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

Ladies and gentlemen, good day, and welcome to the V-Guard Industries Limited Q3 FY '22 Earnings Conference Call hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Keshav Bharadia from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Thank you, moderator. Good afternoon, everyone. I welcome everyone to the V-Guard Industries Limited Q3 FY '22 Earnings Call. Today, we have with us Mr. Mithun Chittilappilly, who is the Managing Director of the company; Mr. Ramachandran Venkataraman, the COO; and Mr. Sudarshan Kasturi, the CFO of the company. Without taking much time, I would like to hand over the floor to the management for any opening remarks, post which, we will start the -- we will open the floor for Q&A. Thank you, and over to you, sir.

Thank you, PhillipCapital. This is Mithun. 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 third quarter ended 31st December 2021. I hope all of you, along with your family and friends are keeping safe and well. I wish you all a happy New Year and look forward to 2022 remain positive guidance for us all. During the third quarter, we have delivered a 16% Y-o-Y revenue growth with a turnover of INR 961 crores. While the quarter started on a strong note, with positive demand momentum in the festive season, the emergence of the third wave caused the growth to be muted subsequently. The impact was felt across our key markets and more so in the Eastern region where we have a strong presence. Revenue growth was strong across electrical and consumer durables segment, while electronics segment showed a marginal decline during Q3 based on the linkage with demand weakness in the [ electronics ] segment. Even so, Q3, once again, saw a broad-based contribution from both South and non-South markets, at business Y-o-Y growth of 15% and 17%, respectively. Non-south markets contribute to 41.8% of the total revenues, up from 41.2% for last year. The business is progressing well towards achieving a well-balanced contribution from a larger number of states and regions. The Electrical segment registered a growth of 18.7% and consumer durables segment grew by 28.1% Y-o-Y. In our electronics segment, there was a small decline in revenues on a Y-o-Y basis as the underlying demand for wired goods remained weaker than expectations. The third quarter also saw the continuing impact of commodity price inflation on margins. While we have taken several pricing actions to offset this to a large extent, some more price increases are required in the coming months to restore margins to normative levels. The A&P expenses were at 1.8% of revenues compared with 0.9% of revenues in the year ago period. Factory-related costs have risen with the starting of manufacturing facilities in Roorkee and Sikkim. Here, I would like to point out that the expansion in in-house manufacturing -- with the expansion of in-house manufacturing. There's a shift from the traded goods line item to the other expenses line item. That is one of the key reasons for the reported increases in other expenses. EBITDA margins saw a decline to 8.8% in Q3 FY '22. Going forward, we expect margins to be driven by volume growth for the pricing actions in categories which have lagged behind. During the quarter, we have made further investments to the extent of INR 19.13 crores to our subsidiary, VCPL or V-Guard Consumer Products Limited, taking the total investment in the subsidiary to INR 44.63 crores. The first manufacturing project undertaken by VCPL is currently under implementation and some other projects are in the pipeline as well. These projects will reduce our reliance on imports and OEM sourcing within India. And we expect to deliver greater efficiencies over a period of time. We have operated with increased working capital this year, maintain higher levels of inventory to offset any supply side disruption. Lower-than-expected demand towards the end of the quarter also resulted in rising inventory days. We will revert to normative inventory levels in the next few months, resulting in strong cash flow from the business. Going forward, with the government's continued focus on investing in progressive initiatives, we see the country is progressing consistently leading to a secular demand growth in all our categories especially for quality, innovation and service-driven products, V-Guard is well positioned to benefit from these trends. With that, I would like to conclude my opening comments. And I would like to thank you once again for your participation and would like to hand over the floor to the moderator for Q&A.

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

Good afternoon and I hope everybody at V-Guard is doing well and are safe. I have 3 questions. Firstly, let's start with inventory. If my number is right, we are at about INR 875 crores as of December 2021, and that's a bit concerning to me. Could you help me understand, so 3-part question here. Essentially, the raw material finished good breakdown of this number? Second is, are we carrying inventory? Obviously, you mentioned that you're carrying inventory higher to manage the COVID risk. But is there any inventory aging risk here we should be aware of in terms of any write-offs or which products essentially are carrying higher than normal inventory? And the third part of this question is essentially, should we go back to the INR 600 crores, INR 650 crores levels by March '22, assuming everything else is normal and things stabilize and there is no write-off and there is nothing else happening, and we are back to normalcy? That's my first question.

Yes. So before I hand over the question to Sudarshan, just I would like to say that keep in mind that we have had a raw material price inflation of close to 20% to 25% in various categories. So the inventory number is actually inflated by [indiscernible] It's probably closer to 25% less than that for last year when we do comparisons. Sudarshan, do you want to take this?

Yes. The first part of the question was the split between finished goods and [indiscernible]. Finished goods out of that is just about over INR 500 crores. So INR 500 crores, INR 520 crores should be finished goods level, the balances are rest, and like Mithun mentioned, this also includes like 20% to 25% inflation per unit cost, so keep that in mind.

