Ladies and gentlemen, good day and welcome to Bajaj Electricals' Q3 FY 2024 result conference call hosted by ICICI Securities. As a reminder, all participant lines will be in the listen- only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi. Thank you, and over to you, sir.
Yeah. Thanks, Virend . On behalf of ICICI Securities, we welcome you all to Q3 FY 2024 results conference call of Bajaj Electricals. We have with us senior management represented by Mr. Anuj Poddar, Managing Director and CEO, and Mr. E.C. Prasad, CFO. Now I hand over the call to the management for initial comments on the quarterly performance, and then we will open the floor for question- and- answer session. Thanks, and over to you, sir.
Thank you, and good evening, everyone. This is Anuj Poddar. Thank you for joining our call this afternoon. I will start with a few opening comments, and then we will move on to the question-and-answer bit. As you have seen, it has been a relatively soft quarter, and I think that is in keeping with the overall trends of a soft consumption demand environment that we are seeing in the economy. That said, let me try and just delayer a bit of the data for you. Our Consumer Products business has been a bit softer with a marginal de-growth at about 8% de-growth, while the Lighting business has held relatively flat despite the soft environment. In the Consumer Products business also, it is important that we highlight a few takeaways into the numbers. This is to look at it in a Y on Y basis.
Actually, it is coming off a higher base last year. Last year's base had two contributory factors that made it a high base. One is the BEE transition in the fans category because of which there was a high liquidation of non-star rated fans in Q3. We as a company in particular had an exceptional Q3 last year in fans with a 64% growth, so we had an exceptional high base in fans last year. The other contributory factor to us last year was the redemption of the RBP points that contributed upwards of INR 50 crore in revenue in Q3. So if you take out the impact of these two factors, actually we have had a soft to moderate growth in the Consumer Products business also on the top line Y on Y in Q3.
Coming to the Lighting business, as I shared, it is a flat to a +1% growth between the Consumer Lighting and the Professional Lighting businesses there. Within the Consumer Lighting, again, if I look at it from a channel mix perspective, actually our alternate channels, which is our modern trade and online as well as CSP as well as exports, they have all grown well. The softness that we are witnessing is largely driven by softness in the general trade and those channels are underperforming, and that is where we have seen de-growth. That is where I think the cumulative de-growth that you have seen. Coming to margins, I think our margins have been softer. The impact of that is three elements. One is we have had a one-time impact of a warranty provision correction. We shall talk about that later in the call. So that is a one-time impact.
Besides that, there are two ongoing impacts. One is because of the soft demand environment, there is high level of competitive intensity and discounting that is leading to softness in the net gross margins as well as negative operating leverage because of overall scale effects. The underlying metrics for us, which we continue to track, continue to be strong. We will happily talk about that later in the call. Overall, strategically, we are confident in terms of what we are doing in the brand and products, some of which we showcased in the deck. Again, we will be happy to share more on both of these areas. The final point that I will make is on the cash flow. Despite the P&L, we continue to remain very focused on cash flow. We continue to optimize the working capital in this quarter also.
We generated positive cash from operations of about INR 115 crore. With that, I will hand it back to the moderator. Thank you very much.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets when asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Dhruv Jain from Ambit Capital. Please go ahead. As there is no response, I would like to take the next question. The next question is from the line of Mr. Achal Lohade from JM Financial. Please go ahead.
Yeah, good afternoon, team. Thank you for the opportunity. Sir, can you first, from a nine-month perspective, if you could just broadly talk about the category level growth, how the growth has been, let's say for fans or mixer or air coolers or, you know, in those categories, if you could?
I can give you that appliance, fans and Morphy Richards level. So the nine-month perspective, our appliance has been extremely low single- digit de-growth, so they're, like, almost flat. Our fans has been a slightly higher single- digit de-growth. I think that's largely because of this particular Q3 because of high base effect. Before Q3, fans was also in growth in the first six months. And Morphy Richards is single- digit growth. So it's the first time we're starting to see growth in Morphy Richards since the last few months, yeah.
And would you be able to also talk about 3Q for the similar three segments?
Sure. Yeah. So in third quarter as well, it was a similar trend. Appliance was very slow, low single- digit de-growth. Fans, in this case, is in the high teens de-growth because of the high base effect that I spoke about, and Morphy Richards, mid-single digits growth.
Understood. The softness was across throughout the quarter, or it was more pronounced in the beginning and then you were seeing some improvement since December? Any color on January as well?
It was largely through the quarter, but if I had to take a very strict read on that, then it did pick up in December over the start of the quarter. If anything, that's not a very sharp uptick, but it is an upward movement that we've seen between October through to December. January, a little early to say. February will give us a clear trend. January also continued same line, but we do expect February, March to pick up also because the winter has now kicked in. One other observation we've had in Q3 is that our secondary sales are trending well ahead of primary sales. In fact, we've built a favorable gap wherein when primary picks up, that should be able to close the gap. That should be in our favor.
Understood. The other question I had with respect to the margins. If you could first talk about the warranty thing as to how it is getting accounted for. The second, adjusted for this warranty, how the margins would have looked like on a Y on Y basis. You also pointed out about the high competitive intensity impacting the gross margins as well. If you could, give us a sense as to what extent has that had impact at gross margin level for this quarter?
Sure. First, I'll let our CFO talk on the warranty provisions.
