaries and rents, this is an unlikely scenario, we will probably still be able to survive that. And this is with 0 working capital loans and everything. So we still have INR 300 crores, INR 400 crores of working capital loans. Today, the utilization is 0. It will continue to be 0 at least for a few more months, and only after that, we will start to use working capital loans. So this is the position we are in.

Mithun, sorry, I just lost your voice when you said about fixed cost. How much was that?

Fixed cost will be about 15% to 18% of turnover.

Got it. Got it. Got it.

Sudarshan -- sorry, Sudarshan, am I correct? Sorry, me and Sudarshan are in different places. We're both at home.

No, that's right. Fixed costs are about 16%.

16%, correct. So 16% of turnover, multiply the turnover by 16%, divided by 12%, you should get monthly fixed cost.

Just 1 more question, Mithun, specifically related to our most profitable market, Kerala. We have faced 2 years back-to-back flood issue. This is a third year where the cases started, maximum cases started in our state. Remittance income, people coming from abroad, losing their jobs, coming back to Kerala and moving south. How do you think, given this situation, if you can talk a little bit on that, what's the ground-level situation? You've been very -- I mean, we have got a lot of inputs from you when you saw the ground-level side. If you can talk a little bit from this challenging aspect. I'm not trying to compare that other companies might rebound sharp because of not too much presence in south. This is not the question from that angle. Just on the ground level, how are you looking at it to our most profitable market?

Okay. So first of all, 2 things, Kerala has not been our profitable market for the last 5 years. Kerala as a market has not grown in the last 5 years. So Kerala's CAGR has been 2% to 3% in the last 5 years. So whatever risks you talked about in terms of 2, 3 things. One is, from the start of demonetization till the floods, Kerala economy has been completely impacted because of the adverse domestic economy, and again, completely impacted because of the crash in oil prices from 2016 onwards. So whatever risks about Kerala has already played out. Kerala, which was contributing close to 30% of turnover, today contributes less than 22% of turnover. And during this period is the time when V-Guard significantly improved margins. What does this mean? We have at least 7 or 8 markets today that are more profitable than Kerala, which are growing faster than Kerala and which are less competitive. We also understand that post our stellar stock price increases, all our competitors are extremely focused on Kerala. So we are not banking on Kerala at all at this moment. So don't worry about it. Even in the next 5-year plan, Kerala does not play any important role. This is 1 point. Second is, so one thing you have to understand, I'm not a health expert, but please understand that Kerala is the first state to identify this as a risk and start testing. All the other states have not tested people. We have tested many, many folds more patients than any other state because we have -- I think the government here has some knowledge how to handle an epidemic because we had the Nipah attack a few years back. So the protocols, WHO protocols were in place much, much, much before any other state. I'm not brag mouthing for the state. But as a citizen, I feel extremely safe to be in Kerala because the numbers we're seeing today is a result of the testing. If any state is saying they don't have anyone with this disease, that basically means they have not yet started to test. So you -- I just -- so please understand that I think contrary to what you're saying, in this particular pandemic, Kerala will be the first state to actually bounce back because we have been the first state to quarantine, we have been the first state to test, we've been the first state to isolate, we have been the first state to screen every single passenger who has come from abroad, okay? But we have a problem because there is no point in just Kerala reopening for business because we need the entire country to reopen. Only then, all companies can work. Because if the borders remain shut and we are not able to move goods from one state to the other, there is no point being -- any one state being opened. So entire country has to reopen for everyone to get back to business because everyone has plants all over the country and everyone has consumers all over the country.

[Operator Instructions] We have next question from the line of Prashant Kutty from Sundaram Mutual Fund.

Thanks for coming down on the call as well. Just 1 thing. Firstly is on the -- while you said that obviously demand from May -- March and all will be difficult to assess. But typically before that, how have been the demand trends until now, let's say, around January, February? Any particular trend, if you could just highlight over here?

So I would like to say something for the benefit of all listeners. I don't want to make any specific comments on the quarter. I cannot make any specific numbers on the quarter. I really don't want to have trouble with the regulators at this particular point. This is 1 thing. Having said that, Jan-Feb was pretty good. In fact, we were gearing up for a very good quarter because at least in Kerala and parts of Tamil Nadu, and eastern, that is Vijayawada market, I mean, Vizag market and all that, the temperatures started hitting 35 degrees in the daytime. And there was some fear also in the minds of trade, whether due to corona, there will be supply disruptions. So we saw a lot of advanced sales happening in South India for air conditioner stabilizers, for fans and all -- most of the summer products. So actually, if you had asked me beginning of Feb, how were things then? This was turning out to be an outstanding quarter. So the answer was pretty good.