And do we expect the inventory days to normalize? I'm not saying the inventory number, but the inventory number of days to normalize by May? So we should revert back to the pre-COVID level of inventory days by May for the summer season?

Got it. So no risk of any write-offs, right? I mean there is no product which is like aging about more than 12 months in the basket. Is that correct?

No, there is no such risk.

Yes. I think these are all fresh inventory. There's not any inventory [indiscernible]. This is a planned increase, and there was an unplanned reduction in sale than what we expected, especially in the month of December, especially second half of December. So I think we should come back to normative levels. It will take us some time because some of these products have long lead times. We also have taken some raw material strategic call to procure some raw materials additionally, especially for if you look at electronics products like stabilizers, inverters and all that. So that's also there typical inventory this all should get normalized by the month of May.

Perfect. Got it. My second question was we are moving to a very important season for electronics segment, right, in the next 6 months. Your thoughts on any demand outlook for ACs and TV stabilizers? What should we expect after 2 washed out summer we saw last 2 years due to COVID? So your thoughts, please?

Yes. Ram, do you want to take this?

Yes. I think last 2 summers have been bad. In fact, we are positively observing that the third wave as what -- the expected third wave is earlier. And we are hoping that the third wave [ taper off ] even before the summer season commences...

Sorry to interrupt. Mr. Ramachandran, we are not able to hear you clearly.

Is this better?

Slightly better. Please proceed.

Okay. Just give me a minute. I'm just removing my headset. And let me talk into the phone. No, I'm just saying that we are encouraged, we are hopeful that the demand recovery will be strong, and we are encouraged that the third wave has moved forward to December, Jan as opposed to March that we were worried. So we are hopeful, I think at this point in time, I think our guess is as good as anybody. But I think primarily, a lot of the sale of these categories is through large organized retail. And with each wave is getting impacted by walk-ins reduced by the deflated -- because of restrictions in various parts of the country. By having said that, I think also, wave 3 restrictions and movement of shoppers into the marketplace has been lower compared to wave 2 and wave 1. So I would say that we are hopeful and positive, and we are looking forward to the summer season with expectations.

Got it. And lastly, on the durable segment margin, on the EBIT side, so it's down to 3% versus almost 7% normalized level. My sense is, please correct me I'm wrong -- if I'm wrong, that there's some price hikes which are yet to be taken. There have been new product launches, which will take time to be profitable. And third is, obviously, we have seen higher marketing spend in third quarter due to festivals. When do we see this going back to normalcy? I mean, have raw material prices stopped going up?

Mithun, can i take this one?

Yes, yes.

So I think basically, if you see, right, we -- this is related to price translation. So if you look at our slides, we have -- if you look at this year versus last year, we translated about 16% increase overall in the portfolio, maybe about 11% to 12% minus of wire, wire, which has a higher copper content and a higher price increase, right? So I think the pricing transmission is one of the key variables. And relatively speaking, the impact of the input cost increase has been more stronger segment than in the Electronics segment. So I think that's really the factor. Also, most of the contributors for this are seasonal. So for example, given the [ season ] which is more around the year, I think compared to, let's say, the water heater or the fan, which is more -- the sellout is in a more narrow period. In kitchen, I think the margins are more or less close to normal margins. But if you look at our water heater and fans and light [indiscernible] the translation will really happen in the season. So I think as we exit -- as we enter the season and as you exit the season, I think we should start to see more price corrections and probably more normalized pricing as we exit the season. So that's what we are hoping. In some of these categories, we are not market leaders. And so we will also be looking at into how the other competitors in the market [ offer price ]. So I mean, fundamentally, there is no problem structurally in any of the consumer durable category from, what I would say, pricing or positioning standpoint, it's a price translation issue.

[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

So during the quarter, there was this acquisition of Simon announced. Could you take us through the thought process the reason for acquisition? What are you actually thinking in terms of longer term with this asset? And additionally, there were -- are you also looking to increase -- I mean, are there any further categories that you're looking to acquire? That's question 1. The second question is, last year, you commenced factories for water heaters and fans. Could you take us through the performance of these categories? And what do you see outlook for these categories for V-Guard in the next 2 to 3 years? These are my 2 questions.

Okay. Regarding, Simon, Ram, you want to take this?

Yes. So the -- fundamentally, I think if you go back and remember, we had made a small acquisition with Guts, through which we could access the manufacturing capability for our [indiscernible] business. So in the case of Simon, we saw 2 significant opportunities as a way to help us to re-prog our capabilities and market position in the switches business. Simon comes with manufacturing facility, thereby giving us access to ready capacities. That was on one side. On the other side, the Simon brand and the know-how and the heritage associated with the brand, which is now over 80 to 100 years old globally, I think this is something we saw a huge potential to leverage because besides the know-how, we also believe that this brand will give us excellent opportunity to participate in the superpremium and specified segments in the market, right? And where this brand is extremely well positioned, being a global player and having designs and platforms, right? Which are competitive with the global offerings. So I think this is fundamentally the opportunity that we saw in Simon. And Simon and V-Guard will coexist in the market as the 2 separate range of switches and help us to address the broader switches opportunity. You must realize that our entry into switches is not more than 4 years old. So building brand equity to be able to participate in the premium superpremium and specified segments is a long journey. And Simon gives us a partner to accelerate this journey so that we can be a more, what I would say, more active participants. Switches are like switchgears. There is an element of differentiation, emotion and whereas switchgear is a more functional. So that was a good route for us to acquire the know-how technology and manufacturing on the switchgears side. But on the switches side, brand plays an important role, particularly when you go to the premiums, superpremium or the specified segment, right? And that's why this -- what I would say, partnership is targeted towards. We believe we should be able to leverage the know-how, the equity and the brand of the Simon and our channel relationships and our go-to-market infrastructure.

