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

Ladies and gentlemen, good day, and welcome to the V-Guard Industries Limited FY '22 Earnings Conference Call hosted by Investec India. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aditya Bhartia from Investec India. Thank you, and over to you, sir.

Thanks, Rutuja. Good afternoon, everyone. On behalf of Investec India, I welcome you all to the Q1 FY '22 earnings conference call of V-Guard Industries. From the management, we are delighted to have with us today Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran, Director and Chief Operating Officer; and Mr. Sudarshan Kasturi, Senior VP and Chief Financial Officer. We shall begin with opening remarks from the management team and then open the floor for Q&A. Over to you, sir.

Thank you, Aditya, and Investec for hosting this call. 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 first quarter ended 30th June 2021. I hope all of you, your families and friends are doing well. At V-Guard, our thoughts are with those who are affected, and our key priority remains that of ensuring the health and well-being of our employees, their families and all our workplaces. During Q1, we have delivered a fairly strong financial and operating performance, while bearing the impact of the second wave of COVID-19. Q1 revenues were higher by 38.2% Y-o-Y to INR 560.7 crores. The month of April and May were significantly impacted as the second wave was more severe than generally been expected. Specifically for V-Guard, there is a high business contribution from Southern and Eastern markets of the country. These regions were more affected to a greater extent, and they were locked down for longer periods of time. Overall, South and Non-South markets witnessed a Y-o-Y growth of 34.7% and 43%, respectively. Non-South market contributed to 43.2% of the total revenues in Q1 as compared to 41.7% in the same quarter last year. The faster expansion in Non-South market is in line with our objectives and follows the significant investments committed in developing high-quality products, widespread distribution and nationwide brand over the last few years. Even so, during the quarter, our growth has been broad-based across product categories and geographies. Electrical and consumer durables have expanded extremely well, while some categories, such as electronics and air-coolers had substantial impact on top line with the second wave of COVID-19 coinciding with the peak summer season. During the course of the first quarter, we saw progressive improvement in this business as the second wave abated and the conditions normalized to a great extent. As a result, we delivered a stronger top line growth in the month of June. Subsequently, the second quarter has seen improved momentum as the country opens up and government vaccination drive covers the larger part of the population. Extended closures not only subdued consumer demand, but also latest disruptions to supply from our manufacturing units, especially in Sikkim. Further, there has been significant commodity price inflation in the last few months. We have been able to offset a major part of the impact. Some residual pricing actions are being planned in the coming months as well. In addition, A&P spending has been increased to support the anticipated business growth. Overall, we expect the business to bounce back strongly in the coming quarters, which should drive revenue growth and margin expansion. Our gross margin expanded by 380 basis points Y-o-Y to 33% in Q1. EBITDA margins were at 7.7% as compared with a low of 2.2% in Q1 FY '21. We expect the further improvement during the rest of the year as sales volumes continue to expand. During Q1, advertisement and promotional spend increased to 2.5% of revenues in Q1 FY '22 as compared to just 0.8% in the last year's first quarter. PAT increased by over 6x to INR 24.6 crores from a very small base. Net profit margin was at 4.4% as against 0.09% (sic) [ 0.9% ] in Q1 FY '21. Our net cash position decreased from INR 349 crores to INR 154 crores in Q1 due to conscious buildup of inventory as well as market closures during lockdown impacted collection. We expect inventory levels to normalize in the coming 2 months. Our debtor days remains well within normative levels, and we continue to uphold discipline in credit control and collections. Going forward, we expect business improvement -- business conditions as -- sorry, going forward, we expect improved business conditions as the economic gets sharp recovery based on expectations. We remain confident that in the longer term, strengths associated with our brand, distribution and product range as well as the resilience demonstrated by the organization in a tough operating environment provides the platform for a broad-based growth opportunity. 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.

[Operator Instructions] The first question is from the line of Renu Baid from IIFL.

So the first question is to understand a bit more on the demand side in terms of after 1Q or July onwards, how has been the demand momentum? You did mention of expectation of sharp recovery in the business sentiment. So how should one look at the broad-based demand outlook from the key markets and regions?

So July has been very encouraging. I mean I'm not at liberty to disclose the numbers. But I can say that July has been very strong. It does look like that we should make up for a good part of the lost sales in Q1 -- by H1.