Okay, okay, okay. Secondly, you just highlighted about Kerala. Obviously, it's been an unfortunate coincidence in the last 3, 4 years, it's probably been a very weak year -- period for Kerala. But generally, from a profitability perspective, you said that there might probably be a improvement you're seeing in Kerala. So just want to ask from that angle, has Kerala become less profitable because there's been no growth? I mean is that probably one of the reasons for it? Because stabilizers is still one of the largest market as far as Kerala is concerned. So...

So I think I have to dispel a few myths that you guys all have. One is Kerala is not -- it is not profitable because of hypercompetition. Like I said, V-Guard has been in the radar of all the competitors for the last 6 years, and it's even more so after our rebranding and all that. So as we started going in, taking market share from our friends in non-south, our friends in non-south have come in aggressively, targeted us in south. So this is one of the reasons for fall in profitability of Kerala, not the fixed cost or anything like that. Having -- this is one point. Second is Kerala actually is only, what you call, 5% to 6% -- 5% of the consumer durable market. So if you look at stabilizers for example, we do maybe INR 20 crores or INR 25 crores of stabilizers in Kerala, and we do INR 100 crores of stabilizers in Tamil Nadu. So that's the difference. Kerala is still the largest market, because in many categories, we have a market-leading position, in large categories like wires, large categories like inverter batteries, we have. So stabilizer is not the reason. So please understand that Kerala is not profitable, or in the sense, the profitability of Kerala has fallen in the last 5, 6 years, mainly because of hypercompetition.

Okay, okay, okay. Got it. And last one from my end, you spoke about another 7, 8 states or probably another 7, 8 regions have become far more better. One is -- I want to ask is, over there, is that, that whatever is happening with you in Kerala, you're doing the same kind of activity in those markets when you're talking about the competitive intensity part? And secondly, maybe what are those -- beyond the southern states, what are the 2, 3 states that probably -- profitability has probably reached a good level and what's the way forward?

So we are doing very well in Orissa. We are doing very well in Bihar. We are doing very well in the Northeast cluster. We're doing extremely well in UP. This will be the 4, 5 large markets where we are growing very fast. It's extremely profitable. And those markets are actually more profitable than Kerala market for me. So obviously, we are not playing the price game there.

So when you're talking about now, let's say, in the past, you used to -- sometimes back in the past, you just kind of clarified it, Kerala was probably earlier considered to be, let's say, most profitable. But now you're saying -- what's the new benchmark in terms of profitability among the southern states?

So to give you an example, Kerala is about 10% EBITDA margin, whereas these other markets will be 16% to 17% EBITDA margin.

Okay. And how would be the rest of south except Kerala?

Will be about 14%.

Okay. So you're saying they're even profitable than overall -- the entire south actually?

Yes, yes.

Okay, okay. And 1 last point on the channel side, while you just highlighted obviously the safety is the first part, but anything in plan which is there from a channel side perspective? Sorry if I missed anything.

So I think we have to wait. This is, like I said, unprecedented. So I already -- sorry, there is some announcement going on the road, so you'll hear some disturbance. Sorry. So see, basically, today, we are not -- we have not thought out a relief package for channel partners or anything. We are waiting to see also what kind of relief packages will be announced by the -- both central and state governments and all the banks. The main cost for all channel partners is interest costs because they're all holding inventory, they're all having collections from the market, which will not happen. So well, let's see -- I think there are some moratorium being proposed by the governments and all that. Let's see what comes out of that. And we'll also see what is being done by the industry, and then we'll take a call. Because today, no one is in the right frame of mind to -- we're not in a right frame of mind to go and talk to our channel partners and asking them do you need some support and all that because our first priority has been to ensure that they are all in safety.

We have next question from the line of Bharat Shah from ASK Investment Managers.