Regarding the manufacturing facilities, we have started 1 in Roorkee for fans, and we had set up a enameling water tank plant in Sikkim. If you look at the consumer durables segment, it's grown very fast, and it's driven by both by fans and water heaters. I'm happy to say that the fans -- the newer plant and the products coming from the new plant has given a huge boost to the brand V-Guard, and we are able to build from it. We are very much enthused and we are even very close to setting up 1 more factory for table pedestal and wall fan in India apart from the ceiling fan plant. So I think the fan business after the wire business, we expect it to become one of the largest businesses for V-Guard because it's a very large market. And with this -- with the products that we are bringing out from [indiscernible] factory and the kind of reception we have got from the retailers, we believe that we will be able to become a very, very strong player in the fan business. Regarding the second plant, which is for water heaters, that's primarily an import substitution. So if you look at V-Guard, it was importing something like 50% of its products for water heaters, roughly worth INR 150 crores every year from China. Now that's down to something like INR 10 crores or INR 20 crores. So almost INR 130 crores worth of products annually will be made from this plant. So that is in the progress. This is year 1 or year 2 for both the plants. I think from year 2 and 3 onwards, we will start to see costs normalize and as the plant achieves full utilization.

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

My first question is, if you can help us with more inputs in terms of the demand pattern across regions and both in rural and urban for us, given that you have shared a pretty good outlook in terms of fixating a packet of the season. So -- and along with that, any comments in terms of reasons for softness [indiscernible] just more of a seasonal correction or any concerning points in terms of the rural uptick?

So this year, we felt that and we are seeing that in numbers that Eastern markets have performed -- underperformed by a large degree comparing to all the other 3 zones. And we also saw markets like Hubli underperforming. So there seems to be some problem in the rural region. I think it could be a mix of things. It could -- and we also have noticed that there were some unseasonal rains especially in East, which also has played a spoilsport in many categories. But generally, yes, so if you see FY '21, both Hubli and Eastern regions were leading from the front. And this year, I think, of course, the base is also high. We have seen a moderation of sales there. So I think we will have to take a call after looking at next year to see whether this is a structural issue or whether this is a passing issue, but our gut feeling is it's probably a passing issue. I think the next year, these markets should come back strongly. There is no reason to believe otherwise. Ram, anything you want to add on?

Nothing in particular, Mithun. And as you rightly identified, I think also the second wave of COVID was a bit -- struck a little later in the Eastern region compared to the rest of the country, right? And they were into it still some part of Q2 also, so next part of Q2 also. So I think it's a combination of these factors is what we are thinking as of now. I think mainly we are seeing a softer demand in the East, right? And that's the only reason, which has significantly underperformed compared to the rest of the portfolio.

Sure. Sir, my second question is on the margins and more specific around the CD or the durable business that we have. You did mention the seasonal categories like water heaters and fans is a bit of a challenge. Probably for water heaters, this was the seasonal quarter. And for fans, since you're also embarking on aggressive manufacturing, in-house manufacturing, which will help to improve the product mix as well as the overall profitability profile for us. So from this perspective, how should we look at margins in these categories, especially at the durables portfolio for over 2- to 3-year perspective? And do you see the headwind that we faced in this fiscal with respect to competitive situation and inability to transmit the prices, are those factors likely to ease out? Or what will -- or help us to improve these margins back to the company level, 8%, 10% margin level?

So first of all, I think the big rally, the hyper inflectionary rally in commodities has stopped. So the commodities are today not going up at a pace that is -- that they were going up in the previous quarters. So that is the good news. The second good news is a lot of companies, after taking stock, have announced the price increases in Q4 and so have we. So that should [ depict ] some of it. The third thing is in the CD margins also hitting some of the factory costs, which is the start-up cost, which will also normalize. So I think by next year, we should return to much more healthier margins. As far as fan is concerned, yes, own plant will deliver better margins, and we can already see a pathway for higher gross margins going forward as we are bringing in more efficiency. We are moving from -- as we move in more and more processes from outsourcing to insourcing, the margins would go up. But please keep in mind that this year, the kind of commodity inflation was unprecedented, and this has impacted every product, but it has impacted some products more than some of the other products. Like Ram mentioned, the impact on electronics is not as high as the impact on water heaters or fans. So I think all this is multiple reasons. And I think by next year, Q2, I think we should start to see normalized margin is my belief. And I am hoping by -- for fans, maybe as early as Q1 of next year, we should see normalized margins because if the summer season is good, I think every company will fast-track pricing transmission to the market.