Any reasons to worry from the recent surge in cases again in south, especially in Kerala?

Not really. I mean, Kerala has been improving month-on-month. So yes, Kerala is having a surge in cases. I mean, rather a number of cases are not coming down, like the other parts of the country. But Kerala also has performed very good in June and July. So nothing to worry on that front.

Sure. Sir, second question is on the margin side. Specifically, if you look at segment-wise margins for electricals, which seems pretty steady at 9%, 9.5% level. So how should we look at some of the category-level margins, as in irrespective of how the copper prices are moving? On an annualized basis our 9%, 9.5% margins in the electricals category now steady given the changes in the mix and the structure?

So there is one category within wires and cables, where the copper content is almost 70% of the total cost of the product. In other categories, copper is not a very -- not the most dominant raw material. In the case of wires, there is a price increase or decrease as and when the copper price changes. The market has gotten to the fact that branded companies are changing prices frequently, both upward and downward. So with the lag, yes, if you look at a 12-month window or a 12-month number, it should largely remain same.

Sure. And sir, lastly, what is the quantum of the residual price hike that we are planning now for -- during the second or the third quarter? And with respect to CapEx for new manufacturing facilities, what are the categories that we are targeting in-house manufacturing, especially in the new entity, which is being planned?

Sudarshan, do you want to take this?

Yes. Okay. Yes. So there are a little bit of pricing actions still to be taken. I think at an overall company level, it may be like 1.5% to 2%. Like Mithun mentioned earlier, bulk of the pricing actions have already been taken, so a little bit of less. Coming to in-house manufacturing, yes, there are a few categories that we are planning to bring into light. Those are the ones which we are currently -- we're importing from OEM. So here, we are talking about some part of the time frame when there is a stabilizer and inverter manufacturing. We're also looking at perhaps kitchen in that important plan.

Okay. Nothing on the kitchen appliances or the other portfolio of yours?

Yes. No, I did mention kitchen, but that also could come back in the plan.

And what is the quantum of CapEx, which we have outlined in the next 2 years, specifically under the new subsidiary, which has been...

It's about INR 70 crores to INR 80 crores a year.

The next question is from the line of Prachi Kodikal from Bay Capital.

My first question is on your loss of production. So you said that in Sikkim as well as in the South, we lost a lot of sales because of lockdowns. Do we have a sense as to what sort of -- and or an amount, what would be the loss on sales because for these lockdowns as well as plant closure?

So if you look at business -- think about sales, May is the month, where we typically do between INR 250 crores to INR 300-odd crores. And the month of May, our sales were something like INR 90 crores or INR 100 crores. So the May month alone, I think close to INR 150 crores to INR 200 crores of sales plus was there. That's the quantum of sale. And there is, of course, some sales loss that have happened in the month of June as well. So yes, something about around INR 150 crores to INR 200 crores -- I mean about INR 200 crores to INR 250 crores -- sorry INR 250 crores to INR 300 crores could be the quantum of sales loss. Because typically, Q1 is a strong quarter for V-Guard, so we should have done at least INR 250 crores to INR 300 crores more than what we have done. In the case of sales loss due to lack of production, like we mentioned in the opening remarks that we had substantially increased our inventory level. So we were sitting with a huge amount of inventory in many categories. So we have effectively not lost any sales yet. But there is something like water heaters, we are not having sufficient inventory going forward. So if further disruptions happen -- as of now, the plants are open, further disruptions happen, we could again face sale loss. But so far, I wouldn't say we have got any sales loss due to lack of production handling.

Okay. Okay. Got it. And you also mentioned that the stabilizer has not -- the stabilizer segment has not done well in peak season itself. So do you think this demand is gone forever? Or do you expect it to come back? How has July been in terms of demand for stabilizers?

So if you look at last year also was a washout for us in Q1 in terms of some of home products. But in the case of stabilizers, it did come back strongly. So -- but we still did not grow in the category. So for a full year number, stabilizer sales in FY '21 was lower than FY '20. So if that is to be taken and projected, we can expect a flat year for stabilizer even this year as well. That means that for the last 2 years, the capital would have not grown. Some of the sales will come back, but some of them are lost forever.

Okay. And lastly, again, on the EBIT margins. Again, for the stabilizer category, the December and March quarter, we saw some pretty strong margins, which were upwards of 20%. But in this quarter, you've seen a sharp fall, down to almost 13% for stabilizer. What is the reason for that? And how should we think of these margins going ahead for the rest of the year?

Okay. Sudarshan, do you want to take this?

Mithun, I will take it.

Yes. Okay.

Yes, okay. Basically, right? I think we have talked to you about margins, right, gross margin. Gross margins are maintained. It is basically the gross profit and thus [indiscernible] of revenue also. So the overall [indiscernible] strong for the electronic category, both stabilizer and inverter are strongly correlated with summer. And adding April, sales have started to look down in these 2 categories and May was the washout completely. So I think gross margin is fine. I think the gross profit picture is impacted by revenue.

Okay. And how should we think of these margins for the rest of the year? What would be a sustainable level for the margins?

Sustainable level, Sudarshan, do you want to take this?

Okay, let me answer that. See, given a normal year, the business should be returning 10% to 10.5% margin, which is about the underlying margin the business can deliver. Yes. Like Ram mentioned earlier, even in Q1, the gross margin has been in line with what it used to be. There is a volume effect, which is why the EBITDA is lower.

[Operator Instructions] The next question is from the line of Achal from JM Financial.

My first question is with respect to import. So how much of the total sales were from the imported products? And have you seen any material impact because of the ocean freight or the currency, et cetera? And given our focus on the manufacturing part, how do we see the outsourcing from FY '21 -- comparing to FY '21? What kind of proportion we had? And in 1 year, 1.5 year what kind of reduction can we expect?

So the first was the imports. See V-Guard had almost [ 7% to 8% ] of products imported, maybe 6, 7 years back. Today, I think it's down to about 2, 2-odd percentage, if I'm not mistaken. So the impact of import on today is very negligible and even that 2% is primarily kitchen appliances, which we are importing from China and Vietnam. But also we are looking at possibility of sourcing within the country. Ocean freight, yes, has impacted. So if you look at ocean freight alone could have accounted for increase in -- decrease in margins for this particular category. But if you look at the company as a whole, import is not a very large item. So the impact on the entire business may not be very large. Apart from this, we are also importing some metals like copper and certain other components. Certain compounds are imported, which we're is used to witness [indiscernible]. We are also importing components for water heaters that are also imported. So I think all this has been factored in for a period. We are costing them with the latest ocean freight, which is almost 5x to 6x the normal rate. So all these costs have already started to hit us in the last 6 months. And we -- I don't think we'll be -- there is going to be further [indiscernible] rates from today. The rates have, in fact, come down from the peak, but they're still much higher than what it was before.

Right. And in terms of the outsourcing, how much was that in FY '21, given our focus on in-house manufacturing for those products? What is the mix we are looking at, let's say, 3 years down the line?

So definitely, in the next 3, 4 years, another 20% of outsourced products will move in. In fact, that will be battery, inverters, some amount of [indiscernible] will be moving. So yes, roughly about 15% to 20% of -- so today, we are at 40% of manufacturing, it will probably go 60% in the next 3 years to 4 years.

And sorry, how much margin can we look at in terms of the gross and EBITDA margin with this announced manufacturing incrementally?

See, it's going to be difficult to say, but all we can say is that every time when we source the product, we have seen margins expand. And we are seeing despite a higher depreciation, higher labor costs and all that, there is still -- they are still margin accretive. I can't put a figure on this because it's a different case for different products. And when we start our manufacturing unit, obviously, the first 18 months to 24 months, it will be running in a loss and only then -- after that, the margins will be expensed. So the impact of all this will take some more time to flow.

Right. And just one more question with respect to price increase, can you help us understand, since September '20, as and when the commodities started moving up, how much is the cumulative price increase we have taken, excluding wires, because wires is you know function of copper directly. But excluding wires, what would be the quantum of price increase we have taken till 30th June?

So Sudarshan, can we give a weighted average price increase to that?

Yes. So in the past month, excluding wires, depending on the category, the rate will be somewhere between 6% to 11%, depending on the category.

Understood. And if I may ask, with respect to competitive intensity, have you kind of seen that particularly increasing in few categories and also in terms of our southern region?

No, I mean, there is nothing new in terms of competitive intensity. Whatever it's been happening is continuing to happen. And what will happen is, due to competitive intensity, some of these companies can delay the price increases and all that by 1 or 2 months. That's the most that has happened. Other than that, there is no particular renewed competitive intensity. I mean this market remains and will continue to remain hypercompetitive as it has been in the last 3, 4 years.

The next question is from the line of Bhavin Vithlani from SBI Mutual Funds.

If you could comment on the competitive intensity and your market share, specifically in categories, such as fans, water heaters and wires?

Ram, do you want to take this? Ram? Okay, anyway. So see, the competitive products, like fans and water heaters, are fairly hypercompetitive. I mean water heaters, we are the increment brand, and there are a lot of new challenger brands that are trying to take share away from us. In the case of fans, it's vice versa. We are the ones who are taking share away from our competitors. In the case of fans, at least, we have made good improvements. I mean our new plant to make decorative antidust fans have come online in the beginning of last financial year. And it has significantly helped us to gain market share in that particular segment, that is the decorative segment from average INR 2,000 to INR 4,000 segment. And we continue to launch new products from the factory, and it is getting very good traction. In the case of water heaters, in fact, unfortunately, we have been at the losing end, apart from competitive intensity, which is something that we could have paced briefly. We were stuck with our factories not being able to produce because of the situation in Sikkim. So in fact, water heaters have significantly lost market share and almost all the other players have gained. We are hoping that this year we can come back strongly. We have made a very good start. The first 4 months have been very, very encouraging for water heaters. So I think if all goes well, we should gain back the [indiscernible] losses.

Sure. And in case of wires? And if you could also help us with your market share in fans, water heaters and wires, please?

So if you look at water heaters, it's around INR 2,000 crores category and our market share is something like 18 -- 14% to 16% in case of water heaters. In the case of wires, it's about 8%. In the case of fans, our market share is about 4%.

And if you could also help us the efforts that we are taking us -- taking towards building our brand? What is the kind of budget we have for the current financial year and in the longer run towards brand building?

V-Guard always spends 2.5% to 3% on A&P, and we'll continue to do that. Even in the first quarter, even with such adverse environment, we have spent about 2.5% our sales. So 2.5% to 3% will be the budget. So last year, we did INR 2,700 crores. So that translates into roughly about INR 80 crores, INR 90 crores.

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

So firstly, because of COVID, what the new product introductions impacted? And how do we see in each of the product categories now the acceleration of these new product introductions going forward?

No, I think there has been a slight impact. You can say that there has been a 6- to 8-month delay in launching a new model or a new SKU. But it has not derailed our launch plans, for example. So our entire product launching pipeline is getting extended by maybe 4 to 6 months because each lockdown is around 2 months, and then there are also suppliers, which are affected, so maybe they're affected for an extended period of time. So with the lag of 6 months, we are able to launch whatever we wanted to launch for the year.

Okay. And these launches now incrementally, these are in which kind of price ranges? Because we have been trying to improve our gross margins, more and more upgrading the product portfolio. And so incremental launches where do you expect to see?

Yes. So if you look at the products that are growing fast for us are products like kitchen appliances, which has got a high gross margin. We have products like switches and switchgears also, which are growing very fast. All these products are having a 30% to 40% gross margin. And in the case of switches and switchgears, we are already double-digit EBITDA product. So as these products become larger and they grow faster than the company average, there will be an automatic impact on gross and EBITDA margins for the company on a positive side.

Okay. Sir, next question is on the channel front. If you can give us the current mix? And within that, the general trade, the e-commerce, what's the kind of mix right now? And how do you see that now -- the changing going forward and to reach Tier 2, Tier 3, on the rural areas? Are we pushing more in terms of e-commerce as a channel?

Hello? Can you hear me?

Yes, Mithun, we can hear you now, yes.

Yes. Ram, they want the split between e-comm, GT and MT.

Yes. Broadly, I think -- so if you look at the nonelectrical products that is if you exclude wire, switches, switchgear and even pump basically, I think that about 8% to 9% of our revenue in the remaining categories should come from e-commerce. And I think e-commerce plus online retail, this should be the reason of around 17% to 18-odd percent, which we are expecting to grow more strongly as we invest more time, energy and focus of our new product development on the emerging channels here. And as far as GT is concerned, GT remains the primary focus of our business. And we derive about 80-odd percent of our business from GT, some of it will be urban and some of it will be rural. We do not have a separate measurement for what we sell out of rural, so not able to give you an accurate and exact picture as far as the impact of rural is concerned.