This is nothing about now, an immediate situation. But on a more longer-term basis, on a strategic basis, don't you think the time has come to have the senior management located in different parts of the -- other parts of the country? You have grown from Kerala, that has been a base. Every company evolves from some base. So I understand that. But at some stage, I think Kerala, even at 22% is not some 22% of GDP of the country. And to that extent, when a senior management or fair bit of management thinking is located in a certain geography, many times, it is unable to take a larger view of the situation and available opportunity. Don't you think it is important for management resources and the other strategic assets a bit -- relatively much more now diversified than what it has been a kind of mired into much more south-based kind of a thinking?

Okay. Are you done with the question? Can I answer?

Yes.

Okay. So Sudarshan is our CFO, he's on the call, he is from Bangalore. Before that, he was the CFO for Unilever Nigeria, which is a listed company. [Audio Gap] Ramachandran, he lives in Delhi, and he works out of our Gurgaon headquarters. The Head of New Product Development, Mohammad Tanveer, is from LG Electronics, Korea. He lives in Gurgaon and works from our Gurgaon headquarters. Head of Legal, Roopak Ahluwalia, is from LG Electronics, he lives in Delhi and works out from our Gurgaon headquarters. Head of Quality, Anjana Narwal, is from Schneider Electric, she lives in Delhi, works out from our Gurgaon headquarters. So I hope you got the gist.

No, I'm aware of that. Last time also when we had discussed, you had given a rundown on...

I can give you another 10 more names, Head of Departments who are working out of Gurgaon headquarters. We have a 15,000 square feet office in DLF Cyber City, state-of-the-art, which houses 250 people from the senior management team and the middle management team, and they all live and work out of NCR.

Thank you for that update. I'm aware of it when we last met and discussed. I'm familiar with that, that your Gurgaon facility is housing a lot of senior resources. My question was a bit larger issue, about taking a world view on a little larger level. You -- it's not about only you operating out of Kerala that I am referring to. But eventually, in terms of the business panning out and strategic thinking panning out in a larger way, won't you think that it is time to outgrow out of Kerala and into the larger consciousness of business?

So let me answer it in one way, okay? So in 2008, when we went for IPO, Kerala contributed 60% of the turnover and maybe 75% of the operating profit. Today, after 11 years, Kerala contributes 22% of turnover and maybe -- 22% of turnover and 18% of our operating profit. So I hope you understand how -- see, these are not things you can do it in 1 year. It takes decades to do. And in a decade, we have done 1 round of diversification. We will -- next decade, we will do 1 more round.

Okay. So long as that is part of the conscious awareness...

No, the only thing we have not done is a large M&A outside of South India. That is the only thing I've not been able to do. If we had done that and it would have materialized, we would probably have almost 60% of turnover coming outside of south, and we would probably be more diversified than some of our peers in the non-south. That's the only thing we have not been able to do, and that's my only regret. But I think in a way, it's good because we have a huge cash hoard now which will completely be of use in an epidemic like this.

Anyway, I thought I'll leave the larger point [Audio Gap]

One question. Can you explain any company -- what is the sales split of Havells and what is the sales split of Crompton? Do they give you the sales split?

Sorry?

Do you have the details? Do you know the sales split of Havells and Crompton zone-wise? Do you know?

Zone-wise, yes.

But how much of it -- can you tell me -- how much is north -- so can you tell me Havells' north and east turnover? What is the percentage of turnover they have from north and east? It comes at 60%, 70%, I think.

Well, I thought that...

So you understood -- my question is, so depending upon where the company starts, and then we have to expand, every company will have this cue. And it will take a very long time to not -- mirror the GDP of the country. That's what I meant.

Can I address more?

Yes.

I didn't intend this thing to be a larger debate about how competition and everybody. I was probably referring more to what V-Guard is seeking to do. Second, this is not a criticism. It was a suggestion. Third, even while it is a fact that Havells' business materially comes from the north part without any question...

North and east. Northern and east.

That's right. Now the issue -- my issue was a bit larger than nearly physical presence and the -- where it has evolved. I, right at the beginning, said, of course, that you have evolved from that base of Kerala and that is where V-Guard as a company has grown, nurtured itself and risen to become what it is today. So without any question, every company has evolutionary traits and origins. I'm saying V-Guard as a company has become material enough to think of a larger opportunity. It's not nearly some senior people in some geography, et cetera. I'm saying strategically whether company pursues its opportunity in thinking in that mode.