And what is normalized margins for us?

One more line. I may just add 1 more line, right? So if you see the first wave of price revisions have been conveyed to the market and as these products were getting into the summer season, right? The challenge has happened to the second wave of increases, right? And as these products have been outside season. As Mithun said, as we get into season, right, that's the best time to land these price changes because otherwise, mainly, we are trying to correct prices when there is already inventory in the trade.

Got it. And this is for all, Mithun sir, you mentioned margins in fans are likely to be back at the normalized level. What do those normalized margin levels be approximately?

So our gross margins in fans are about 25% pre-inflation. That -- and it has dropped to close to 20%, and it should come back to 25%, 26%. That is our belief.

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

Hello? Can you hear me?

Yes, yes. Please, go ahead.

So one thing which I wanted to understand was on the specifically on the pumps on the category. How is that market evolving? We have heard from some of the other players that the market [indiscernible] and the challenging environment continues. If you can touch on how the pumps market has been for V-Guard? And how do you are expecting going forward? That's my first question.

So for us, the pump business has not been that bad. I think primarily because our exposure to agricultural pump is not very high. Our agricultural pump sales is practically negligible. Most of our demand for pumps comes from residential pumps like pressure boosting pumps and submersible pumps and the pumps that are used for residential purposes. So our impact on pumps has not been that bad. In fact, pump has done a reasonable growth if you look at the first -- if you look at Q2 and Q3. I don't have the exact pump sales numbers with me, but pump has done well for us, It has not been very big. It's probably to do with the fact that we don't have exposure to the agricultural pump segment, which has been impacted as what we have heard.

Okay. The other question is on the ad spending. What we are seeing is that a lot of other competitive [indiscernible] significant bump up in the ad spending. If you can touch upon the ad spending for this quarter? And going forward, how do we see the ad spending on a full year basis on the next year, what level -- absolute level what you would like to maintain it at?

Yes, A&P spends are about 2.5% to 3%. And last year, it was only 1%. So we would like to take it back to 2.5% to 3%. But for that, we have to have more healthier transition of pricing into the market. And I think once that happens, we will restart expanding to the pre-COVID levels. So I think, in the next 1 or 2 quarters that should happen.

Okay, sir. So next year, 2.5% to 3% level, that will be the ad spending, what we'll be expecting on a full year basis?

Yes, yes.

And while you have talked about price hikes and you also touched about this point that the full absorption has not happened. So if you can just touch upon the total quantum of price hike which you would have taken across product categories in the 9 months? And in terms of absorption, how much it would have got actually absorbed? Or what would be the gap in terms of the absorption of the pricing.

Okay. Sudarshan?

Price growth across 9 month as a blended average across all categories would be about 12%, excluding wire, that's an average.

And sir, this fully absorbed or in terms of the absorption by the channel or by the market...

What has actually passed on is 12%...

So this 12% has been fully absorbed by the market?

Yes. This is what we have -- this is not the announcement, but this is the actual...

This is the actual realization.

Realization, yes.

Okay. Sir, just if I may see 1 more question in terms of our premium versus value mix. Over the last couple of years, we have seen that the value categories across product segments have seen hyper competition. And we have focused more on premiumization across categories. So will you be able to touch upon the mix in terms of what we have in terms of premium versus value right now? And in this environment where price hikes are happening across product categories, so not having higher value exposure. Is it going to impact us in the future? So how is that right now?

No, I think if you look at us, we have always had products -- wherever we are mature, for example, stabilizer, wires, pumps, and water heaters, wherever our category is more than 20 years old. We have product segments across different segments right from the premium all the way to standard. There's newer categories like fan and probably the newer categories and kitchen appliances, where we had more products in the value segment, and that's where we are building up the premium portfolio. And just like we mentioned earlier, the -- one of the reasons we set up our own factories is to ensure that we have -- we are able to manufacture products that are appealing to a segment of customers which are expecting a certain fit-finish and features from the product, which may not be possible by working with the outside vendor. So I think that is a journey. So I don't think we have seen any down-trading or anything like that so far. But in fact, if you look at us, we actually lost out on sale of premium water heaters this year by a good INR 13 crores or something because we had supply chain issues in that particular segment of manufacturing, whereas we were able to sell the value segment. So we have not seen that because the prices have gone up that people are changing to -- from one segment to the other. I think when someone is now constructing, he is aware of the fact that for everything, the price has gone up right from steel, cement and all that. So I don't think, so far, we have seen that kind of a huge change in the behavior where people are dumping premium products and moving to [ alley ] products because the segments are different and they're buying that for a particular reason. And then during -- in the construction BoQ, the cost of these products are not that big when compared to the cost of like a steel, cement and stuff like that.

Okay.

I hope this has answered your question.

We'll move on to the next question. That is from the line of Hitesh Taunk on ICICIdirect.

