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

Thank you, [ Faizan ]. Good afternoon, ladies and gentlemen. We welcome you all to the Fourth Quarter Fiscal '21 Earnings Call of V-Guard Industries Limited. We have with us the senior management of the company, led by Mithun, Managing Director; Mr. Ram, the Chief Operating Officer; and Sudarshan Kasturi, Chief Financial Officer of the company. We would like to thank the management for giving us the opportunity to hold this call. I now hand over to the management for the initial remarks, and we'll then take questions. Over to you, Mithun.

Thank you. A very warm welcome to everyone present, and thank you very much for joining us today to discuss the operating and financial performance of our company for the fourth quarter and the financial year ended 31st March, 2021. I am pleased to report a very encouraging financial performance by V-Guard in what has been the most challenging period in the recent memory for both human and commercial activity. The pandemic led to nationwide and localized lockdowns during a large part of the year, creating widespread uncertainty with significant bearing on consumer demand as well as our supply chains. In this backdrop, we have achieved broad-based growth across product categories and regions. We have continued to expand distribution presence while launching several new products and driving greater focus on online engagement with customers. Our people have shown a lot of deep resolve to keep the wheels turning throughout this period to deliver the possible outcomes. As a result, we saw a good rebound in volumes as the unlocking happened in the second half of the year. We closed FY '21 with a 8.7% growth in revenues at INR 2,699 crore. During Q4, we expanded [Audio Gap] percent to INR 849 crore. However, Q4 last year was a low base as national lockdown in March 2020 had significantly impacted consumer demand. Raw material cost inflation has remained a challenge. Sharp increases in input prices have had some impact on gross margins. We have taken pricing actions to mitigate this to a large extent, but some near-term pressures are likely to continue. And in FY '21, EBITDA margins expanded by 120 basis points to 11.4%. During Q4, our margins increased from 8.4% to 12.9% on a Y-o-Y basis. This is indicative of the performance our business can deliver once the economy opens up and business conditions become more conducive. Profit before tax was higher by 16% in FY '21 and 136% in Q4 FY '21. However, the growth in profit after tax was lower at 8% and 110% respectively, due to increase in effective tax rate. The higher tax provision is linked to lower profits from our Sikkim manufacturing plants, which have a tax advantage. Our Sikkim units were under lockdown for an extended period, almost up to September of 2020, which disrupted their operations for almost 6 months. Our net cash position increased from INR 138 crores to INR 271 crores based on higher profitability with a stable capital employed. Our core ROC rose to touch 40% in FY '21. A strong focus on collections and credit disciplines help to bring down [ better levels ]. We have taken a strategic call to hold 15 days of additional inventory as we anticipate demand coming back faster than production capability are resuming. Many of our Tier 2 and Tier 3 vendors may face external disruption due to labor and raw material shortages. Overall, it was a very strong performance in the fourth quarter, continuing on the growth momentum of business in Q3. However, as we enter the new financial year, the country has been hit by a more severe second wave of the pandemic. Extensive lockdowns have once again been imposed, which will significantly impact consumer demand during Q1 of FY '22. We remain confident that our business, built on the edifice of a strong brand, high-quality products, widespread distribution and deep consumer relationships have the resilience to come back strongly when the situation normalizes from Q2 onwards. On that note, I would like to thank you once again for your participation, and I would like to hand over the floor to the moderator for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Nitin Arora from Axis Mutual Fund.

Sir, my first question is related to the margin. So now this is the third quarter where we are consistently delivering on a higher double-digit margin, and even on an analyzed basis, we have done way better. Now how do you draw math here in terms of future margins for us? So you know that we wanted to do a double-digit always. Demand really came up and you've delivered even, I would say, at par with the higher brands or, let's say, the market leaders' kind of a growth. If you can throw some light. I understand there is commodity pressure. There could be some mix benefit because of stabilizer as a category, which generally grows 5%, 6% a year, certainly growing at 14%, 15%. That also benefits. Let's say, cable wire also benefits. But generally, in your view, how confident now you are on your margin trajectory? If you can throw some light on that, that will be helpful.

See, the best way to look at EBITDA margins rather than looking at quarterly numbers is probably if you look at the full year number. The reason being last year was an unusual year with very low first quarter and then a decent Q2 and a very strong H2. So I think if you look at the full year, there is decent improvement in EBITDA margins. Some of these cost cuts, what we have done is not permanent in nature. For example, we have spent only about 1% or 1.2% or something on A&P -- or 1.5%, instead of the usual 2.5%. So I think when we look at future, we have to assume that we will come back to spend. But I can say that if revenue growth rate is at that 15%, which is something what we would like to grow every year, I think 10% or a little more than 10% is possible. We still don't know whether commodity self-peaked. I mean, copper continues to go up. There is some cooling off in steel prices, but we really don't know. So we're going to wait and see what really happens. But we have always stated that a 10% EBITDA margin is what we would like to achieve, and we have done that. And that's what we probably will do, maybe a little more than 10% because we have got into some new categories, which are more profitable than traditional categories. So there is slightly -- that impact also coming in. So that's what we would like to say, a 10.5% -- 10% to 10.5% is probably sustainable.