Yeah. So Achal, this warranty insurance we brought in last year, and this was probably the first in the industry, so there was no precedence of how this was accounted for. So we and the auditors have taken a call that the premium that we are paying has to be amortized over the period of the insurance. However, after the initial phases, we had products getting insured at various levels throughout the months. Now, having reached a point where all our products are now insured, we had assessed this accounting once again, and we are of the view that ideally we should be charging off the entire provision instead of amortizing over the period of the insurance. Hence, that is the one-time impact that you see of INR 21 crore because the insurance premium that we are paying, we are now charging off completely to the P&L.
Understood. [inaudible]
On your question on the margins, if you take out the effect of schemes, because we internally we track that separately, our gross margins at the FLM level have gone up by about 1.5%, blended across our product categories. Then some of that has gone back in the form of schemes to trade. But at a product and category level, if you aggregate that, it's up by about 1.5%. I think there's a mix of two aspects. One is the portfolio optimization or premiumization, and second is improvement on COGS.
Understood. Sir, if you could update on the logistics, where are we? I remember earlier we had talked about close to 200- 250 basis point impact of these duplicated costs. So where are we on that journey?
We are actually back to the cost levels that we had in about Q3 last year. We are back to that level. The inflated cost that was there in Q4 FY 2023, which is JFM 2023, and April, May, June 2024. I am sorry. I am mixing between calendar year and financial year. The elevated costs that were there in the first two quarters of this calendar year because of the transition, that is all gone, negated, and rolled back to normal cost of logistics that we had about a year ago.
Understood. In terms of the demand situation, how do you read from a medium to long-term perspective? The recovery has been fairly elusive for a while now. How do we see this for the industry, if you could comment? What are the sort of lead indicators would you look at? Any comment on that, please?
Actually, to be honest, we have been calling this out since four quarters. I think others have called it out later. We are seeing weak consumer sentiment in the economy across the board, starting initially with rural, but that had built up into lower urban, lower middle class segments. I think that is manifesting itself across many consumption sectors, though there are some exceptions. For us, given that historically we have been slightly more skewed towards rural and second, third tier, et cetera, and the lower price segments, obviously the impact on us has been sharper. That said, as our journey towards premiumization is moving and our brand scores improving, our focus on GTM also towards urban India has been increasing and we will continue to drive that.
In the short- term, while rural or the non-premium segments are facing the brunt more, obviously we are facing a slight more brunt, but we are in the process of de-risking on that. We are starting to see some of that in Morphy Richards also from this quarter onwards, and we should continue to see that on Morphy Richards, but also on the other main brands and other categories as we start to premiumize on that front. That said, how long will this continue in the future? I do not know right now. To your question on lead indicators, to me, employment or jobs, or interest rates, these are couple of lead indicators. I do think jobs are in a much better position now than they were till about six, seven months ago.
If that trajectory continues or if it simply holds on that front, and the second lead indicator of interest rates stabilize to start coming down, I think that, to my mind, will be the trigger for consumption to come back on a structural basis. On a tactical basis, the election's coming up anytime soon in the next three to four months. I think that should put some cash in the economy at a consumption level. I think tactically, there'll be a short-term blip because of election. Structurally, I think when interest rates come down and jobs hold, we will see a structural upside there.
Understood. This is very helpful. Just one question, if I could ask. In terms of the mix of premium products, if there is any way to quantify in various categories?
At an overall level, if I look at, let's say, in fans, we don't publish the data. Our overall over the last two years, our premiumization has been about 6 percentage points, showing in our contribution between sub-economy fans to the other economy and premium fans in favor of economy and premium. Similarly, if I look at water heaters, we had about a 2 percentage point contribution shift in favor of premium water heaters. If I look at lighting and we test ceiling lighting, again, we've had almost about a 4 percentage point improvement there in terms of premiumization. So we have three core segments where we were not premium at all.
Understood. I'll fall back in the queue for more follow-ups. Thank you so much.
Thank you, Achal.
Thank you. Before we take the next question, a reminder to all the participants that you may press star and one to ask a question. The next question is from the line of Anuj Sehgal from Manas Capital. Please go ahead.
Yeah. Can you hear me?
Yes, Mr. Anuj.
Yes. I had a question on the distribution side. Bajaj Electricals went through the whole RREP program and went into a distribution model where it was more of a pool-based model. Are you guys still continuing with that? In the current scheme of things where things are generally slow, just wanted to get a sense of how that is faring and the whole idea of improving return on capital, both for the business and also for the distributors, how has that played out, let's say, in the last 12- 18 months?
That's WIP. It's a good question. What we are now in the process of implementation is what we call RREP 2.0, which means there are certain features of the original RREP that we're retaining, but some features that we are revisiting or changing going forward to suit the current business and the future business. Okay? What I mean is, if you look at RREP, there's a whole theory of constraints on not dumping, having certain price discipline, territorial discipline. Those aspects we will continue maintaining. There are aspects where we had moved to a model where we will have a single distributor across the entire product portfolio, entire multi category. That part we're revisiting. We think we need different distributors who can cater to or specialize in or focus on different product categories, particularly as we expand our product range in that sense.
That part is something we're revisiting. Similarly, in the traditional RREP, we had fared well on penetration and reach expansion, particularly into tier two, tier three rural. That benefit we are continuing. But that was also the cost of weighted distribution, large urban counters, large value counters, which we had not been very strong in. We were under-indexed in. That was not purely because of distribution defocus, but also because our brand and products were not premium. As we're premiumizing our brand new products, we are looking at different approaches for urban India and the large value counter. That's an aspect we're opening up. In summary, the core theory of constraints, pricing discipline, not dumping, we are retaining. But other aspects aligned to our business model and new product categories, premiumization, urban focus, those we are revisiting, yes.