So I think I'll answer this in 2 different ways. One answer I can give you is that my job since I took over as the MD has the intention that the company is professionalized as much as possible, so that the company is not -- there is -- company moves out of the promoter shadow and the promoter family shadow. And the company, in fact, will -- yes, let me complete. Company can run for next many generations irrespective of who is the promoter because we -- I'm the second-generation person, and unlike many of our peers, I'm the only person from the family involved in the business. In fact, my dad has just announced his retirement by the end of March, moving out of the Board as well. So my job has been to ensure that we create a culture and system where the company is independent of its founders, and the shareholders are separated from the management of the company. I probably will be the last person from the family to run the business, I can safely say so. This is one perspective. The second perspective I would want to give is, it does not really mean that moving to a big city will guarantee success. We have tons of examples of companies like Walmart, companies like -- many companies that are located in obscure towns and are still able to run. So I think, like I've said, it doesn't matter where you're physically present. So in this -- this is the only way I can say that my job has been to ensure that we onboard the right set of people, we put in place the kind of systems that is required to be run in the as much professional way as it can be done. And I think we are probably 30%, 40% away into that journey. In the next couple of decades, we'll complete it.

[Operator Instructions] We have next question from the line of Sumit Singhania from Daiwa AMC.

So you highlighted that Jan and Feb sales has been good. So how has been the inventory into the system being March will be a washout for you? That is the first question. And second, you in your earlier interactions have highlighted that we don't give much of a credit to our distributors and all. So how would have been our debtor days and how you look at it going forward from hereon then?

So end of December, our inventory days were something like FG and raw materials, all the inventories put together were something like 55 days. Sudarshan, please correct me if I'm wrong. This particular number of days is very normal for that particular quarter of the month. So you will also see, if you compare us with all our peers, we are probably the most efficient -- one of the most efficient in terms of managing our inventory in terms of number of days. Because we have a very, very sophisticated supply chain system that we put in place a few years back that has slashed inventories from about 100 days to close to 50 days. We've cut inventory by half by improving availability. So this is not a software, it's also the way we work, and it's a complete redesign on how we think about supply chain that has helped us to do it, not just the software. So that's the thing about inventory. So we will be in far better position than most of our peers as far as inventory is concerned. We also have a very, very integrated supply chain that means we know -- we are more connected with every level of our supply chain than most of our peers, which will help us to take fast corrective actions and which are already underway. So as far as inventory is concerned, we will be in a much better shape than most of our peers. Because already, we were holding very, very optimal inventory. Yes, inventories will go up a little bit. Debtor days also, I think debtor days again are at about 50 days. We are not the best in the industry because we do only 30% channel finance vis-à-vis 100% by some of our peers. So our end inventory days optically may not look as good as some of our friends. But by and large, debtor days is in line with market. We'll have to see. And like I said, we always have the luxury of our cash hoard which is pretty large. We can tide over this crisis, and we can give some, what you call, moratorium to debtors if it's required and if the government support is not enough. So we'll wait and see what happens. At this point, I can't make any projections regarding how it will happen. But I just can say that among the lot, we are the probably better placed than most of our peers.

We have next question from the line of Harish Bihani from ICICI Prudential AMC.

So every adversity creates opportunity for strong companies. When you look at what's happening, is there some opportunity that could kind of emerge or it's too premature to kind of think about it?

This is going to create a lot of opportunities. We have started to get -- we have been flooded with calls by desperate promoters for buyouts and all that. So it's already started. But let's wait and see. We don't want to catch any falling knives here. So we'll wait and see.

Okay. And in terms of distribution, anything wherein higher support could help or your competitors are also fairly strong, so that won't make a big difference?

So I think, like I said, the major cost for distributors is working capital, and they are all taken bank loans either directly or through channel financing, which are again working capital bank loans. So I think really, they will need support in terms of bank loans. It's what they will require. Because it's -- imagine that you've completely paused the entire activity for a month, there is no inward of inventory, there is no outward of inventory, there is no sale, there is no collection, there is nothing. Everything is paused. So hypothetically, if the government can pause the interest rate and all that, everything by 1 or 2 months, whatever is required, I think it should be largely fine. Because you can't have everything paused except for the interest rate and the debts of the -- whatever little debt single debtors carry. Having said that, as a company, we don't believe in dumping material. So right throughout the year, when the economies were slowing, we were one of the first companies to take corrective actions and stop pushing materials to trade. And in fact, we were in the process and we are in the process of setting up secondary tracking, so that even if our sales team wants to, they won't be able to dump material into the trade. So culturally, we are against dumping material into trade. We don't believe in simply shifting the inventory from our warehouse to the distributor's warehouse and counting it as sales. And I think, definitely, our distributors are probably more healthy in that sense. Having said that, we have new markets which are non-south, primarily west, where probably our distributors are not the strongest. They probably might require support. East and north, I'm not so worried. We have fairly good business, fairly good distributors. And south, of course, we are probably larger than anyone else. So we don't have anything to worry.