Got it. That is helpful, sir. And just one on a shorter-term question. I understand completely it's difficult to give any guidance how these things will move in post-COVID. But generally, a short-term question. In terms of your utilizations for April and May, some data on the plant utilizations and as well as on the inventory movement. So you said it's a deliberate call that you took of giving more inventory in the market because, generally, volumes last year also came back very sharply and people were facing supply chain issues. So if you can throw some light, has the inventory being optically very high given normal sales are happening? Or the utilizations are also still about 40%, 50%? So some inventory is moving towards the secondary sales? If you can throw some on the short-term data points? That's my last question.

Yes. Ram, you want to take this?

Yes. So I think we were a bit challenged last year as we came off the lockdown period, as we were relatively thinner on inventory. And some of our factories took some time because of the supply chain recovery, the associated value chain. And we had some significant issues in Sikkim where we lost -- because of COVID we lost significant revenue and had an bottom line impact, as already Mithun already highlighted. So we've been conscious of this fact. And we felt that there are ways possible, and therefore, we should have adequate buffer in our inventory. So we tried to build inventory from October, but then a stronger December quarter so there's no extinguished -- whatever the growth line, inventory improvement that we could create. We continued to build our inventory through Jan, Feb and March. And what is the inventory that's [ what we're investing ] to what we have built, right? It's in that -- predominantly in that period. And maybe to some degree, there may be some additional inventory, which may arise because of slower offtake in April as the pandemic started to happen, yes? But fundamentally, this [ 15-day ] was a planned response, which we have been trying to gradually build from October to be able to respond to fluctuations in market demand and fluctuations on supply value chain.

And generally, in terms of utilization at the plant level in April and May, if you can throw some light there? And any movement in secondary happen in April and May? I mean, you must be watching closely....

April, most of the plants have operated. And I think May, again, it would be from case to case. And fundamentally, the situation would have started to get interrupted through May. So you can expect that based on raw material availability and what they are holding, right? Is what -- so we've tried to convert existing raw material, which was there on our hands into FG. So I would say, April, pretty much on course. May would be, what I would say, maybe -- it may vary from factory to factory. For example, Sikkim is in lockdown. Last 2 weeks have been in lockdown in Sikkim. So I think it's a situation of case-to-case because the strategies of each, what I would say, each district administration is different, right, based on their constraints, yes? So it will be difficult to give a general answer for this because we have 7, 8 manufacturing sites. So broadly, what I would say is April is on course. May would be pretty much reflecting the disruption which is happening in the marketplace, right, because of the lockdown, yes?

The next question is from the line of Rahul from Haitong.

Firstly, congratulations on a very strong performance through this difficult time. I've got 2 questions. The first one is, I assume your depreciation has been continuously increasing over the past several quarters. I want to understand your CapEx plan and how much you spent in '21? And how do you see CapEx happening over the next 2 years? So that's the first question.

So I'll just answer this in 2 parts, one is on the strategy side and one is on the number side, which Sudarshan will do. The strategy side, we have stated before, last 2, 3 years, that we would like to go from a predominantly outsourcing company to predominantly in-sourcing the strategy. There are various reasons for this. One is that we would like to now start making products which are in the mid-premium and premium range, which in some cases are not possible to be manufactured by vendor ecosystems because they require huge investments in machinery. And that's one of the reasons we have put up a factory for fan so that we can play in the liquid painted fan market, which is the -- on the premium end of the spectrum. And so as we gain scale in each category, as we are becoming more and more experienced in each category, as we are having enough volumes, we typically will move from an outsource model to in-source model. There is also a good 7% to 10%, 7%, in some cases 10%, increase in gross margins when we move from in-sourcing to outsourcing. And maybe half of that, maybe 6 -- 40% or something another of that flowing into EBITDA as well so -- not EBITDA, sorry, even after depreciation. So even after considering the higher cost of depreciation, higher cost of organized manpower, we find that producing products in our own factory is making sense in many cases. And after GST, it actually makes sense to own the entire value chain. The guy who owns the most backward-integrated value chain will have the best margins and best ability to respond. The second is Indian government has progressively bringing anti-dumping duties against China. So some of these manufacturing units are being set up to replace the Chinese imports because we don't have a vendor ecosystem for some of these categories. Like if you look at pedestal fan, there is no vendor ecosystem available in India. So every company has to go and set up own factories. Or maybe we are not happy with the kind of quality offered by Indian vendors in that particular segment so this is the reason we are setting up these factories. Sudarshan, you want to talk about the CapEx number?