Okay. That's very helpful. Just to clarify, the reason you have to do that is because as you premiumize, you have to have a dedicated sales team for specific product segments so that they can more effectively service your large accounts. Is that the main reason?
Yes. I will explain that a little more qualitatively. For example, Consumer Lighting, we did not have a separate business vertical. We now have a separate business vertical, and we require separate distribution for Consumer Lighting, otherwise it does not get focused. The way trade also functions with lighting is different from how it functions with appliances. So in fans, we have wholesale, et cetera. That is a large channel that we are missing out on that whole part of the trade. The old RREP was not conducive to that. So we have actually opened up some of those things there. Third, when we are launching Morphy Richards, Nex or even the NPG categories, et cetera, the beat plan needs to be separate because the actual end retail counters for those product categories are different from the traditional retail counters for our traditional Bajaj products.
To cater to that, we do need separate go-to-market efforts on that. In some cases, the same distributor can do justice to it. In many cases they cannot. So to actually service in this example that we made, Consumer Lighting, fans, Nex, Morphy Richards, NPG, et cetera, we could not have continued with the existing model. So we therefore said we will revisit our distribution model in keeping with our current and future product focus areas.
Got it. Thank you. Very clear. My second question is, on the margin trajectory for the Consumer business, obviously you have laid out a roadmap of getting to double-digit margins, but we are nowhere close to that, even if we exclude the one-offs. So how should we think about the margin trajectory for the business, let us say over the next two years?
Anuj, good question. There are two buckets I will put it in. Buckets or cost aspects that are unique to us and cost aspects that are dictated by external market. On cost aspects that are unique to us, our current investments in R&D, tooling, digital IT, et cetera, what we are doing, those are unique to us and those are overloaded right now. I think those will continue to mature over the next 12-24 months, and then when that happens, those will start falling off faster and the ROIs on that will start kicking in. That is where there should be some margin relief. The second bucket which is really hurting us now more than anticipated was external market factors, which is manifesting itself in two ways that I told you. One is discounting.
I think a lot of this discounting and schemes are tactical and therefore masking the expansion in gross margin that we are otherwise enjoying. I think as soon as market picks up and some of these competitive tactical bottom fishing goes away, I think that will come back. The second is low operating leverage. Right now it is negative operating leverage. Our internal math says we need about our cost structures, et cetera, at INR 330 crore, our operating leverage starts kicking in. Right now operating below that, about INR 300 crore, INR 310 crore where we are seeing a negative leverage. We have two options. Either to start contracting ourselves structurally, which I do not think is in our medium term interest. Therefore we will hold to our current model and structure till we start seeing some traction in the market, which we think we should in the medium term.
Okay. Thank you very much.
Thank you.
Thank you. The next question is from the line of Anirudh Agarwal from Valuequest Investment Advisors. Please go ahead.
Yeah, thanks for the opportunity. First question was on the kitchen appliances segment. Notwithstanding the fact that macro has been slightly muted overall.
Sorry, Anirudh, not very clear. I heard you on kitchen appliances. I did not hear after that.
Hello, is it better now?
Yes.
Yeah. Thanks. First question was basically on the kitchen appliances segment. Kitchen appliances, notwithstanding the fact that macro has been fairly muted, all the initiatives that we have been taking over the last couple of years or so on distribution, on product and so on and so forth, do not seem to be adding up to any sort of growth for us, right? If you can just help de-average that, in terms of how new products would have contributed, distribution expansion would have contributed, and what is the impact of the core industry growth slowdown? That will help.
Anirudh, good question, and I'll just be candid with you on what we're seeing on the data, and then we can conjecture on what's happening. Yes, there's clearly a slowdown in kitchen appliances in particular since the last few quarters. We're seeing that for us. We're also seeing for other competition where kitchen appliances are large part of their portfolio as well. What we have been focusing on at product level, there is a fair amount of innovation, even on a proposition of durability, et cetera. Our primary research on brand scores and recognition of our durability, we are seeing clear upticks on brand scores for us in kitchen appliances, as well as recognition of our products scoring higher on durability. Is that translating to monetization? No. Is that because of a weaker market? Probably.
What we also believe is that conversion of our brand and product innovation into actual brand salience will take some time. I think today we are coming in from a historical perspective where we've not enjoyed high brand salience. We've typically been price warriors, even in kitchen appliances, even if we've been players of scale. But today we're moving into value proposition innovation. That takes two, three, four years, where people start recognizing us for that and start allowing us to convert that into pricing power. In a stronger market, hopefully we should start seeing that traction. In a weaker market, today we don't have the ability to price ourselves out of a weakness of a market.
Right. Understood. Basically, just related to that, if we just highlight some numbers in the distribution expansion part, where would we be in terms of the number of distributors, number of retailers reached, and any other internal metrics that you would be tracking to understand where we are headed with the entire distribution expansion strategy?
Retail count on an annual basis right now is about 210,000. On a quarterly basis because of some counters not being active in every quarter, that falls just under 2 lakh there. At a distributor level, one second, let me just pull out the exact number for you. Pull out the number. Give me a second, I will pull the distributor count. Got that. Distributor count today is about 742, and this is again an expansion, like I told you, because of us starting to move to non-exclusive distributors across different categories.