Sir, my first question is how much price hikes during Q3, sir?

Okay. So Sudarshan, how many -- how much price hike during Q3?

Q3, should be around -- between Q2 and Q3, right? So it should be around 3%, I guess.

Only Q3?

Only Q3, correct, yes.

3%.

3%. Okay. And sir, my next question pertains to our recent acquisition of Simon Electric. Sir, what is the revenue potential of this company at peak utilization?

Yes, Ram?

I think the company's capacity, right, is flexible. By that, what I mean is it should be able to scale up the capacity further to what is existing today. So I think right now, it should support about INR 120 crores to INR 150 crores of revenue.

Sir, my last question...

[indiscernible].

Okay. Okay. Sir, my last question pertains to our tax rate. Sir, are we getting -- I mean, our tax rate has been -- was higher for the period despite opening of a new plant. Sir, are we getting the benefit? Or will it flow from the next quarter onwards?

Sudarshan?

Okay. Our tax rate is higher because we have not yet opted to go for the new tax regime, and that is on the basis that some of our plants at Sikkim have a tax holiday. It is -- the ETR is currently higher because the profit output from those plants have been lower than expected. The newer plants do not have tax holiday, by the way, okay? This is -- the tax holiday only applies to the Sikkim units. We have not yet made the change because when you look at a 5-year basis -- we will evaluate the 5-year basis and then decide when to make the change, that's something we will evaluate on an annual basis. At some point, we will be decide.

So what tax rate should assume for FY '23 and '24, sir?

FY '23 is at 25%.

The next question is from the line of Ankur Sharma from HDFC Standard Life Insurance.

Just 2 questions. One, while you did talk about this 12% blended increase, right? in terms of price hikes, just trying to get a sense of the mix between volumes and have you within the larger categories, right? So for example, wires, fans, heaters stabilizers, if you could please help give us the breakup between volume and value growth in Q3?

We don't give out category-specific numbers, but YTD basis, 9-month growth of 31%, which is wires [indiscernible] category, there the price growth will be 20% and volume will be 11%. That's for 9 months, yes.

Okay. Any other categories you can share? Or is it something...

We usually don't give out the volume numbers.

We don't give out category number.

Okay. Sure. Okay. Fair. Okay. Second, when I look at Q4 of last year, you're sitting on a fairly high base, right? Close to 58% kind of growth. So just wondering, as you head into Q4 this year and also for the full year FY '22, any guideline on margins?

So I think it's very tough for us to give guidance. But when you look at Q4, please look at last 3 years, not only last year. Because last year, there was a high growth because FY '20, we had a decline in revenues because March, there was a lockdown in FY '20. So FY '20 base is very low. So FY '21 growth looks higher. So you can look at last 3 years and put a CAGR of -- reasonable CAGR, and that's what we're looking at.

The next question is from the line of Achal from JM Financial.

My question was -- you mentioned that the other expenses shot up because of the commissioning of the new plant. Is it fair to say that the sales from these plants are yet to be affected. And hence, while the gross margins are lower because you sold out of the existing inventories -- the benefit of the gross margins on the new production is yet to be reflected in the gross margins. And hence, this quarter's EBITDA margin is disproportionately impacted because of that?

Okay. So let me just give a couple of lines before I pass this on to Sudarshan. So just what happens when you start a plant, it let us assume that a plant requires 800 or 600 people to run the plant. We will employ 400 people, but the dividend, but the output we get is probably going to be very patchy because there's a lot of rejection and stuff like that. So basically, as a percentage of sales, the employee costs in that plant, whether it's outsourced labor or -- and a lot of it is outsourced also, that is coming in the other expenses. So as the plant matures, and we start driving efficiencies, these costs as a percentage of sales from that plant will progressively come down. So that's what Sudarshan had alluded to in terms of -- and even in my opening remarks. Sudarshan, do you want to?

Yes. Just add 1 point. Yes, so that is a factor in the initial year, the conversion cost of the factory will be slightly higher. So it has had some impact on the margins. So that is 1 factor. Also the bigger movement, if you look at that particular line, there is a big movement, that's because when we start operating our own factories, factory-related costs go into that other expenses item, other expense line item. Earlier when it was a traded goods, it was growing off the top. There is a purchase of trade goods which goes before the gross margin escalation. That expense line has shifted. That's why the [indiscernible].

Basically so what happens is, in this case, is the gross margin will look slightly higher than what it is and other expenses also will look a little higher than what it is.

That's.

Right. In other words, the cost inflation led gross margin contraction is much higher than what you can see in the numbers. Is that fair?

It's higher than what we see in the numbers. For instance, if you take 9 months to 9 months, the gross margin drop is only showing 20 bps, 0.2%, right? But if you add the factory element in this, the real drop is like something like 2%.

Okay. Okay. That's helpful. That's helpful, sir. And specifically, I wanted to check in the previous con calls, you had indicated the competitive intensity in the home market was actually pretty high. So just wanted to get some update on the same -- have you seen further or -- further intensity going up or it's kind of stabilized now and the low base is already there so we can see some pickup in the growth?