Yes. Yes, sure. Yes. So that is the thinking behind setting up own manufacturing, as Mithun explained. Apart from that also, the new categories that we enter entail some significant investment in molds as well. So that's the other part of the CapEx. In the recent past, the Sikkim -- I mean, water heater plant and the fans plant, which we have set up, so those are big CapEx investments, say roughly about INR 40 crores each. Going forward, we would expect CapEx to be at around INR 60 crores, INR 70 crores a year. That's what we would expect.

This is very helpful. The second question I've got is regarding South and non-South. Now in the fourth quarter, we've seen a very strong growth in the non-South, about 70% like. So I wanted to understand, is there a specific reason or effort that you made during the particular quarter? Or is it more because of the various gates being locked down at different points in time?

No, I think it's point #2. See, the last year, it's not like we were -- we were not encouraging our people to travel and meet retailers and distributors because we are -- we were fearing for the safety of not only our people, but even the staff of our distributors and all that. So it's not like we made any extraordinary attempt to increase. It's just that in the first quarter of last year, places like Kerala had a more severe and extended lockdown than some of the other places. And the enforcement is -- it's not only the lockdown, it's also the enforcement of lockdown. Although every state government talks about a lockdown, the degree of enforcement varies from state to state. Last year, many of the rural markets in non-South, they were operating like as normal because the local authorities were not that keen on enforcing some of these things. There is also, in some states, the state government classified motor pump as an essential commodity, so pump shops were open. In some states, they said fan is an essential commodity. So they opened. So it depends a bit. So I think don't look at the quarterly number. Maybe a yearly number is the best way to judge. And even in the early number, there is a 1% or 2% increase by non-South. Non-South has grown almost double the rate of South. So that is the general trend in which it will go in the future.

The next question is from the line of Aditya Bagul from Axis Capital.

Congratulations on a very good set of numbers. Sir, just digging a little more deeper into the geographic split between South and non-South. While you elaborated that there will be a huge divergence, would like to understand in terms of absolute numbers, do you think that South as a segment has -- or a geography has grown at 6%, 7%? And our competitors also have grown at that rate? Or do you think that there is some market share gain or loss?

So I think generally, when we looked at our numbers, when we looked at -- when we talked with our partners on the ground and when we look at our numbers of our peers, one thing is very clear, there is a more of -- whenever such kind of pandemic or something similar happens, the retailers are keen to stock only well-known brands. Customers are keen only to buy brands that are able to offer good after-sale support and buy products that are good quality. So I think there is also a small shift happening towards the organized. So maybe local brands have not been able to supply because they have less formal supply chain. Many of them are competing on the base of price. They have lower cost because they use migrant labor, and they don't pay any ESIP et cetera, and all that. So a lot of these small guys, because there was very little social security being provided by them to their factory workers, many of the migrants left. So there has been more severe supply chain disruptions for smaller guys. The bigger guys also have better relationship with suppliers. We are able to be first in the queue when an unlock happens. So all of this would have -- so I'm guessing that all the branded companies, larger companies would have grown.

Right. So if I were to understand this, I think we've gained market share vis-a-vis the unorganized segment. But versus our organized peers, the market share remains more or less status quo. Is that...

It may be status quo -- we would have -- I don't want to talk about it too much. But we would have gained -- like, for example, we know for a fact that in France, we have gained market share because also we have launched some products. But we know for a fact, we have lost market share in water heaters because our factory was shut. So in some categories, we have won, some categories we have lost.

Understood, sir. Sir, my second question is to do with more of the price hike that we've taken. While you did allude to certain strategic price hike, can you quantify what was the number in Q4 and probably what you're likely to do in Q1?

Sudarshan, do you want to take this?

Yes. So in Q4, we have taken price hikes progressively across various categories. And depending on the category, it ranges anywhere between 5% to 10%, the kind of price hikes that have landed so far. There are some more to do against certain specific categories and that recent one. There is a little more pricing action that is yet to be done. If I were to quantify that, at an overall company level, that would add up to about maybe 1.5%, something like that, around that much of pricing action need to be taken.

In Q1?

Yes. In Q1 or Q2. It depends on when we are able to land it.

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

Sir, the basic question, on what has been the growth in e-commerce as well as the rural platforms? Also, can you indicate, the non-South markets have done well, but if within that if you can [Audio Gap] West as well as North region separately?

Sudarshan, you want to take this?

Yes, e-com has grown 40%. Your second part of the question, I missed some. Were you saying the region split for non-South?

Sir, e-commerce growth as well as the rural sales growth as well. And the region-wise growth rates, East, North, South, 3 regions.

Rural, I don't have offhand so I can't give you details for that.

Okay. Region-wise?

So yes, North grew at about 11%; West at 19%; and East at 7%.

North at 11%? Hello?

Yes. West at 19%, East at 7%.

The next question is from the line of Charanjit Singh from DSP Mutual Fund.

Sir, my first question is, especially on the fan segment, where you have regained some market share. So in terms of the product portfolio launch, in which price vector you would have launched and just gaining market share, this has been in Southern or the Northern market?

Ram, do you want to take this?

Yes. I think you're referring to Mithun's observation on some market share gains in fans, right? So they are -- that's the -- yes, that's in the mid-premium segment. And that's a new launch, and we've been able to make a decent entry into that category. And that's been all incremental business on our current business, yes?

Okay. So what price range will be this mix in segment as far as...

This should be like INR 3,000, INR 3,500-plus. INR 3,000 to INR 3,000-plus to, say, INR 3,000 to 3,500.

Yes, customer price?

Yes, around INR 3,000 customer price.

Okay, sir. Okay. And sir, so we are also hearing some of the very new entrants overseas scaled up very well in science business, adding capacities which can service the Southern market. So any thoughts about that? Can that impact our market share, whatever we have, in the fan space?

Ram, you want to take this?

Yes, yes, yes. I think our fan business is still in the developing stage, right? So I think it's too early for us to worry about market share loss, right? So we should actually be looking at what is the room for us to grow. That's fundamentally because we have opportunity to expand the product ring breadth and also the distribution breadth. So I think -- and also the product portfolio helped also. We have opportunity to significantly enhance vis-a-vis competitors. So I think we have a lot of room for creating improvements and enhancements on all these 3 access sites. So I think I wouldn't worry too much about -- it's a fairly large -- fan is a fairly large market. And I think even within [indiscernible] GST and now these 2 years of COVID. Currently, the unorganized sector is also getting significantly impacted, although that is very low in South, which is where your question is related to. So I'm just saying that's not -- I mean, I don't see that as a near-term concern, yes?. I think because we have a lot of levers to press to grow the business.

Okay. And sir, in the initial remarks, you talked about some of the costs will come back and A&P spend tends to be one of the factors we may see that will come back. So in terms of FY '21, what was -- as the overall percentage of sales and how do we see going forward in FY '22 the A&P spending?

So A&P percentage, I'll ask Sudarshan to answer, I don't have it with me right now. As far as the long-term A&P spend trajectory, it will be around 2.5%, which is what it's been in the last few years, barring COVID year. So if we have a normal year, that is what it should be.

Yes. For FY '21, A&P spend was 1% compared to 2.3% last year.

Okay. Okay, sir. So this will normalize to 2.3% in FY '22. That is the way we should look at?

Yes. But we are also -- we don't know how the year is going to be, right? So for example, I don't see any company spending on A&P, at least in the first quarter. So that quarter, spend will not happen. So we're going to wait and see. If you are having -- if there is a sense of -- so it will be quarter-to-quarter. The first quarter number may not get -- I mean, A&P spend, although we have spent money in April. May, I don't see us spending any money. And June also, we'll be busy with restarting operations because I'm expecting -- so it depends. So we can't predict what's going to happen actually in FY '22 in terms of the A&P spend. So it will be case-to-case and how -- so once we gain confidence that the market is back to normative levels, sales is back to normal levels, we will spend and so will others.

[Operator Instructions] The next question is from the line of Aditya Bhartia from Investec.

Sir, last year, we had lockdown starting from March sales -- towards the end of March, which means that the usual inventory stocking that takes place hadn't happened. This time around, because March was usual and because we were seeing very strong growth and prices were also going up, I presume the dealers would have stocked up on the inventory side. From that perspective, do you expect that inventory in the channel is a lot higher than where it was at a similar time last year? And therefore, even when the markets open up, primary sales may not increase at the same pace as they did last year?

So we are monitoring -- yes, Ram, you want to take this?

Yes. I think last year, March, the trade inventory would have been high because the lockdown started from 23rd, and they would not have had the opportunity to -- and normally, they stock up for April -- in anticipation of April. So the trade inventories were higher largely at end of March. I think trade inventory now is normalized and possibly a little lower than what traditionally would have been the normal inventory in trade.

Yes. So I think contrary to what we had -- what you are saying, I think the trade inventory has actually not gone up. So what it means is that whatever we have sold to the trade has got sold off. That is one. And they are also not stocking -- of course, there has been some upstocking due to price increase and all that. But the overall trade inventory is not very high, is what we believe. Because if that was the case, we would have had trouble collecting the money.

Understood, sir. And sir, this time around, given that COVID incidence is much more wide spread, there is a possibility that smaller towns may not see the same kind of demand revival as this for last year. And from that perspective, it would be interesting to understand how exactly is our sales mix between Tier 1 towns, metros as well as smaller towns in rural areas?

So one general trend has been that -- one of the things that has been there because of interest rates are falling and construction costs are going up significantly, we are seeing a lot of people, including in May when there is a lockdown, scrambling to buy apartments, which they weren't actually seeing an apartment. So this is what builders tell us. They've actually -- most builders are having decent sales even during lockdown. And at least in many states, construction activities are classified as essential and they're ongoing. So I actually believe that there is going to be some kind of reduction in trade inventory, faster than what has happened last time. Because in last time, there was no activity happening for 2.5 months. This is one. So I think we'll have to wait and see. We are having a lot of cases, that is true. But it's not like a big percentage of the population is -- the cases are -- a big percentage of the cases are being fatal. The number cases are very high, yes. But that percentage of fatality is still low, and the 10% overall number is not very high comparing to the overall population. So we'll have to wait and see how this affects rural demand. Last year, yes, when the unlock happened, rural was leading with sales. But within a month, even cities sales was back to normal. The only issue was with modern trade because they were located in malls, and malls were not open for a long time. So other than that, individual shops in the cities were doing decent sales even last year. So we'll wait and see. I think we are optimistic. I don't think there will be a huge widespread demand extraction as one feared in the beginning of COVID.

The next question is from the line of Mayank Bhandari from Nirmal Bang Securities (sic) [ Batlivala & Karani Securities ].

Sir, first question is related to the Electronics segment. We have seen pretty high margins in last 2 quarters, Q3 and Q4. So is it related to -- I mean, what exactly it is related to? Can you just throw some light on that?

Okay. Sudarshan, do you want to take this?

Q4, we saw stabilizers growing substantially, so stabilizers did well in Q4. That's one of the primary reasons for margins in the electronic segment. While that was for Q4, for full year, it was actually an unfavorable mix.

Okay. Sir, what kind of margin we can argue could be sustainable in the segment?

So I mean, at an EBITDA level, like Mithun mentioned earlier, a double-digit 10% plus will definitely be sustainable.

Okay. And sir, in terms of your acquisition of the noncontrolling stake in a battery starter in January 2021. Sir, how has things been like? What is your target there? Can you throw some light?

Ram, you want to take this?

Yes. So I think as we had highlighted, right, our focus is on the technology which is being incubated by that startup for potential application for some of our, whatever -- for some of our business lines, right? So that's our focus. Right now, the start-up is in technology development stage. So -- and so it's more on the, what I would say, in the latch stage, right? And it's far from commercial production at this stage, yes?

So like, as I see in the presentation, our market share is very less in the UPS and the [ factories ] that were 4% to 6%. So what is kind of like -- is there any strategical goal you have in mind to increase the market share there?

See, we -- okay, I think there are a few categories where our shares are, what I would say -- I could say we are a late entrants into this category, right? I think we got into this around 2010, 2011. So we are 8 or 9 years into this industry. And we currently hold 4% to 5% share, as you spoke. So that's just to give a context of why we are where we are, because we are relatively young in this category. And I think our focus fundamentally here, in the initial part of our launch has been to develop category understanding and make sure that we are able to participate in the various segments, right? The last 3, 4 years, we've been fundamentally doing extensive work, right, to what I would say, deeply participate in the value chain, right, owning all the designs and getting involved deeply into sourcing of components so that we are able to be more efficient and competitive and profitable. The last couple of years, our focus has been fundamentally to improve our profitability in this business so that when the business comes up, right, it is healthy and positive for the organization. Because at current level, it is already about 12% to 13% of our business side. So our focus has been fundamentally -- after the initial launch and entry and building a platform, has been to shape the business for profitable growth, right? And I think part of that, we are looking at various aspects. So I think the design part of it and the sourcing value part of it is something that we are now in the -- design, we have executed. Sourcing is what we are in the course of executing. And so our focus primarily will be to build a healthy business to start with, right?

Yes. Okay. And lastly, sir, I just want to understand like in terms of the distribution touch points, how much you would have increased in last year? So we had highlighted about 40,000 dealers we had by the end of FY '20. So is there any number around that for FY '21?

See, last year, as you know, a good part of the year was gone in the lockdown and all that. And like I mentioned earlier also, our focus last year was to ensure the safety and health of our employees and the safety and health of our channel partners. So we also did not encourage traveling unless otherwise it was an emergency or it was really required for someone to visit the market. Because we knew, looking at other countries, that there was a possibility of a second wave. So we are not only -- we did not -- so adding retailers during through a phone call, et cetera, would be very difficult. Having said that, we have increased some number of fan partners in new categories. Like, for example, we have launched a newly launched air cooler is a new category for us. So sales have gone up 30%, 40% in that category, aided by increase in our channel partner. We have also probably increased penetration in switches. There may not be new channel partners, they may be our existing switchgear or wire retailer. So I wouldn't say we have increased the number of touch points significantly last year owing to these challenges. In the current year also, we probably won't take a target to increase the number of retailers until there is a clear sense -- unless like, let's say, we are able to make sure that a significant part of our front-line staff is vaccinated.

Okay, okay. One last question, sir. Sir, is there a difference between EBITDA margin in non-South and South geography-wise?

Yes, there is a difference. Sudarshan, you want to take that?

Yes, the gross margins are comparable, but given the scale difference at an EBITDA level, yes. Non-South is lower than South.

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

I just had 2 questions. Firstly, on 2020, obviously, gave a lot of confidence in terms of demand recovery post the COVID unlock. And a lot of us on The Street thought that, okay, this demand looks structural and it will continue. Obviously, 2021 has its own share of hiccups. But overall, would you have any thoughts around this? Or any lead indicators would you track internally, which essentially gives some sense of sustainable demand adjusted for COVID over the next 2 years, let's say, 12 to 24 months? Could you help me on that, please?

So I think at this point, it will be very difficult to give a particular number of guidance. But I think we -- what we are doing is we have planned a scenario-based planning for the current year. So we have built in various scenarios that are possible in terms of demand. There are optimistic scenarios and there are pessimistic scenarios. So -- but even in the most pessimistic scenario, we don't see a huge, what I call, widespread demand destruction that happens. So that is what we've internally built, and we're working on that. As far as the indicators are concerned, when we talk with -- for example, like I mentioned earlier on another question, the real estate companies and the builders are -- at least the organized ones and the RERA-certified ones are all talking about even in May, they seem to have sales. While customers are not able to physically visit the site and all that, people are still booking apartments. So it looks like after many years, it does look like the real estate industry, after being in doldrums, are slowly coming back, which is a good news because a lot of our products, like electrical wires, switchgears, fans, et cetera, are going to -- a part of it is definitely going into buildings. So that seems to me very good news. And if that's happening, that means that the demand destruction is -- demand is -- it looks like it's intact. So that's one indicator I can give you, which is happening. So yes, so we are optimistic going forward.

Got it. And one question I had with Sudarshan on the balance sheet. So inventory obviously has gone up a bit, which you said is intentional in terms of extra stocking this time. But credit has also gone up to INR 470 crores. Any specific reason for that?

It's a natural consequence of having higher inventory.

Okay. So it's more to do with just the inventory increase equal to credit increase? That's all.

Yes. So we just have to -- just have to see the total cash generation cycle together, nothing more than that.

The next question is from the line of Sonali Salgaonkar from Jefferies India.

Congratulations on a great set of numbers. Sir, my first question is regarding your distribution network. Could you give a ballpark understanding of how much of that would be towards rural distribution in India? And how much of that would be urban centric? And also similarly for South versus non-South.

Okay. Ram, you want to take this?

Sorry, can you repeat the question again? I lost the second half of it.

Yes. So sir, a sense -- a broader sense of the segmental distribution network in, firstly, rural versus urban; and secondly, South versus non-South.

I think -- look, I think this is fundamentally going to be a consequence of how the pandemic plays out, right? Now what we observed initially is that the urban areas were significantly getting impacted, particularly from, I would say, in the last 10 days of -- the last 15 days of March and going through into the months of April, right? And what we are seeing post mid-April, this is steadying gradually to smaller towns and rural areas. And I think fundamentally, it will follow that is what we feel. Similarly, what we found, right, is the pandemic spread was initially slower in the South and East and the markets remained open longer in these places compared to West or North. And what we are now finding is that -- and as you can see, it's right now, stronger. The numbers are stronger in South, for example, right? So I think it's fundamentally going to follow the evolution and development of the -- what I would say is the pandemic, right? So I think you should see that hand-in-hand with how the pandemic will evolve, right? I hope that answers your question, right. So...

Understood, sir. And secondly, on the kitchen appliances and switchgears, these have been our focused categories across -- for a few quarters now. So going forward, say in the medium-term over the next 3 to 5 years, how much do you expect the product mix to be contributed by these? That's my last question.

So I mean, we have a portfolio of emerging categories, right? It's not just kitchen and switchgear, but like we have switches, we have air coolers. We have also got into water purifiers. So I would look at it from -- I would look at it in that sense. And obviously, right now, I think we are limited in our ability to scale some of these categories as that will require us to enter newer accounts. And fundamentally, suppose, you look at something -- we are fundamentally focusing on existing channels and existing business partners for last year and current year, right? In our strategic plan, yes, they are important drivers for our top line growth and margin improvement. But I think depending on how COVID will play out, our ability to achieve the same will be indicated, right? I don't want to give a guidance in terms of what kind of lift and support that will come. But sufficient to say that it should be able to contribute in a meaningful way like, let's say, 1 percentage or 2 percentage points on top line or bottom line. So that's certainly -- say, it will certainly -- the expansion of this portfolio will certainly have an impact on the margin profile and the growth of the organization, yes? But the pace at which we will be able to do it, I think the pandemic is still to play out fully, and as Mithun rightly highlighted, right, we have been focused, right, from the beginning of the pandemic, right, in making sure that our people are protected. And so our focus has not been to expand to newer counters and newer geographies, but rather to utilize the opportunity within our existing value chain for the improved penetration of the products, yes? There are also supplies in China. The -- these are also smaller categories. So there are also supply chain challenges which emerge because in some of these categories, we have outsourced supply chains also. So I think it may not be right time to develop a point of view on how this will go. Of course, needless to say that it's our strategy, and it has been part of our long-term plan to use these as the drivers for our growth of -- business growth and profitability. But I think the realization of that pretty much depends on how the pandemic will evolve.

Sure, sir. And if I may ask just one more, how much percentage of our overall production is outsourced currently? That's it from my side.

Sudarshan?

Outsourcing is just about 50%. It's come down from its 60% top levels close to 50%.

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

Sir my 2 questions would be, first, I wanted to check given that the second wave of pandemic that hit the core southern markets and there has been a disruption. So the new product launches that we had planned, large kitchen appliances segment, where are we with respect to launch of those products? Are they on track by the festive season? Or there would be a likely postponement of the product launches?

So the newer categories within kitchen appliances like chimneys, hobbs, hoods, and water purifier, they're only being sold through our e-commerce partners and they are doing well. So we are not -- yes. So there are some supply chain challenges. Although water purifiers are made completely in India, the chimney business is imported, so there is fragility in the supply chain there. But otherwise, they have scaled up well. I think the first 6 months in the e-commerce partners platforms is spent on creating a base of happy customers, which is very important for our sales and ratings. And I think both these categories have achieved that, especially water purifier is doing exceedingly well. And now we will start accelerating sales because we have not done any promotion for this category yet because we wanted the -- the first part of the entry for e-commerce is building a base of happy customers, which has now happened in the last 6 months. So they're doing well. And I think in this time, for example, e-commerce is one of the few ways in which someone can buy a product in some of the states, although not all the states are permitting nonessential e-commerce deliveries.

Got it. Secondly, this year, if you see the dividend payout has stepped up from the typical 25%, 27% range to 40% level. So does that mark a shift in terms of the dividend payout policies, given that cash flows have now started to improve for us?

The payout percentage of net profit is still something around 26%, if I'm not mistaken.

Yes, that's correct. We're still at that 25%, 26% only. It's not gone up.

Okay. Then maybe I would have made some mistakes because I think...

Yes, the dividend is INR 1.2.

Okay, INR 1.2. And then there was INR 0.9 as well there. So...

Yes. INR 1.9 was for the previous year, which is about 20%. That's gone up to 26%.

Sorry, I may have made mistakes at my end, then.

Yes. See, I think -- sorry, I'll just make one more point. I think our cash flow has been going up the last 2, 3 years. So we have always mentioned that with the increase in cash flows -- and anyway, our dividend policy is also stating that we will pay up to 25% or even more if we don't find use for the cash. So it's around 26%.

Got it. I think my bad, I've done some mistake there. And lastly, broadly, if you look at last 6 months with some pent-up demand and having good volume accretion coming through. Our Electronics segment had seen very sharp increase in profitability. I understand that's not a sustainable margin. But on a very steady-state basis, given that in this category, we have the market leaders, we have reasonable volumes and pricing power and as price increases might follow in the first half of the financial year, are we seeing -- or can we expect the sustainable margins in this category the way they have moved up from 12%, 13% to 16%, 17%, can they inch closer to 20% levels from a 2 to 3-year perspective? Or is there a catch year?

See, what has happened in the case of Electronics is that if you look at the full year, the sale of air conditioner stabilizers has decreased. I'm talking about the full year, not just in Q4. And it has been the sale of lower KV or television stabilizers has gone up. It could -- because we have -- well, the sale of TVs had gone up during the pandemic year. So the profitability of the TV stabilizer business is higher than the air conditioner stabilizer business. So I think the percentage of margin should be seen as more of a mix issue for the full year rather than -- so we will go back to our -- when we go -- the mix goes back to normal, the margins also should go back to normal. But that -- yes.

In a normal year, if the air conditioner sells well, the margins will come back to normal. But if air conditioner market doesn't do well, then one can assume that overall, the margin profile could be relatively better?

To see, this last year was an unusual year. I mean, we are in a warm country. So I don't expect that -- see, when air conditioner stabilizers doesn't perform, it actually impacts the entire company. It impacts the stabilizer business as well because air conditioner stabilizer contributes nearly 50% to 60% of the value revenues. So although the margins are slightly lower than the other stabilizers, it is important that we grow the air conditioner stabilizer business as well. So you're right in saying that the percentage looks higher. But in terms of absolute profit, it may be low.

Right. And sir my last question, I mean, you did talk about that internally, you worked up with various scenarios of COVID, worst case as well as the best case scenario. Given that last year, we were significantly impacted because of supply chain. This year, even if you look at the base case or slightly bearish case scenario, double-digit or mid-teens growth should still be fairly reasonable for you as -- or you think our assumptions could be a bit misguided here?

No, I think this year, again, we are not giving out a guidance per se, but we have built some scenario-based models internally. I think just like last year, we should not expect that there will be large-scale demand destruction. So I don't think that will happen. There could be -- we could have 1 quarter of a very challenging quarter and we could have 1 okay quarter and then we could have very good quarters in the last 2 quarters. So that's what we should do. I'm not giving out a guidance per se. I think we'll -- we should probably take it as it comes and see how each quarter develops.

Mithun, if I may add a couple of points, right? So I think it's also a question of whether we will see 1 cycle or 2 cycles also. And like what has happened, so we're seeing the second cycle. But probably, the impact of that has come in April and May this year. So I think also when the timing of that cycle is happening is also a factor, right? If it happens in October, November, December, you have one situation. If it extends into April, May or March, like it did the last time, then it's a different scenario. So I think it's actually difficult to judge, right? So you can have a hypothesis for how many cycles will be there and when in the year they will come. And that will be then a consequence on the business and also what is the depth of each cycle or impact of each cycle. So it's really hard to have a point of view because it's like you're going to develop a point of view on how the pandemic will evolve, right? So...

Yes, but nobody will take a view at this point of time.

Exactly. Yes. So exactly, that's why I'm saying. There is no meaning. There may be like some view on pandemic we can take and we may have an internal point of view. But we are not -- we are nowhere near being even a well-informed target or being an expert, but well-informed guy on -- people on how the pandemic is evolving, right? Because we are not [ capable ] on this side. So that's how I would put it, yes? So it may be possible for us, for a given situation to say what could happen, right? But it's not possible for us to say what that situation will be. And that's where the scenarios have been developed to basically understand, okay, if it goes this way, what levers we press, if it goes this way, what levers we'll press, right? Like that, some types of scenarios we have done as well. That's, I think, what Mithun was referring to.

Ladies and gentlemen, we will take the last question from the line of Aniruddha Joshi from ICICI Securities.

Sir, just one question. Can you indicate the channel-wise revenue breakup for FY '21? So e-commerce, ESD, modern trade and then the off-line channel.

Sudarshan or Ram, I don't know if you can...

E-commerce was INR 65 crores. ESD was...

Sudarshan, can I give a thin number, right? So I think let's break it into 3 broad pieces, right? So there is organized trade, which would probably be e-commerce, modern trade, regional specialty or CSB, CPC. That's one cluster I would put it, which are -- which are organized trade. I think this may be about 16%, 17% for us, yes? In the [ non-wires ] part of the business, yes? and as far as the rest would be traditional trade, right? I think that would be an easier way to look at it, yes?

Thank you. Ladies and gentlemen, that was the last question for today. Wishes to V-Guard family. I would now like to hand the conference over to Mr. Mithun Chittilappilly for closing comments.

Thank you all for participating in our conference call. And I would like to thank [ Thepade ] for hosting this call. Thank you very much.