Right. Understood. This same 742 would have been around 550, 600 couple of years back, if I remember right.
Couple of years back it was that. Towards about one year back, it was what? 654.
Okay. Essentially you're saying that we've got distributors going up, but the reach essentially has not gone up. Is there any sense on the WD?
But retailer reach, to be honest, we are not looking to push that because I think marginal utility of retailer expansion is low. Our focus now is moved to WD from ND, which is to focus on the urban higher value counters where we are present, but extraction needs to be higher. So rather than focus on just expanding from 210,000 to 220,000 , I don't think those incremental 10,000 counters will give us business as opposed to top 20,000 counters, how can we start extracting greater value, particularly with our urban and premium products per share.
Right. The metric to track for you would be the WD, right?
That's right. WD and our own portfolio mix, et cetera, urban, rural mix, all of those metrics.
Okay. Are you seeing any improvements on that front as of yet on the WD end?
We saw some in the initial two quarters. Now last two quarters have been kind of flatlining. I think what we're also seeing is that growth is one aspect, but the cash collections have become weaker in the market. I'm not talking to us because we're largely linked to channel finance . But from retailers to distributors, just the cash flow has become weaker. The liquidity in the system has dried up. The credit periods have elongated. I think these are all typical outcomes of weaker markets. When the market picks up, I think cash needs to move much faster for that to pick up overall.
Right. Understood.
One of the points I made, I think, in answer to the first question, it is the first time that we have seen a gap between primary and secondary sales, where secondary sales in Q3 have outstripped primary sales. That lag has only built up, which means people are de-risking a little bit. That is a good place to be in because when people start then moving away from this de-risk approach, then primary sales should grow faster than secondary sales whenever that happens, yeah.
Right. Understood. Then fans, Anuj , let us say Q3 obviously had a higher view last year, but even on a nine-month basis has been fairly soft. So any outlook on fan sales as we go ahead?
On fans, to be honest, we stay confident. Fans and coolers are two areas where even in this year, nine months, our primary research shows that we had a margin growth in market share of almost 1 percentage point. If you look at an overall basis, I think we are trending well. I think Q4 again, we should see a further pickup, particularly on the premium fans. Q3 typically, people stock up at least from us a little more on sub-economy. Q4 is where we should see some pickup in premium, but overall market share gains are something visible to us in our primary research.
Great. If you could just quantify on the gross margin front, what the impact of these additional schemes, the discounting was, because given the fact that we have been premiumizing at a decent clip plus pricing benefits from lower commodity cost on a Y on Y basis, there should have been some improvement on the gross margin, right? You said 1.5%, but if you can just elaborate a little bit more on that as to why we are seeing a 5 percentage point gross margin impact Y on Y.
Premium impact is as high as almost 3.5- 4 percentage points. So that is hurting us. We started to take signal correction in that. The way we are doing that is from December, we started to take some price increases, though we have again passed some of that back on. But this is to start signaling that ultimately we need to start also some price increases, and scheme will go down. The other thing now we started linking from January onwards, where some of these are flatline schemes. Now some of these schemes are getting more and more links to volume expansion.
To us, now some of the schemes, while not all of it can be linked to volume expansion, we started splitting the schemes or the impact of these schemes between just general givebacks for boosting or supporting trade, to some of it is linked to overall growth. So we will see how the market takes that, but we started from January.
Understood. Final question from me was on the warranty cost. So what sort of recurring warranty cost will we see in the quarter to come?
Next quarter will be the normalized warranty that we provide for based on the failure rates of the product. There won't be an aberration like what we had this quarter. It will be in the range of INR 5 crore-INR 6 crore.
Understood. Basically on the other costs, broadly run rate would be the number X of these INR 21 crore of incremental provision that you've made. That would be the fair run rate to assume going ahead.
I didn't get that question.
No, I was saying on other expenses. If I X out the warranty cost for Q3, the incremental provision that you made. That number is the sustainable run rate on other expenses.
Yeah, that is true. Yes.
Got it.
Besides that, the A&P spend this quarter was a bit low, so that can add up a bit in Q4.
Okay. Understood. By how much? What the spends have been in this quarter and nine months till now, you can share?
This quarter has been about 2.8%, 2.9%.
YTD?
YTD has also been in the same range, yeah.
Understood. And this is slightly lower versus last year?
It is about 1%, 1 percentage point lower than last year. Last year, as if you say this Q3 was about 4.3% because we had a spend towards the Built for Life. But if you say on an annualized basis, about 1 percentage point lower.
Got it. Yeah. Thanks.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to one or two per participant. Should you have a follow-up question, we would request you to rejoin the queue.
The next question is from the line of Dhruv Jain from Ambit Capital. Please go ahead.
Thank you for the opportunity. I have a question on the Lighting business. We have seen this prolonged realization impact. When does this start to reverse? Do you expect say in next year, the industry goes back to double-digit growth? Any future thoughts would be helpful, sir.
Firstly, yes, there has been softness in Consumer Lighting in general, and then the last couple of quarters, a price erosion that has been impacting Consumer Lighting business. That said, in this quarter, our performance Consumer Lighting is flat at about 0%, which means we bucked the impact of the softness to make up for it in alternative ways. We are confident that six, two to four quarters out, we shall start seeing growth in Consumer Lighting. Our product range is fully in place now. Our go-to-market has been slightly slower than anticipated because of the softness in market base. That said, along with the consulting firm that we have just engaged, we have embarked upon a 12-month project for actually expanding a go-to-market .
I think first six months, phase one is more about more preliminary work, but therefore, I think post six months, we should start seeing the benefits of that project, which shall culminate in 12 months. So anywhere from six months to now, to 12 months onwards, we should see an impact or benefit of our go-to-market project that we have initiated, and therefore, in turn, benefits on our revenue monetization there.
Okay. And sir, on the CapEx side, I think you have done about INR 100 crore kind of CapEx in these nine months. Incrementally, what is the kind of run rate that you would be expecting, and is there a shift in mindset of doing more things in-house or any different thoughts there, sir?
Most of these CapEx are pertaining to the dyes and molds that, new products that we have invested in, and not on the expansions of factories, et cetera. This would continue for one more year because we will be launching more products under the Nex and also the Bajaj categories. You can expect about INR 40 crore-INR 50 crore more CapEx coming in this current next financial year.
Okay. I mean, final question from me. We have seen a little bit of prolonged kind of down cycle here, right? Individually, say, the four or five key categories that you operate in, do you think that growth for the next four or five years will be in high single- digit or do you think that there are certain categories which can even surprise us further from here? Reason for asking this question is that in certain categories like fans, we are seeing, say, penetration of close to about 90%. Just your thoughts there, sir.
It is a good question, Dhruv. I wish we could predict that precisely. That said, I think fans on a value basis should continue to grow despite the penetration levels being high because of an upgradation at an average ASP level for fans as a category across form is number one. Number two, I think replacement cycles of fans should continue to come down over the next many years because Indians typically have fans replacement cycle as long as 10 years. That has to continue correctly over a period of time. When and how the inflection point comes, we shall see. I think the bigger opportunity to my mind lies in the appliance space. In the recent past, particularly kitchen has been weak, but I do think in the medium- term, appliances because of lower penetration as well as this movement toward higher ASP should see a double figure.
Every cloud has a silver lining, as I say. I know we have seen an elongated period of a weak market environment, but what that also does really is, prevents a lot of entrants that were coming in. I do think while some of us are all facing the brunt of this, our ability to face the brunt of this is stronger or better than many of these other players. So in a two, three-year perspective, I think some of the players, Bajaj for sure, will be left standing, being beneficiaries of this elongated and high stress period.
Just one small question linked to your answer here. Is it that competitive intensity currently is materially lower versus what it was two years back? Are you seeing that on the ground?
Of the competitive intensity. I think the number of players that are starting to get attracted to this sector two, three years ago was very high. I think from a number of players' perspective, the intensity is slightly reducing. The nature of competitive intensity is more amongst the existing players, that there is a race to the bottom because of tactical measures like discounting, et cetera. That is only a desperation to sell. I think that cannot continue for long. So the players, as they start reducing, when there is a drive towards consolidation, automatically some of this pricing irrationality also goes away. So the market come back, I think what you should be left with is a more consolidated market, fewer stronger players, and with a better pricing strategy and rational behavior. Differentiating between the types of competitive intensity.
Okay. Great. Thank you so much for the elaborate answers and all the best ahead.
I just want to call out, take this opportunity to address what I spoke in the opening comments that to us, we are clearly here as long-term players. We are here to actually maximize our next five, seven years, and therefore we are being very clear on our brand and product. We are seeing, I am saying this with complete conviction, that our brand scores are clearly showing sharp uptick across most of our product categories and this brand architecture, House of Brands approach that we unveiled, we have shared with all of you. We are starting to see where the positioning of the brand, particularly Bajaj as a durable brand, is starting to get recognized. Having said that, these are not short-term changes. These are changes that take time to actually start moving the needle.
As the needle moves over the next two, three years, as we mature in these claims and p erception in the marketplace, and that is why we called out here something like the Good Design Award. As we start getting recognized for better products, better quality products, better aesthetic products, et cetera, that pricing power brand feelings will hold us in very good stead over the next three to five years. What we have not put on the deck is also quality. We measure COPQ, which is our quality metric. That is improving drastically. I think all of these, this is designed to actually help us stand out in the next three to five years. I do not want to name competition, but we have seen in worst scores for some of the competition, I think in the short- term that is helping them. For the long run, I think that will start hurting them as a brand and as products as these brand scores continue to dip for them.
Moderator, you can go to the next person in the call.
Thank you. The next question is from the line of Chaitanya Panchmatia from PL Capital. Please go ahead.
Thanks for the opportunity. I want to ask you then, what is your in-house manufacturing right now? What percentage of total manufacturing is in-house, and what is your target for FY 2025 or going ahead?
Percentage of in-house. One sec I will give you the figures. Percentage of in-house manufacturing right now is about 20%, so 80% outsourced. We don't have a specific target, but I think that should, if we're talking FY 2025, that should remain at a max of 25%.
Okay. Thanks a lot for that.
Thank you. The next question is from the line of Rahul Gajare from Haitong Securities India Private Limited. Please go ahead.
Hi, Anuj. Good evening. You have talked about demand at length. I just want to understand one aspect. We do realize that the demand is not as badly impacted at the premium products. I think when you commented on the growth of mid-single- digit for Morphy Richards, I think that is just supporting that argument, you know, that at the premium end of the product, the demand is not as badly impacted. What is your thought on, and you also indicated that your premium shift has been about 6%. I would think, particularly in your fans, your premium portfolio should be about 25%, 26%. How do you tackle this separately? How do you deal with premium basket, and how do you deal with mass market basket, especially in the light of the Nex brand also that you have launched? That is the first question.
Rahul, I think all valid points, and therefore we are starting to see. Historically, our indexing has always been 95%+ non-premium. As we start making that shift, I think it is a gradual shift, and we are starting to see that in our portfolio, leading with fans, but also with mixer grinders, water heaters, et cetera, portfolio mix is improving between that. While Morphy Richards will lead that at the top end, Morphy Richards is small contributor there. I think that will continue to grow even in this weak market, as we are seeing. But for us, the bigger step up will also come from Bajaj itself premiumizing, which we are starting to see. The fans shift that I spoke to you was led by Bajaj, but also the water heaters, mixer grinders, et cetera, is happening in Bajaj here.
Coming to Nex, I think Nex for us is a three to five-year strategy, because I think going into long-term future, fan will remain a key category for us, and we do think it is a category, given its size and scale, in that merits us having two brands in that category. Nex will just help us accelerate that shift of gaining share in the premium segment. This year, as we have shared in the deck, we have just launched, opened it up to trade. We will see what the response of trade this year, but it is not a singular focus for us, but we will continue going forward with this one.
Okay. I think you all also talked about looking at additional CapEx of what, INR 40 crore- INR 50 crore in molds. This is going to be across Morphy Richards, Nex, and Bajaj? Or are you going to be focusing more Morphy Richards for a particular type of business and Nex only on fans? Can you just clarify that?
This CapEx is across the company, across brands. That said, Morphy Richards has very less tooling and molds, so that tends to be bought out products more. So we look at the nature of products, and we showcase some of that in the deck this quarter, last quarter. These are not high volume products, so these are typically not exclusive products to us, but it is more duration as a brand that we bring. These are typically third-party products. A lot of the innovation, exclusive products to us, still lie under Bajaj, but also in the Nex. So all this CapEx tooling, et cetera, that will happen in Bajaj and Nex, and that is where you will see higher volumes. So we are optimizing that across these different brands and categories.
Anuj, my last question is on the balance sheet. The company has no debt, decent cash flow. I think even in this particular quarter, you would have done about INR 100 crore of free cash. So your interest cost is about INR 20 crore. Can you just help break this into vendor financing and other, if there are any major elements in that other, so we know how to model this going ahead. Thank you.
Yeah. So out of the INR 20 crore, about INR 11 crore is on the channel financing. We use about INR 800 crore of channel financing limits, and this INR 11 crore pertains to that. Apart from that, because of the lease accounting that we do for all our warehouses, the new office that we have taken, et cetera. So for the lease accounting, the finance liability is about INR 5 crore. Apart from that, there are some interest on account of the taxes, GST, et cetera, which is under appeal. So those were there. So these are the- These are the breakup of the interests.
I did not get the lease.
Rahul, o ne point to add on this, you are seeing interest cost under the finance cost line, but we also have any interest gain or treasury income that comes in other incomes here. Going forward, as cash balance on the balance sheet keeps building out, our finance cost as a line will stay, it will not make out there. But on a cumulative basis, it will start becoming a net surplus for us.
Okay. I did not get the lease number. You talked about INR 11 crore being channel financing. What was the lease number?
Lease is about INR 5 crore.
Okay, fine. Fair enough. Thank you very much.
Thank you. The next question is from the line of Praveen Sahay from Prabhudas Lilladher. Please go ahead.
Yeah, thank you for taking my question. The first is related to the warranty. That is the reassess of warranty. Can you give some more color on that? I like that number because PPT is saying INR 21 crore and press release saying INR 23 crore. Also, if you can give some more color on this, like what exactly is the change and this cost has actually arisen.
Yeah, sure. So INR 23 crore is at a company level, INR 21 crore is for Consumer business and INR 2 crore for the Lighting business. So that's the breakup. As I mentioned, this product was new to the industry. I mean, we were the first one to introduce the manufacturing warranty insurance. So the premium accounting, we are not very clear. I mean, even the auditors had a view, we had a view, and based on that, we used to amortize the insurance premium over the period of the warranty. For example, if you are giving a two years warranty, that premium used to be amortized over the 24 months. Now, most of our products are under the insurance, so now the outflow on the premium and the warranty is almost equal today.
At this stage, we had revisited this to see whether this accounting is proper or not. Then we found that there is a huge gap coming in between the premium that we are paying and the actual expenses that we are incurring. To correct that, we said that we'll discontinue the process of amortizing this premium and charge it off upfront. So this INR 21 crore is the difference of that. From next month onwards, it will be a normal impact that will come in.
Okay, thank you for that. Second question is related to the, as you had mentioned earlier in the call, about the scheme linked to the volume expansion has impacted the gross margin. Can you elaborate more on that? Like more discounts you are giving to push the volume. Is that the way to look at why the gross margin impacted?
I'm not sure I fully followed the question, but let me try and address it anyway. So first, I'll just break it up. Our underlying gross margins are improving because our COGS have improved slightly, but also because our portfolio mix has improved towards premium products. So our gross margin is slightly expanding if we go by our ASP, MOP, or DLP, et cetera. That said, we have certain schemes running across categories for our channels, et cetera. So we have a month-end credit or payback to them of certain commissions, incentives. So when you net that out, that is the one that is ticking away. That's the various forms of discounting and schemes. That is adding up to almost 3-4 percentage points. But without that, our actual gross margin expanded by 1.5%.
So that's the overall performance in last couple of quarters, including this quarter three. The linkage to volume that we said, we are tinkering around the schemes to see how we can mitigate the impact of some of this stuff. So there are two measures that we've done for that. One is now we further started signaling price increase because I think prices not increased adequately, not just by us, but by industry also. So we have since the last couple of months started signaling price increase to the market. But while in the initial stages, also passing that back through discounts. But at some point, we pull back those discounts to actually give full effect to the price increase. The second aspect that we spoke, or I mentioned earlier, is some of these schemes that were not linked to volume growth.
We now started linking these schemes to volume growth to try and see if we can get an operating leverage benefit of the scheme also and therefore mitigate some of the discount at an EBIT level. That said, I think these are all tactical measures that we're trying to optimize and balance. To balance between top line market share defense and bottom line. I think how this will really fall away when we start moving against these headwinds and demand comes back, then I think we'll all stop having some of these measures in place.
Okay, great. Thank you. And lastly, on your advertisement, what is the normal as a percentage of sales we can consider?
Right now we're operating at about just under 3%. So for the near- term, you can consider that. I think we're starting more buoyancy. We would like to go up to 4% odd. But right now we do need to balance when we're not seeing great ROI on advertisement with muted demand, then we don't want to burn cash there. Just on your earlier comment, on the price increase that I mentioned, our price increase in fans between December and January has been about 2.5%.
Thank you, sir. Thank you for taking my question. All the best.
Thank you.
Thank you. The next question is from the line of Sarang from Entrust Family Office. Please go ahead.
Hello. Thank you so much for the opportunity. My question is related to Morphy Richards. I just wanted to know a couple of things over here. Like how big is the brand for us, and like you mentioned that the growth rate in MR is in single- digit. My question is, with expected turnaround in sentiments and demand coming back, what can be the expected growth rate going forward? Also on the profitability front, if you can throw some color on how MR is doing. Lastly, how well penetrated is MR, given that we are already a well-established player when it comes to distribution network. So these are my questions related to Morphy Richards. Thank you so much.
Firstly, in MR, we are now starting to see growth rate. We had a de-growth happening, if you go back two quarters. Before that, we had de-growth, not because premium segment was de-growing, but because we did not have a product roadmap in place. This is something I have spoken in the past, that post our signing of the long-term licensing deal is when we started working a long-term product roadmap. Now since the last two quarters, you are starting to see us introduce new products that are unique to Morphy Richards and distinct and separate from Bajaj. This is also a function or a part of the journey of repositioning Morphy Richards as an aspirational lifestyle brand.
Premium is just a price point, but if you look at the nature of products, now we are starting clearly to have very differentiated products in Morphy Richards, whether it be coffee maker, garment steamers, air fryers, digital toasters, and so on and so forth, [inaudible] , et cetera. We are distinct from a portfolio as a company that we have under any other brand. Now we are starting to see the growth in Morphy Richards. I think going forward, the growth rate or percentage will only pick up in Morphy Richards, both as the market evolves, but also as our products start coming out, more and more of these products, we do expect that to happen. Showcase some of these products. In terms of penetration from an India perspective, Morphy Richards operates in a segment, if you cut that, into low single- digit penetration.
But as that part of India grows, I think that penetration level and growth rate should stay healthy. If that answers your question.
Thank you so much. Thank you.
I'm sorry. The question on penetration was more geographic in nature. I think Morphy will remain, or at least in the near future, our focus on Morphy will remain towards the top 50 cities of India. While it's open through certain channels, particularly online, to anybody, anywhere in India, from a go-to-market perspective, I think top 50 cities is what makes sense for us.
Okay. Any color on the channel mix if you can provide for Morphy Richards?
I think Morphy is a flip of the rest of Bajaj. Morphy is about 60%+ on alternate channels and between 30%-40% on general trade here. Bajaj is exactly the other way around here.
Understood. Thank you so much.
Thank you.
Thank you. The next question is from the line of Hardik Rawat from IIFL Securities. Please go ahead.
Most of my questions have been answered. Just wanted to understand what has been the volume growth this time around in the Lighting segment because considering that there has been a price erosion, still you managed to stay flat Y on Y. So just wanted to understand on that front.
Yes. The volume growth also, if you look at our product mix, has been relatively flat. Why we, despite price erosion, our revenue is also flat because our ASPs are gone up because of portfolio premiumization. So it is not volume growth that is compensated, but it is portfolio premiumization that has compensated for the price erosion.
Is it fair to assume that volume growth has also been flat Y on Y? Both volume and value.
Yes.
All right. Thank you so much.
Thank you. The next question is from the line of Chirag Lodaya from Valuequest Investment Advisors. Please go ahead.
Yeah. Thank you for the opportunity. Sir, I had one question, please. You mentioned in the beginning that we are moving towards non-exclusive distributors, et cetera. So where are we in that journey? And if you can share initial signs, what kind of results you would have seen in some categories, et cetera.
Yes, Chirag, as I said earlier in the call also, we have added about 100 distributors in the last one year. Went from 640 or 650 to about 740 right now. That's part of some of these are because of the move towards non-exclusives, et cetera. That said, I think the growth or expansion, A, in terms of appointment of these distributors has been slower than we expected. I will come to the reasons. Secondly, while we appointed distributors, their investments in putting feet on street or DSOs or pushing the market has been lower or slower than we expected. I think both are a result of a weaker market where they are also little risk-averse right now and not either taking those bets or investments as they would in a buoyant market.
Even where they are willing to take those investments, earlier point I made where credit cycles in the market have elongated, their own paybacks from retail has slowed down, therefore, they are also getting pinched right now. So, if the market had been more buoyant, we would have seen a further expansion of our distributor count, but also further feet on street from these distributors. I think that GTM has been slower because of these factors that I mentioned.
How are we implementing it category by category, city by city, state by state? How are we implementing it?
I am not sure what the question means. How are we implementing meaning?
I mean, it's a big rig, right, on the overall GTM side.
Yes.
You are taking category by category, extracting out one category and appointing new distributor. You are picking particular geography and just distributing those categories amongst different distributors. How you are taking?
I think there are two, three factors. Firstly, if you look at all our current distributors in current business, a clear skew between which distributors focus on which category, which is not doing justice to a particular category for maybe various reasons, either the interest or potential or the affinity or ability, et cetera. That's first factor where we see a clear skew, whether the- We see, let's say, an opportunity in fans where the distributor is focused on appliances. Then that merits a discussion on should fans continue with the distributor or move to a separate distributor. That's point or factor one. Factor two is where we ourselves are, let's say in fans or other categories, growing something, let's say Nirlep is a good example or Morphy Richards, where we're growing, we feel the need to now pick up that business.
We map the beat plan of that distributor. If that beat plan of that distributor is skewed to a certain number of counters, which we think for Nirlep requires a different kind of counters, then again, either that distributor has to be willing to actually invest in more DSOs to change or create a new beat plan for Nirlep, or we need a separate distributor for Nirlep. Similarly for Morphy Richards or Nex as we go forward. Therefore, we're also mapping into the future as to what our product category brands are and what is the beat plan required for that. It's a mix of both.
What is it that they currently, our data is showing, they are skewed towards where we feel there is a loss of opportunity or going forward into the future where we feel proactively we need a separate approach, and is the distributor right or able or willing to do that? Third aspect in all of this really is actual scoring and performance of these distributors, which of their fundamental investment appetites, et cetera, may be constrained and may not match our expansion. I think if you put all of these three factors, that is what defines our go-to-market structure. That is the plan or the theory. In execution, when you do some changes like this, you cannot come at it hard at one go across all India because there is an impact of disruption.
Some of those changes are by design calibrated so that both the business of trade and the business of us is not disrupted in a negative manner, but it is done in a more smooth manner. This is something we have been doing. For example, if you look at Lighting, we started this journey almost 18 months ago when we carved out Lighting. Unlike the earlier implementation of TOC RREP , where it was a very harsh implementation that had a stop-start mode, this is something we have been doing since the last 18 months in a more calibrated manner. The other example of that is fans, where you have seen us have growth in fans business also by introducing wholesale and other segments that we were not operating earlier. We have done that in a manner without really disrupting business on an overnight basis. The execution is far more calibrated.
The strategic structural approach is more one time where we are clear what we want to do.
Fair point. But in your opinion, how much time it might take for two years?
18, 20, 25 years break, 18, 20-
This will continue over the next 18 months we feel. This is not designed to cater to now, but this is designed to cater to our next five-year what we are to do. In the next 18 months, we will keep rejiggering on our go-to-market and distribution so that if you look at three to five years out, this distribution structure is catered to that. Again, there are different modules in that. Like I only called out one module which is on Consumer Lighting, we are engaging a consumer, sorry, consulting firm, where we are actually approaching that in a certain project level basis. We are doing that. Similarly for Nex and Nirlep, we are right now actually doing that in almost a clean slate, greenfield basis. But for existing Bajaj and Morphy, where we are actually doing that in a far more calibrated manner.
Right. Anything material you would like to call out on Nirlep because a lot of NPD you have mentioned in the presentation on cookware, cooker, cooktop. Anything meaningful happening there? Can we expect material from-
Launch has been slower than anticipated. We expected Q3 launch will happen. It did not happen due to various operational reasons. Q4 we have launched, but this is not a pan-India launch right now. We are testing it in Maharashtra and East, which is West Bengal and parts of Odisha right now. We will see how that goes before we expand that in the coming fiscal year.
Got it. Just one, what would be our net working capital days today?
Net working capital days is close to 22, 23 days.
Versus same time last year in March 2023?
We need to calculate that, we will come back later with that figure.
No problem. Lastly, sir, hypothetically, if we start growing double- digit from next year, is it possible to achieve this 19% margin guidance in next one or two years or you would like to recalibrate given the situation?
If we grow double digits in two years, it is possible, yes.
Okay. Thank you, Anuj.
Thank you.
Thank you. That was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you very much and once again for joining us. I think we have addressed all our questions. All I will say in the end is that we stay firm on our conviction on a strategic roadmap, which clearly to us, internally our brand scores and product scores are two things. It is telling us that we are on the right path. We are not taking shortcuts. We are not compromising on product quality. We are not compromising on brand. While we are taking certain tactical calls on sales, but I would rather take tactical calls on sales and discounting while holding firm on a proposition that we are offering to consumers. I think that will hold us in good stead over the medium term. We are seeing competition take certain irrational calls, not just on pricing, but actually on product quality, et cetera. I think there are different ways to achieve margin.
We are not tempted to follow that course. We will stay the course on what we are doing. With that said, we are confident about also the anecdotal feedback that we are getting on our products, et cetera. And I think if that continues on a consistent basis, then I do believe that our monetization and all of this will also improve, our pricing power will improve. That remains our core thesis as we go forward. Thank you once again, and good evening.
Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.