Yes. I think whatever issues were there and they are part of our base. And if you look at that, we have grown very strongly this year in consumer durables and that's where we have a lot of competitive intensity in the past. And then we'll continue to grow because we have taken some actions. It can be own manufacturing, it can be new product introduction. And we are taking back those losses.

Got it. And just 1 question, if I may ask, sir. In terms of the CapEx for FY '22 and '23, if you could comment on that?

Sudarshan, CapEx?

Yes, it's -- just as we had commented earlier also, I expect it to be around INR 70 crores per year.

The next question is from the line of Ronak Chheda from Awriga Capital.

Am i audible?

Yes, please go ahead.

Yes, I have 2 questions. The first question was given the power situation in the country which is improving, how do you see the long term growth rates for products segments like stabilizers and UPS from a 5 to 7 year view?

So I think this year, if you look at us and look at the electronic numbers and especially for stabilizers in that, it is primarily tracking the trend in the wired tool segments. 50% to 55% of the sale of stabilizer come from the air conditioning segment in value term, and air conditioning segment has been hammered, especially room AC has been hammered in the last 2 years. I think so we should have a very positive growth happening in the next couple of years. Before COVID, this segment was growing at about 7% to 8% annually, and we expect this to come back to that growth. In fact, today, if you look at it, it's the decline over the last 2 years. Inverter segment also, of course, it was growing at about 10% to 15% pre-COVID. And I think again here also is a summer-driven product. What we are saying is that, yes, the sales in cities are probably coming down because power factor. But these markets in rural areas are expanding. And as new and new villages get electrified, we will see demand for these products because they will not have the kind of quality of power that -- like uninterrupted power that they should be getting. So far, we are not seeing a threat in terms of a steep decline in the market for these products.

And my second question is on your in-house manufacturing. Do you see -- are these in-house manufacturing ROC accretive for the business in the long term when it's steady-state manufacturing output?

Yes. So any manufacturing investments we have done, there is usually a 4- to 5-year payback period. And we have not gone -- we have not invested in any manufacturing where the payback period is higher than that. So definitely, it is ROC accretive. But I'll tell you a more important issue is that we need to have -- control the supply chain aspect as possible because only then we will be able to play in certain segments of the market. So you can't play in the premium segment by depending on some vendor sitting somewhere because they are not going to be able to make those investments. And we have seen this with our fan business. We have seen this with water heater business. So I think that's the way to go.

The next question is from the line of Rakesh Roy from Indsec Securities & Finance Ltd.

Sir, my first question regarding any market say gain in any product during the quarter in Q3?

We don't like to comment on this, but we -- yes, we don't want to comment on market share gain. It's asset sensitive, yes. But yes, you can look at our considerable numbers, and you'll find that they have grown faster than many [indiscernible] -- Obviously, we've made some deals.

Okay, sir. Can you save us some market shares of fan or water heater we have currently?

Ram?

Mithun, I think we can share offline. I think this is...

Yes, we, will share offline.

I don't have the specific data -- actually, it's there in the investor presentation, we've given our market size and our estimated market share.

Okay, sir. Sir, my last question, sir, any plan to add new product in 3D business in near future?

I think as and when required, we will evaluate and we will announce. We again, we don't want to talk about product launches before it happens.

Okay, sir. And sir, 1 question regarding especially on the Eastern markets. Sir, how is the Eastern market growth during the quarter, especially negative -- what do you say was growth in Easter market? In which area you see more a decline, especially in the Eastern market?

I think almost all branches in Eastern markets have reported a decline, barring slightly better of is maybe Northeastern markets and Orissa market. And barring that, all the other states have reported very poor numbers.

The next question is from the line of Gaurav from Bowhead India.

Well, there has been a lot of challenges for our business maybe due to COVID and...

Sorry to interrupt, Mr. Gaurav. Sir, we are not able to hear you clearly, we request you to use the handset mode while speaking.

Is it better now?

No, sir.

Is it better now?

Much better.

Okay. So yes, sorry for the disturbance, sir. So there have been a lot of problems in terms of COVID and which is why we couldn't get much of our sales in our Electronics segment. And then internally, we have been doing a lot of initiatives like doing our own manufacturing, expanding to non-South market, et cetera, et cetera. So sir, over a slightly long term, let's say, for FY '24, do you have any sort of a target in terms of your revenue? Like currently, you do INR 900,000 crores kind of a quarterly turnover. So on the revenue side as well as on the margins, which is currently in the single digits, high single digits. So do you have any target for FY '24 or FY '25 when things normalize when your initiatives start giving you benefits? So if you could just give some idea how we should track these numbers for your company?

So obviously, we have internally targets for all this, and I'm not at liberty to talk about it. publicly. But all I can say is that we have always maintained that we would like to grow at a 15% CAGR in terms of revenues. And that's what we would like to do. Of course, this year, we've had a huge hyperinflation. So probably it's not right for me to expect that we will grow at 15% over and above 20%, 25%, or 20% cost growth. But I think next year onwards, we should get back onto that 15% journey. And so that's roughly like we will probably grow 2x the GDP growth is what we can expect in terms of the revenue. And in terms of margins, yes, we were at about 10%, and we wanted to slowly improve the gross EBITDA margin. And that's also something that is on our radar. And I think on manufacturing, a better product mix will definitely go a long way in doing that.