Okay. If I can just squeeze in one more question. Like you said, that we had kept inventory levels ready for the demand. So how are the inventory levels across different products right now? And how do you see the restocking levels by the dealers going forward?

Ram, do you want to take this, inventory level?

I'll do that. Yes. So I think, as Mithun had said, we had taken a very conscious decision to upstock inventory, mainly to be able to participate in the summer season because we expected a good summer given that the previous summer was difficult. But I think we got into COVID and could convert that into sale only in the month of June and July. I think fair to say that the inventory has significantly come down in the month of -- at the end of July. And we expect the inventory to normalize by end of August. And as far as the -- what I would say, there would be some -- a little bit of overhang of inventory, which is negligible, though. But on the overall portfolio in the summer categories because categories like inverters, air conditioners or categories like inverter batteries, these 2 categories, I think you can expect that beyond June, the recovery starts to be slow. So I think, by and large, I think inventory will get normalized by end of August. I think barring these 2 categories where we may carry some additional inventory. As far as trade inventory is concerned, trade inventory is quite normal. I haven't yet seen the read for July. But I think the read at the end of June was that trade inventory for at least mid-August was more or less normalized.

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

My first question is regarding the EBIT margins of our consumer durables segment. This quarter, we saw quite a subdued margin. How should we look at the margins going forward with the demand assumption?

So consumer durable also has products like air coolers, it also has new launches in kitchen, where we are launching them online and using digital media to promote this. So I think consumer durable margins will remain low because we are still in investment phase. To put it in perspective, we have spent almost INR 5 crores on air cooler campaign, where the annual sale is only INR 30 crores. So that is the kind of investment that is going into the category. So you will see that the consumer durable margins are remaining low, mainly because of subsequent investments in A&P. And once this category starts to mature, we should see 11%, 12% EBIT margin for consumer durables, but we are at least 3 to 4 years away. So yes, indeed, in this particular market of products, products like electric water heaters, solar water heaters, et cetera, are extremely profitable, even [indiscernible] is profitable. But the new categories, like kitchen appliances, breakfast appliances, water purifiers and air coolers, they will continue to attract significant investment. So that is the reason why the margins are looking a bit low because this year we have spent quite a lot of money on promoting air coolers for the summer season. But unfortunately, the second wave was much worse than what anyone expected, and we were not able to tap into the demand.

Got it. My second question is about non-South. Now we continue to see good traction in non-South across consistently for the past few quarters now. Sir, anything you would like to highlight in terms of the gross margins of South versus non-South right now? And how should we look at the traction from here on?

Sudarshan, do you want to take this?

At a gross margin level, there is -- the 2 have more or less [indiscernible] right now. There's hardly any difference between non-South and South. From here, as non-South grows faster, we should start seeing the operational leverage coming in.

Got it, sir. Sir, just a last question on the price hike. You mentioned 6% to 11% price hikes were taken ex wires. Just wanted to confirm this quantum was taken YTD or in Q1?

No, no, it's over a period, from starting maybe 7, 8 months now, last 3 quarters, price hikes have been been taken.

Got it. Sir, what could be the price hike quantum in Q1 specifically from April?

I mean these things have come in phases. So approximately, I want to say 1/3 of that.

The next question is from the line of Koundinya Nimmagadda from JM Finance.

I have a couple of questions. Sir, firstly, just trying to understand what is the thought process on having a separate subsidiary for consumer durables, if you can elaborate on that?

Yes, Sudarshan, do you want to take that?

Yes. Okay. So the subsidiary will undertake manufacturing activity. Basically, what is imported or source from OEMs will now be made by the manufacturing subsidiary. And one of the benefits is also that new manufacturing entities have a lower rate of tax. So that's the value.

Yes. Sir, I think in some of the previous questions, I think you mentioned about manufacturing fans and other appliances as well. I think, for fans, we already have a factory, right, at Roorkee and also for some other appliances. So what are the categories that you're looking at manufacturing in your subsidiary?

Okay. Let me clarify on fans, specifically, what we currently do is ceiling fans, where we already have a unit. The TPW fans are imported. That's what will go into the new manufacturing unit in the subsidiary.

And what are the other categories, sir, in the subsidiary may enter into manufacturing for?

Inverters, batteries, stabilizers, kitchen.

Understood, sir. Got it. Sir, my second question is from your annual report. If I look at the contingent liabilities, it has been a bit tad higher for the past couple of years. So can you help us understand these litigations and also the bank guarantee amount, which is sitting in our contingent liabilities?

The contingent liability, the main item is there is an ongoing income tax matter pertaining to TDS or certain TDS things. This is built over years. But for one of the years, I think, FY '10, '11, the ruling has come in our favor, but the department has gone on appeal. Meanwhile, other assessments are getting completed, and the same issue is being raised. We believe we have a strong case on that. So we're not really too worried about it.

And what about the bank guarantees?

Bank guarantees are given in the normal course of business. It's for purchases and copper purchases and things like that.

And they tend to remain high, in general?

Yes, it's in line with the volume of business. There will always be a certain volume of bank guarantees, which are outstanding.

[Operator Instructions] The next question is from the line of Rahul Agarwal from Incred Capital.

Most questions got answered. Just a couple of things. So on the durable side, broadly, overall gross margin for the company actually held up, right? In fact, actually, they're up Q-o-Q as well, quarter-by-quarter. So the EBIT level performance is broadly explained by what? Just Mithun explained that since the expenditure is quite high and the products are immature and new and hence, they'll take a while to basically come to double digits. Is that correct?

I was talking only about the consumer durable part, where we are having new categories, like air coolers, breakfast appliances and water purifiers, which are either being promoted through mass media or digitally. So the expense remains high for this new category. The established categories within the consumer durables are profitable and in something like fans, these are consistently improving, their gross margins as well.

Mithun, if I may just add to clarify. I think there are 2 observations. I think both -- which is -- one is valid for both consumer durable and overall -- I mean, both are valid for both the cases. Firstly, see, what's happening is that the EBIT margins are a function of revenue as well as the gross margin. So if the revenue is down, right, the EBIT margin tends to go down. So that's I think one of the drivers of durables. But generally, our gross margins are more or less better -- I mean, at a similar level as this last quarter. So if you look at quarter-on-quarter, our gross margins are there. The one other cause of variation on gross margin, which is -- or on EBIT, it's actually on gross margin and EBIT both, is that this year, our summer categories have underperformed as a proportion of the overall mix, mainly stabilizers. So that is also having some impact because stabilizer has higher margins than the company average. So these are 2 factors, which are impacting. But broadly, the variance in EBIT margin can be explained by revenue side variance than the gross margin variance in itself, although there may be small variances in gross margin product to product, which may be addressed through pricing corrections, some which have been taken, some of which will follow.

Got it, sir. So second question was on V-Guard consumer products. So Sudarshan mentioned INR 70 crores to INR 80 crores of CapEx, that's a normal CapEx for the company anyway, right? The another INR 100 crores announced, is it incremental to that? Or is it going to be incorporated in the same number?

Sudarshan? I think...

The project I mentioned will entail a total CapEx of about INR 200 crores. So that will happen over 2, 3 years.

Yes. So whatever the INR 100 crores of investment in subsidiaries, including the normal CapEx is correct. See, wherever it is a new factory, a new product line that we are building, it will come into the subsidiary. Wherever we are undertaking CapEx for an existing plant, will come -- will not come in the subsidiary, that's all.

Just one more point to add, right? So basically, what Sudarshan is saying is that the overall CapEx will be expanded over 3 years, whereas the INR 100 crores that you're talking about is that when you set up -- you allocate some money towards capital, and that's what we're talking about. The initial projects may have a CapEx requirement, which should commensurate with that. But the outgo of that will happen gradually, right, because plants will take some time to set up, and it will cross calendar years.

Sure, I understand. So it's not an incremental spend. Basically, whatever we are spending, INR 70 crores, 80 INR crores a year over 3 years, that basically moves into the subsidiary account, right?

I think I understand your question. Even before the subsidiary, we were talking about INR 70, INR 80 crores of annual CapEx for V-Guard. If the subsidiaries were not there, we would have set up the plant ourselves.

Correct. Got it. Got it. And lastly, on the Sikkim situation, how is the situation right now, sir? Is the production on track now? Because we are hearing that still the 7 states in Northeast are still struggling with COVID. So what's your take on that?

Ram?