Okay. And last question from my side. In terms of stabilizers and inverters, given what we know of today, how should one think about it? Or it's too premature again?

See, there are different scenarios. We have to understand that both inverter and AC stabilizers, just like air conditioners, are seasonal business. So there is -- so we'll play it by the year. I can't make any comments because 3 months back, I was not thinking that India or the world will be in this situation. So we really don't have a precedent for something like this. That's the honest truth. No one has a precedent. So it will be very difficult to make predictions. But we can -- all we can say that we have a very fast responsive supply chain. So when things get back to normal, we will be the first ones to get to the market. If things don't go as well as we hope, we will be the first one to cut our inventory in the supply chain. So that's all I can say. I think that mentally we have to be prepared that the shutdown could be longer than 21 days.

We have next question from the line of Jayesh Gandhi from Birla Sun Life.

In a way, you answered my question, but still, I'll ask again. In the next 21 days or maybe slightly longer as you suggested and the subsequent few months, do you anticipate having to support your channel partners, your distributors in terms of some credit flows or in terms of some credit days, so that their business itself remains intact and they continue to support you in the future?

So like I said earlier, right now, everything is at pause. So the biggest worry for channel partners is working capital loans. So that is the main thing. Definitely, something will have to be done, not only by us, by every company. So we'll wait and see the packages announced by consumer, FMCG sector, consumer, larger durable sector, automotive sector, and of course, our own friends in the FMCG sector. So -- and we will see, we'll take a call. Having said that, given that we have INR 250 crores as on December, we probably can -- and 0 working capital loans and 0 term loans, we probably can -- we have the flexibility to offer. That's what I meant. We have the most flexibility in the industry to offer whatever known offer. We may not be the first ones to offer, but we have the more flexibility to do so.

Yes, the current situation may entail that and you are ready to, in case required, offer some assistance.

So I think -- see, we have to understand that at some point, the world is going to reopen for business. At some point, India is going to reopen for business. Even after World War II, the world did reopen for business at some point. So we will try and see how best to support our channel partners, not only channel partners, we have to also think about vendors, we have to think about our employees, we have to think about -- forget the office staff, we have to think about off-role employees in the factory, all that. We have to think about all that, and we have to think about the organization as well. So we will take a call. We'll have to take -- we'll have to balance between supporting all the stakeholders and supporting shareholders, and we'll have to take a call. Because at some point, everything is going to be reopened for business. So the organization that supported the best way it could probably can has the best chance to come back faster. In that sense, looking at our debt position, which is 0, looking at the undrawn INR 500 crore working capital line, which is 0, looking at INR 250 crores of cash as on December, we are probably the best placed to fight this out.

We have next question from the line of Ketul Sakhpara from Mahindra AMC.

Sir, would you have a sense of what percentage of your sales are financed by the likes of, say, Bajaj Finance or any other NBFCs? Any color you can give on that will be very useful.

Sudarshan, do you have a number on this?

The Bajaj Finance, you're talking about is the consumer financing. It's not a big portion of our business. It only applies for certain specific categories beyond higher than a certain selling point. I don't have exact number, but I guess, it will be like less than 5%.

See, Bajaj Finance only finances -- all these companies only finance purchases above INR 15,000 consumer -- something like that.

There's a minimum threshold for this too.

Yes.

Okay. Any other NBFCs that finance your consumers?

Yes, Sudarshan?

Consumers...

We've Pine Labs.

There is Pine Labs, which is a relatively newer one. That's other than Bajaj Finance. But other than these two, there's nothing.

I think -- sorry, I think there is HDB but it's smaller, I think. But it's mainly Pine Labs and...

Pine Labs and Bajaj Finance is what is mainly.

Okay. So you would say more than 90% of your sales would be from consumers buying either with credit cards or straight cash or...

Yes, yes. Because see, for finance for them -- sorry, for the foresee -- the rule is, if these finance companies have to give that loan, the average ticket size of that single invoice has to be more than INR 15,000, something like that. So our product value, 95% of our products are average selling price of less than INR 2,500 or INR 3,000.

[Operator Instructions] We have next question from the line of Dhaval Shah from Girik Capital.

So 1 question. Sir, in this past 15 days of this pandemic and where the production was disturbed, any cost item you felt that could be leaned further where the cost could be cut and the operations can still further -- still work smoothly when everything has come to a halt, like maybe remote working or getting more automation in the plant which you must have thought through in this past 10, 15, 20 days or something in the logistics side or something on the sourcing side? Have you given any thought to it, if you can share?

Okay. So we have a project called Udaan, which started in 2014 or so. This is the third version of Udaan we're doing. It takes -- it's an 18-month rolling project where the first phase of Udaan, that is Udaan version 1 focused on reducing inventory and improving efficiency. Udaan 2 focused on cost reductions. Udaan 3 is looking on further cost reduction and faster time-to-market of new products. So basically, this is what it does, the project. It's now almost -- it's at a very advanced -- it's at a very mature stage. So obviously, when something like this happens, there is going to be a lot of reduction in commodity prices like you've seen. There will be a lot of desperate vendors who will slash prices, both globally and domestically. So this particular project will help us to squeeze the best -- further squeeze the best out of them if it is possible. But all that depends on when we restart business. So as of now, I don't have -- on that -- a thing on that. See, you have to understand that if you look at cost, 72% to 73% of the cost is in cost of goods sold. So that's what we focus on. Overhead is only 16%. So if you look at us in the last 5, 6 years, what we have done, we have expanded gross margins from 22% to 27%. And this is the time after demonetization, during the GST chaos and floods in Kerala, twice in 2 years, so you can understand the kind of efficiency that we are building into the supply chain. We are also in-sourcing. So from 35% own manufacturing about 8 years back, today, we are at 55% own manufacturing, and we will go to close to 60% own manufacturing in the next 5 years. So again, this own manufacturing will further boost gross margins further. Net of extra depreciation, extra cost, it will further boost margins. So this is -- these are things we have already taken even before such a pandemic has come. So definitely, there is a supply chain, what we have built today, the capability what we have today, the way we work today, we can -- definitely, we will be able to slash cost. But for all this, the country has to reopen and -- for the supply chain engine to restart.

Got it. Sir, second question is not related to this pandemic. But before that, sir, we saw over the past 4, 5 years, penetration of electricity did help the entire consumer durable sector in terms of penetration, kitchen appliances because of the electricity being available. So what was your -- what is your reading for the past 8, 10 months when the spending by government in other projects slowed down? But how has been their effort to get electricity to each household as what they have -- as what they had planned? Did you see any efforts?

So every company has a strategy on how it should grow market share. And we have taken an approach what is called the Walmart strategy, which means that we first try and set up bases, not in the biggest of cities but in tier 2 towns and cities and try to expand the tier 2 markets. For your information, we don't have an office in Bombay, our office is in Thane. We built up -- we set up an office in Delhi only some 2, 3 years back. Before that, our office was in Gurgaon. So basically, this -- what this means is that we have to focus where we fight. So having said that, we realized 7, 8 years back early on, east is going to be the best-performing market because east as an economy is what the country was in the 1970s and '80s or where maybe what South India was in the '70s and '80s, and it is just right for a boom. Because their average consumption, their average penetration, everything is much, much below the country. If you look at a Bombay and Delhi, people already have 5, 6 brands and 5, 6 refrigerators and TV and few cars and all that, so there is not going to be any growth in a Bombay, there'll be no growth in a place like Central Delhi. So basically, what we have seen that is that at least in east, we can really feel the difference where we have built at least 3 100-crore branches in a span of 8 years, primarily because there has been more penetration of electricity. If you look at South India and all that, we are pretty much fully electrified. There's not much left. So definitely, to answer you, yes, this has helped, and not only us, every company to grow. I think the eastern markets will grow faster because that is the -- that they have the advantage of a low base.

Low base, correct. Got it, got it. Great. And sir, if you just can little bit on this supply chain, I mean, you mentioned 55% is your own domestic, but do you think -- I mean, your own manufacturing. But a lot of reliance of the industry is there on China. Do you think industry would give a rethought to this model or they've already started doing it before this and a lot of manufacturing would shift to India itself?

So I think definitely, even if you look at us, we used to import water heaters from China. Today, we are making -- today, we are -- we really did not know that the government was going to increase the import duties from China. But in the nick of time, we set up a plant to make redundant the imports we were doing from China. We had about 60% manufacturing in India and 30% from China, but even that 30% of water heaters is now going to be made in India. So definitely, post GST, every company will try to own the entire supply chain because you get the maximum benefit if you have complete control over your supply chain. Post GST, either you work with very large vendors who also are as professional as you in terms of manufacturing and manufacturing efficiency or you work with your own factory. This will give you the most benefit. And now you will also see more and more people setting up plants to reduce dependence on China. Having said that, every single electronic component still has to come from outside India. India doesn't even manufacture even 1% of electronics. In fact, we used to make printed circuit boards in the '80s and '90s, that industry is completely destroyed. We don't make anything in India these days. So hopefully, the larger electronic companies like Samsung Group and all the other groups, they may set up bases in India and then we can say that we are owning the entire supply chain in India. But having said that, with the global recession happening, they may defer their plan.

Okay, okay. And your 55% own manufacturing, everything is like owned factories or something you'd give it to a third-party also, but your entire factory is...

No, no, it's all own factories, entirely owned, yes, yes, entirely.

So you don't prefer any sort of outsourcing work to domestic?

No, we do. So for example, see, wherever we are having the right scale, we are having own manufacturing, so I can say what we don't manufacture, we don't manufacture kitchen appliances, we don't manufacture switches, we don't manufacture air coolers, we don't manufacture these smaller products, all the last category -- we don't manufacture inverter and batteries because battery is a gathered substance. Apart from these, we manufacture pretty much everything. And if you look at something like inverter batteries, we have like 4 vendors, which does close to INR 300 crores to INR 400 crores of revenues totally. So they're all large vendors.

So [indiscernible] of batteries, basically, waiting for scale in other categories also, once you get...

Yes. So once we have -- exactly. So once we have the right scale and once we believe that we can improve gross margins by 7%, 8%, we will -- 6%, we will move it inside.

[Operator Instructions] We have next question from the line of Ashish Poddar from Anand Rathi.

Sir, my question is related to the production restarting after all these issues gets normalized. My concern is that most of the workers are -- have gone back to their villages. And when -- even when the situation normalizes, it will take time -- I mean they normally take time to come back to the production plants. So in the interim, do you see that the people who are sitting on low inventory may face a stock-out situation, and in the interim, the smaller brands who are sitting on high inventories will get advantage of that? It's just a thing -- the concern which is coming to my mind.

So let me tell you 1 thing. March is a very, very big month for all companies. Because in March, you have both quarterly and year-end scheme closing and you also have the annual foreign tour schemes and all that. So the March month is very, very big for all companies. If any company tells you, March is not a big month, I'll be very surprised. So please understand that March itself is a very, very big month. And please understand that because this purchase is not to fill actual sales, it's actually to get all these schemes, the distributors typically pick up this inventory only post March 10 or March 15. So that entire sale has not happened for any company. So that entire inventory, not only for us, for all companies, will be sitting in all our warehouses. And so I wouldn't see any stockouts for some time. But yes, we are not worried about our own cycles, but we have vendors. That means, for example, in our factory, we are doing the manufacturing, but we also have vendors, and they also have workers. Those vendors, there are people who supply nuts, bolts, clamps, small, small, small items, and all of them are very, very small vendors. So I really foresee a problem in those things. Those things will take time to come back because they are much more smaller and their workers would have pretty much all left. Many of them may shut shop because they may not continue business even if the government does not do something very, very large scale for all of them. So yes, that will be an issue. And that will not be an issue for us, that will be an issue for everyone, even the little brands.

We have next question from the line of Ritesh Badjatya from AMSEC. Thank you. Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Equities for closing comments. Sir, over to you.

Yes. Thanks a lot, Mithun sir and Sudarshan sir, for taking time out and answering all the questions, and thanks to all the participants for your presence. Sir, would you like to make any closing remarks?

Yes. I would like to wish all of you a very, very safe few weeks. Please take utmost care. Please listen to every single thing your local administration is telling you. It is for your own benefit. So please take care and please stay safe. I would like to thank Chirag and Nirmal Bang for hosting this call. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, on behalf of Nirmal Bang Equities, that concludes this conference call. Thank you for joining with us. And you may now disconnect your lines.