Okay. And just 1 follow-up. When you say 15% CAGR, so the base we should take is around INR 3,600 crores to INR 3,700 crores as a current base because Q1 for our company as it is for the entire corporate was not comparable. So INR 3,600 crores, INR 3,700 crores base is the right base to track that 15% CAGR performance?

Yes. Yes. But it's going to be difficult because a lot of the sales that were some happen in Q1 also happened in later in Q2. So I think it's a little yes -- more or less, yes, it's probably correct, yes.

The next question is from the line of Lakshmi Narayan from ICICI Prudential AMC.

I just want to understand out of your business plans which you outlined at the start of the year, how the year has progressed, which segments have positively surprised you in terms of your internal targets and what has actually gone on the other side? And what do you attribute that for?

So I think no company is anywhere close to achieving anything what they set out to do at the beginning of the year. Because revenue-wise, yes, we are okay. But volume-wise, we are not okay because revenue growth has been strong because there's been inflation. But because of that, demand moderation also could have happened. So I think we have done well in Electricals better than what we have set out to do in the beginning of the year in terms of revenues and margins. whereas in terms of electronics and consumer durables, consumer durables has done well on revenues, but not on margins. So it's a mixed bag.

I was asking for more new product introductions and in terms of customer acceptance, et cetera, right? Anything which has actually...

So I think if you look at the new products that have surprised us positively the switches business -- model of switches business has done extremely well. It is growing very healthy. It is highly profitable. even at a small revenue of INR 40 crores, INR 50 crores annually in the current year. If you look at water purifier which we are only selling to Amazon and Flipkart only online partners, we think we're doing extremely well, highly profitable, I mean not highly profitable, but I'm saying highly -- gross margin profitable, but I think we've very strong reviews, and we are doing extremely well with these 2 platforms. So I think these are some of the things that have possibly surprised us and we are eager to have more products launched in our D2C that is only online going forward.

Got it. And I also saw that you have launched kitchen appliances, for example, gas stoves, et cetera, right? How complementary is your channel? And how do you overcome it because you are predominantly an electrical appliance firm and the -- something related to kitchen appliances may not overlap with that [indiscernible] success has been and that -- this market you've actually launched because I picked up 1 in Kerala.

So kitchen appliances are only, today, sold primarily in South and then on e-commerce platforms. In the South it's doing reasonably well. Yes, we have both a mix of electrical as well as white good retailers, whereas white good retailers are forming part of the kitchen appliances sales system. Electrical retails are not, but we also have an opportunity to sell them on e-commerce, which we are doing. And there are also -- there is good acceptance. And we consider, at least for us, water purification is also part of kitchen appliances for us also in the same basket. So if you look at it this year, we will do close to INR 150 crores worth of kitchen appliances with close to about 5%-odd EBITDA margin. And that's not bad.

This is essentially in the gas stove or you include water purifiers also?

This is all the kitchen appliances put together. Gas stoves maybe INR 35-odd crores in that. And then we have other kitten appliances also. So about INR 150 crores of kitchen appliances, we see it, and that's a pretty good start and a pretty good platform for us to build. Having said that, this is a segment where even if we get a -- if we are on the lookout for an M&A opportunity and if we get something that is fitting our profile, we will pick it up.

Got it . One last question from portfolio of fans, right, there is a movement towards different type of motors of energy conservator, cetera, right? And also how well we are geared for that? And second question is that is there a portfolio of fans family complete with exhaust fans and table fans, et cetera, what is the mix like?

So Ram, you want to take this?

Yes. So I think as far as fans are concerned, we have put range of plans for all segments of the market. I think that's the first part of it. I think the second part of the question was related to the energy efficiency question that you had asked. As far as that is concerned, I think like other companies, we are working to put together a portfolio in place and we are pretty satisfied with the progress that we have made in terms of the new model development to be ready to meet the energy [ certifications ] requirements, yes.

The next question is from the line of Aksh Vora from Praj Financial.

Sir, I just wanted to know from growth perspective, our last 5 years CAGR has been growing at 7%. So what would be our growth perspective from medium to long-term perspective? And like we have introduced manufacturing in fans and water heaters, what could be our gross margin inching up to in the next 3 to 5 years and, say, operating margins level around 10%, we are average on last 5-year basis. So what could our operating margins lead to?

Ram, do you want to take that?

Yes. I think Mithun has already mentioned that our objective is to grow our business at about 15% per annum over the long term. So I think that's the perspective which we are building all our long-term business plans. On the margin side, we would [ increase ] by 0.25% to 0.5% every year. I think it has been a bit challenging this year, this last few years because of COVID and other situations. But we are hopeful that with the investments that we are making towards manufacturing and as also in the product development area where we have put now a very strong product development capability for continuous refresh of our product portfolio, I think these 2 investments should help to support us to work towards the objective of improving 0.25% to 0.5% operating margin every year, right?