Yes. So basically, the plants have opened again, and the -- so the factory is operational again. I think, yes, the COVID impact is there in Northeast. And yes, from time to time, that has potential to interrupt our operations. I think -- but for now, we are good, and it's been a week since the operations have started again.

The next question is from the line of Naval from Emkay Global.

I have 2 questions. First, some details on the digitalization plan, what you had outlined in your annual report with 4 pillars -- focusing around 4 pillars. What are the time lines you are expecting it will be fully implemented? And second, as you are increasing your in-house manufacturing, will your R&D spends inch up, which has been in the range of 0.5% of sales from last 4 to 5 years?

Ram, do you want to take this?

Yes. So actually, the company has been working with an objective of digitalizing for quite some time, right? And this is a journey, which is at least now 6 to 7 years old. Progressively, we have been intertwining, objecting towards setting up the digital road map together with our functional transformation. So as and when each functional transformation is happening, we are also situating digital infrastructure and digital capabilities to each of the functions. I think what the annual report is talking about is more centered around some areas that we are currently working on here. So this has been a much longer journey for the company in terms of walking towards enterprise digitization. I think right now, we are working on digital supply chain and digital product life cycle management. These are 2 areas that we are working on. We have rolled out digital capabilities towards, what I would say, I think, retail management area. I think some of those areas are touched in annual report. So just wanted to say that the scope of what we are doing in that area is much broader, wider, and we've been working for a much longer period of time in this area. But this is going to be a journey. I think it's something that -- because this entire space is continuously evolving. Mainly what we have tried to do is we are trying to make sure that we have platforms, which have potential. So the challenge to evolve our digital infrastructure is not that significant. So I think that's just to give you a background in this area. But I think we have a lot more work to do in this space. Coming to your -- I think there was another question, which was -- sorry...

R&D spend.

R&D spend, yes. I think as far as R&D spends are concerned, I think there are 2 major initiatives, which are likely in the next 3 to 4 years. One is, I think, V-Guard has already announced that we have acquired a piece of land in Kochi, where we are going to set up, what I would say, greenfield R&D capability. This is going to come up in the next 2 to 4 years, and then it's going to support our, what I would say, the R&D infrastructure development part of it here. The R&D process part of it, we have been rolling out product life cycle management capability over the last 2 years, and this may go on for another couple of years. So the process side, I think, we will be hardwiring the R&D ability to enable speed and time to market through this intervention, which will strengthen the ability of the R&D function -- to co-work with other functions and other stakeholders outside of the company also, other functions in the company and stakeholders outside. There is then the third piece, which is about the ideation piece and which is basically how do we get more? And how do we -- that is creating impact? This is an ongoing activity, which is gaining steam, and we're doing more and more work on than that is on inciting side, so that we are able to create consumer relevant propositions around which we can build our products. I think today, where V-Guard stands, I think we are pretty much -- we have evolved over the last 6 or 7 years or 8 years. And now we pretty much have our own R&D capability, and we own designs across our entire -- across all the categories that we are playing in. So as far as the scope of investment in R&D itself is concerned, which is in tooling and molding, which is fundamentally a subset of the capital expenditure, which has already been shared by Sudarshan. That will be more market-based and the category-need based. And I think that's something we are not constraining at this stage. And it still remains a less significant part of our overall CapEx because most of our categories, right, the investment in tooling and molding is not very -- it's not a high ticket item, barring probably air cooler or the switches, right, where the tooling investment may be very, very significant, right? So that should give some perspective to you in this area.

Okay's. And one follow-up on digitalization. So if one has to look at as you're saying this is like a 6-, 7-year-old journey when you started, and much of that has been already in the system. So if one has to rate from between 1 to 10, where are we? The intention to ask is basically whether the majority of efficiencies are already in your financial performance, system processes? Or the majority of that is yet to be seen in years to come?

So I think the -- let me put it like this, right. So data analytics-based benefits are yet to come in. I think the -- as far as the process standardization, and the choice of [indiscernible] I think for digitizing these are already in place and the workflows are already on our digital platform. I think function to function, this is different. I would say -- you should look at this as a journey. So it might take -- for example, you would take a function, it will take you a year for design and hypothesize, it will take you another 1 year, 1.5 years to deploy, yes? And then it will take you another 1 year, 1.5 years to extract benefit out of the process, right? So it has to be seen as a journey. And the journey is in different stages. If you look at a function like us, we started with first, we have made a phenomenal journey. And this is like fully mature, and we have been able to get whatever benefits we wanted in some 3, 4 years back, right? And from there on, progressively, different functions are at different stages of the bearing. And I think benefits in many other functions are work in progress or can we expect it in the coming period.

[Operator Instructions] The next question is from the line of Achal from JM Financial.

Sorry, if I'm repeating the same question. So in earlier answer, you mentioned that the gross margin at 33% was despite a lower mix from high-margin product, like stabilizers? So how do I look at this? Is it driven by some element of an inventory gain, in the sense the price increase kind of had a benefit of that and to do with the premiumization?

No, I think, see, what is happening is summer products are products like stabilizers, which are high margin, but summer also has lower margin products like inverter batteries. So I think on a blended basis, they will still come towards the company average gross margin.

Okay. Okay. So if you are looking at for the rest of the year, I just wanted to see that clarification. I think Mr. Kasturi said 12.5% something. So is that the margin we are talking about for the rest of the year?

Let me put it this way. FY '20, that is 2 years back, our gross margin was about 29%. Last year, the gross margin has crossed to 24.5% because the volumes are very low. This year, it's come back to 27.2%. So we are still around 1.5% lower than our FY '20 gross margin. That is what Ram had mentioned that is probably because the stabilizer contribution was extremely low. I think we're close to -- a lot closer to INR 60 crores to INR 70 crores of sales, just in air conditioner, stabilizer alone in Q1. So that's the kind of fall that has come when we compare it 2 years back.

Okay. Okay. So in terms of the EBITDA margin, one would be looking at a double-digit margin, if -- I mean at least a 10%, 10.5%? Or like earlier, you had talked about 100 bps improvement year after year, so how do we look at that?

Yes. I think we have hit [ INR 850 ] crores of revenue, which was our initial plan, which should have hit a 10.5% EBITDA margin.

Sorry, what kind of revenue you said? I couldn't hear that, sir.

Over INR [ 850 ] crores of revenue is what we had anticipated to do in Q1, and we are almost INR 300 crores short of that.

So I think just to add, right? I think the point we are trying to is that, by and large, our gross margins are maintained, right? But it looks like the EBITDA margins are lower. That's because the volumes have not materialized, right? So if we materialize the planned volumes come through, we will hit planned EBITDA. That's the first point. Second point is that within the planned -- within the planned business, there is a contribution from stabilizers. So if you see the actual business, which has happened in the summer quarter, the sales of stabilizer have been not in the same proportion, even in the lower volume. And that has had a 1% impact on the overall gross margin for the quarter and which will be reflected in the EBITDA also. So that's the limited point that I think we were making.

The next question is from the line of Hitesh Taunk from ICICI Direct.

I just wanted to know this quarter tax rate was on a higher side. This is because of low -- because of no benefit from the Sikkim plant or lower benefit of the Sikkim plant? Is it that?

Yes, it is. There is a lower proportion of profit from Sikkim, which leads to a higher tax rate for the quarter.

So what one could build in for FY '22 or '23, sir? What kind of tax rate?

The full year tax rate will be around 25%.

Okay. Okay. And sir, my last question pertains to our strategic investment in Gegadyne. Have you launched any product from that technology? Or are we planning to launch using that technology? Which products are we going to launch? Where are we focusing? If you could share some thoughts on that also.

Ram, do you want to take this?

Yes. So see, Gegadyne a deep technology start-up, okay? So the cycle time for technology developers will be long. So you're not going to get an immediate outcome like next quarter or the following quarter. I think we are at least a few years away before we get us, what I would say, commercially marketable product, yes? That's the first point I want to make. So there is no immediate implication of that for this financial year or next financial year, first point. Second point is fundamentally this plant is making energy storage -- I mean they are basically bringing energy storage technology. And mainly, that will impact our inverter battery business.

Ladies and gentlemen, this was the last question for today. I now hand the conference over to Mr. Bhartia for closing comments.

Thank you, everyone, for participating. On behalf of Investec India, I would like to thank the management team for giving us the opportunity to host the call. Sir, would you like to make any closing comments?

Thank you, Investec India, for hosting this call, and please stay safe everyone. Thank you very much .

Thank you.

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