Okay. That's helpful, sir. And sir, what would be our mix in outsourcing and in-house manufacturing currently? Across...

In-house manufacturing will be around 55%.

And outsourcing would be 45%, right?

Right, right.

And this would be likely to change in favor of in-house manufacturing or would it be remain same?

No. In-house proportion is increasing. As we said, we are setting up a more manufacturing units. So we will see that percentage going up.

Okay. And lastly, sir, how is our distribution right now, like what are our exact distributorship across pan India level? And what is the target to increase that by?

Ram?

Yes. I think, Mithun, as we've mentioned earlier, we are working to add about 5,000 to 6,000 outlets every year to our distribution network. I think today, we should be in about 15,000 outlets.

Sorry, sir, how much?

It should be about 15,000 outlets now.

15,000 outlets.

Okay. And this would be predominantly in non-South areas or mix of South and non-South?

Yes, the outlet expansion primary in non-South area, but [ that ] will be in certain corners of the South where there will be opportunity for us to expand, particularly as our channel mix is continuously changing.

The next question is from the line of [ Mira Wasa ] from Anand Rathi.

My queries have been answered.

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

Yes. Sir, in terms of our distribution, how is our distributors are in a way paid? Is there any fixed distribution fee or they are based on an ROI-based system?

So usually, we pay on the basis of sales, it's a percentage of sales...

Then in case of such inflationary situation, at least what we are finding that some of the consumer companies are shifting towards a fixed payment? I mean, let's say, if the sales was [ 100 ] and just because of price hike, if the sales become 115, then if you are going to pay same percentage, let's say, 5%. So instead of now [ 100 ] of 5% or so [ 115 ] of 5%. The amount goes up significantly for the dealers. So what -- at least we have [ seen ] at some companies that they are retaining INR 5 the same. So how -- what -- are we keeping it fixed percentage on whatever sale they do? Or we are shifting partially to -- percentage partially to fixed payments.

Okay. I can hear some disturbance. Hello?

[Operator Instructions]

So I think we have also keep in mind that when a distributor is buying our products, stocking it and selling, he is also having a working capital requirement to be invested in the business. So unless we compensated for that, I don't think it will work out because we always have to think win-win. So we are not planning to change from a percentage to a fixed amount, primarily because along with inflation, diesel prices have also gone up. I think along with inflation, we will be forced to increase salaries of staff, along with inflation, the product prices have gone up, which means that this inventory holding value has gone up. It's outstanding in the market, he has to collect that money from the market. So there is a working capital investment in the business that also goes up along with inflation. So due to this reason, I think it's better to stick with the percentage. Maybe in an industry where everyone pays in advance, maybe that's okay. But in our industry, I don't think there is any advance payment done. So wherever working capital has to be invested, I think a fixed amount will not be wise way to go.

Okay. So sir, in case of , is there any, let's say, input prices [indiscernible] reduced prices of some of the products. So then in that case, automatically, commission would also reduce for the dealer?

Yes. It's a 2-way street. If the prices of a product comes down the Northern -- the revenue will also come down for them and they will only get a percentage of that revenue, correct.

Okay. And last question, if I assume, let's say, [indiscernible] is 100 then what would be the trade commission scheme? And what would be the final realization at [indiscernible]?

Ram, you want to take this? Although I'm not sure whether we could hear you. Ram?

[indiscernible] but, typically, in our kind of industry product sells below MRP, right? And so that's something. So the MRP many times is not fully realized that people will be selling between 90% to 100% of MRP, right? As an example. Then there is -- so that we call as MRP, so MRP is the market operating price, which always stays lower than the MRP, right? And then there is a dealer price, which is the price at which the product -- the net price at which the product lands to the dealer, right? So that's -- and there is the list price. There's a price at which we sell. That's our list price. And there are some schemes and discounts, right? So your net off schemes and discounts, you get the net price that we realized. And that is -- and from the list price if net off schemes, so it is also the net landing lending price to the dealer, okay? And the gap between that and the MOP is the margin, right? I think it would be difficult to give you a standard number across different product categories, this may be different from category to category, right? We play in a wide range of categories from wires to consumer durables. But typically, I would say 6% to 8% is the kind of margin that they would make in some of these categories. Maybe it's a very distribution heavy category, it will go higher. And if it is like a category like wire or something like that, it can even go down to 2% and 3%, right? So it depends from category to category. And the extent of involvement of the trade partner in distribution, the length of credit that he is giving in the market. So it's difficult to answer that with a single answer, right?

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Keshav Bharadia for his closing comments.

Thank you, management, for giving us the opportunity to host this call and the valuable insights into the business. And thank you to all the participants for joining in. Sir, any closing remarks before we conclude this call?

Yes. Just thank you, PhillipCapital for hosting this call, and thank you all for listening.

Thank you. Ladies and gentlemen, on behalf of PhillipCapital India Private Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines.