Hello everyone. Welcome to Bajaj Electricals' 1Q FY 2024 earnings call. From the management side today, we have with us Mr. Anuj Poddar, Managing Director and CEO, and Mr. E.C. Prasad, the Chief Financial Officer of the company. Thank you, and over to you, sir.
Thank you, Dhruv. Good evening, everyone. Thank you for joining our investor call today. Let me put my opening comments in. We have had a soft quarter performance. I think this is largely due to a soft and muted discretionary consumption demand environment in the economy, coupled with a weak summer due to unseasonal rains. If I split up our results a little more for you, particularly when we talk of consumer products, appliances as well as Morphy Richards business actually has seen a growth, but partly offset by degrowth in the fans business because of the unseasonal rains in the summer period. As always, we have continued and tried to balance out and optimize between our top line and margins. We have strived to protect our margins despite the various pricing and discounting actions prevalent in the marketplace, while maintaining a slightly flattish revenue trend.
We are closely tracking all of the sector performance and competition in the market. We believe that our performance is well in line with that. We have maintained our market share and strived to maintain our balance, our interest in that context there. At the same time, despite there being a soft environment, we have not shied away from a strategic focus on product launches as well as brand strengthening and evolution of each of our four brands that we now operate. Finally, I want to highlight that our margins are a reflection not of inherent weakness that we have, but of operating deleverage. If I may share, we continue to build for growth. We are upping and have increased our costs in aspects such as our R&D as well as the setup of a new consumer lighting vertical since the last three quarters.
You are also seeing some impact of the demerger costs getting built in at a corporate overall level that will stay for two, three quarters before the growth kicks in. All of these costs are designed to deliver growth. In the short term, in a weak demand environment, these costs do come to bite us, but we are consciously not choosing to descale or roll back any of these because we think these are important for us from a medium to long-term perspective. From an internal perspective, we have done the math on this very clearly. From our internal budget perspective and had we had, let us say about another INR 100 crore of revenue, a lot of that gross margin on that revenue would have flowed straight down to the bottom line, and therefore you would have seen a very different margin profile.
The point I am really highlighting there is that what you are seeing is really a trend of external environment. The internal metrics as we track them are fairly healthy, and we are very visible and conscious of that here. Last one point I will bring out is on our logistics since that is something we have spoken last time, too. That transition continues to happen. We have a roadmap on bringing down the logistics cost. We will see visible results of that in the P&L from Q3 onwards, and you will see improved benefits of the logistics cost optimization. With that, I will hand it back to the moderator. Thank you very much.
Thank you. Ladies and gentlemen, 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 handset while asking the question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Anirudh Agarwal from Valuequest Investment Advisors. Please go ahead.
Yeah, hi. Thanks for the opportunity. A few questions from my side. First was on the lighting business. If you could share the split between professional and consumer lighting and how both of those businesses have done. Consumer, we know that there was some softness expected, but how is the professional side of the business done? Second question related to that on the consumer front was what are some of the lead metrics that you are tracking, right? Obviously the top-line numbers continue to remain muted. But in terms of the GTM deals and the number of dealers, distributors appointed, if you could share some outlook on that or what are some of the other metrics that you track that tell us that in the next couple of quarters things will turn around on consumer lighting as well.
Anirudh, thank you very much. Firstly, on the professional and consumer lighting. Consumer lighting is seeing a soft demand environment, so there is degrowth in consumer lighting. On the professional lighting, we had a high base effect due to EESL orders last year in Q1. If you take out the EESL, professional lighting is a flat trend. Therefore, cumulatively, we are seeing a negative growth or degrowth on lighting, but led to high base and professional on EESL. Otherwise, it is flat and it is negative on consumer. Having said that, when I am saying high base of Q1, we are confident that Q2 will see a growth in the lighting businesses. Coming to your consumer product side, the various metrics that we track, couple of them that I will call out for you.
From a market perspective, our market shares, when we are looking at various categories, we do continue to grow that. We are growing that in the appliances business. Morphy Richards, which had been soft, has come back. In fans also, we are growing our market share, though we have had a degrowth in this quarter in particular. Just one additional point I will make in fans is that actually look at fans with a slightly larger arc because you had the star rating regime kick in on 1st January. So there is a lot of upheaval in that category from January till now. So if you look at a six-month basis for that category, that is a slightly more correct way to look at it, and we are seeing those trends, and those trends are positive.
One last metric in that, because we have been asked in the past and we have been sharing. Our premiumization journey and portfolio mix continues to be healthy across product categories. In fans, I will call out the data. I think last time we had shared that our sub-economy fans, which used to be 80%+ a couple of years ago, in Q4 was about 67% of our total product mix. In Q1 now, that is down to about 58%, which is showing a healthier mix on the economy and premium segment picking up for us there.
Right. On the consumer lighting business, if you could share how we are pacing in terms of the entire GTM revamp now, and are some of the lead indicators at least turning green, or are we still a couple of quarters away from I think a couple of quarters away.
I will split that into three things: our products, our distribution, and then the revenue. Our product portfolio is almost fully in place. We have made huge progress in all the and even this quarter, we have shown slides on the products that we rolled out. So there, I think we are on par with the leaders, which is not the case that used to be in the past. On the distribution or go-to-market side, one is internally, our team is fully in place. On the distributor front, we have put that in place, but there is a weakness because of the market weakness.
The distributors that we have put in place have, quite frankly, not fully employed the best efforts in the marketplace, including feet on street, because they need to see a momentum uptick in the demand for them to start investing in that more fully to get ROI on their investments. We believe as the demand cycle kicks in consumer lighting, with the product portfolio ready, our team in place, and the distributors appointed, the last leg, which is of them starting to do the push in the market, we will see an uptick once we have a bit of a tailwind. I think you should see that. You will see some growth for us in Q2, that is more internal based, but you will see overall market growth, I think, from Q3.
Got it. Final question from my side on the margin front. If you have any estimate in terms of the GM hit that we had because of not being able to take the price hike in fans.
No. We do not put out a GM et cetera at a category level. I will share that in overall level, you are seeing GM expansion for about, I think, about sub 1%, but at a contribution level, it is about a 2.4% overall gross margin expansion that we have had in our business in Q1. That goes back to my earlier comment, had some operating deleverage not been there, that could have also been visible in the EBIT margins there.
Okay, great. Understood. Thanks a lot, and all the best.
Thank you.
Thank you. Next question is from the line of Renu Baid from IIFL Securities. Please go ahead.
Yeah. Hi, good evening. Anuj, the first question is on the consumer business. How do we look at the overall margin trajectory improving once demand stabilizes or recovers from third quarter? And in your view, how far are we now from our targeted levels of 10%+ or double-digit EBIT margins?
Renu, thank you very much. I know that's the concern, and that's why I brought out that in my opening comments. The internal metrics are healthy. To my mind, this is purely a question of operating leverage or deleverage. As that kicks in, the demand kicks in, we are very confident that you will see a sharp uptick in margin there. That's my answer to you on both of these aspects that you asked.
Sure. Secondly, in terms of the new BEE-rated fans, compared to the current pricing and the costing, what kind of under-recoveries still continue in this segment? How are we looking at the entire revamp of the positioning that we had done in the last two to three quarters? How is that resulting in terms of growth for us across segments and categories?
On the fans, I think there is yet a between 3%-5% under-recovery. I think a lot of that is led by competitive forces. We have always maintained that we are happy not to be drivers or leaders in price erosion. Unfortunately, some of competition is doing that. I think it would be healthier if we were all able to pass on these cost increases to the consumers. Maybe as the tailwind kicks in, you will see that happen. We will not be laggards as and when the market forces allow that to happen. On the overall, with the brand repositioning, et cetera, while that is not visible in numbers right now, we are doing brand track study. These are category by category. Just yesterday, I have seen another set of brand track studies, and that is showing very clear metrics in the brand track studies for us.
We have visibility on that front.
Any update on Nirlep that you can share in terms of how are we going ahead with respect to the distribution reach and growth in the portfolio?
Yeah. Nirlep, you will see by first half of September, a relaunch on Nirlep. Everything is ready. We have done a trade announcement two weeks ago. In first half of September, you will see a consumer communication on Nirlep with the new positioning and product range also.
And on the distribution side, you think we will have to invest materially or we are reasonably covered on the distribution and GTM for Nirlep?
Distribution has been in place for a while now. That has been waiting for a launch from our end. We timed that so that pre-festive we are ready to launch, so that in the festive period, we get the benefit of upside on Nirlep also.
Sure. And lastly, related to the EPC business portfolio, quickly in terms of what kind of timelines can we look in terms of the listing of the portfolio? And on demerger, how do we look at the balance sheet of the EPC business at the onset of the company getting listed and starting afresh?
Firstly, in terms of timeline of demerger, Renu, I would just say we are at the cusp of that. Like we have shared, all the statutory authority approvals are in place. This last leg of documentation process, transition compliance, including with the clients and contractual transitions in place right now. While I will not announce a public timeline, I think it should happen fairly soon from now. Post the demerger, then obviously listing will follow in course, whatever the statutory timelines on that, between 30 to 60 days. I think it is 30 days. On the balance sheet, I will bring in our CFO, E.C. to talk.
Yeah. Whenever this happens, this will happen with retrospective effect, because our appointed date is of 1st April 2022, as on which date the capital employed for the business was INR 550 crore. What will happen is, the difference between the capital employed as on that date and the date on which we make it effective will go to them as cash. The capital employed will remain as INR 550 crore, which will move to them.
Okay. Got it. Sure. Thanks much, sir. All the best. I will get back if I have more questions. Thank you.
Thank you, Renu.
Thank you. Next question is from the line of Achal Lohade from JM Financial. Please go ahead.
Good evening. Thank you for the opportunity. Just couple of questions. One, you said discounting by competition. Can you help us understand, is it far more pronounced in a particular category or particular geography, or a combination of that?
So one is a combination of everything. It is happening across. In this soft demand environment, everybody is playing that differently. But there is a fair amount of discounting schemes or various forms of not taking price hikes, et cetera, that most competition is doing. And slightly more pronounced in fans because even if it is not discounting, the costs have gone up, so price hike is not coming in, and therefore, on a net basis, that tantamount to greater level of discounting. But that is across the board otherwise.
Anything specific in kitchen appliances as well?
Kitchen also, but I would say, if you ask me, relatively, fans is a greater impact. Kitchen is lesser so, but it is there in kitchen also.
Understood. Secondly, with respect to how the demand environment has been in June, the exit month of the quarter, as well as July. Are you seeing any signs of pickup or things remain, because as we are getting into the festive period now?
If you look at Q1, April, May, June, clearly April and May were particularly extremely weak. June was definitely much better than April and May. There was a growth still in that quarter. Again, in June, what we've seen, and let's say fans in particular also, tertiary demand has really picked up. For coolers also, we saw a pickup in tertiary demand in May and June. So that's a positive sign. Some of that did not translate to primary or secondary demand, because at that point, people are not stocking up. But even if tertiary demand has happened, I would be more happier for that to have happened, because it sets us well for the following seasons and is a positive sign for that to catch up there.
I'll hold off my comments right now on July and for Q2, let that come in, but we are far more positive on Q2 than Q1.
Understood. Sorry, I am harping on the margin front. Let us assume, like you said, in second half, things normalize in terms of demand environment.
Yes.
How do we look at the margin trajectory? How soon can we expect double-digit margins given the various measures you are undertaking, and also at the same time the investments?
Achal, I will never put a timeline, but let me tell you. Q2, second half, like you said, I think as demand picks up, we have done our math. The operating leverage will kick in. It would have happened even in these months had we hit slightly higher numbers. We have got the gap there. Like I said, our cost structures are now built in or baked in for higher growth in the future, and that we are not pulling in. Therefore, it has to come in through greater demand in revenue. Lastly, the one big lever that we see kicking in during Q3 is logistics. I think we are yet hampered with some of the transitionary costs that are there, and that will be mapped out month on month, so you will see that kicking in from October. Given that, you will see margin expansion on Q3.
On double digit, while we will not give a projection, it will not happen this year, but assume some point next year onwards, we should start getting closer to that destination.
Understood. Would you be able to quantify what is the fixed cost here, which we are talking about the operating leverage. What is the extent of fixed cost to remain as cost excluding raw material? How much is remaining raw material fixed?
Yeah. So more than quantify, I will tell you the components of that. Like I said, if you look at overall R&D costs, if you look at the overall costs of our consumer lighting division that we set up, for which we have not got the upside now, and then overall establishment costs including. Yeah. Okay. My CFO is telling me it is INR 450 crore. I quite frankly do not have the math, so I will have to reverse do the math on what you are saying here. And then production, I would say promotional costs, et cetera. We are creating four brands. All of those are coming in at a cost there. So these we do not want to step back on right now. And yeah, last bit is the digital and transformation technology costs.
Those are investments that are going in. We have a digital transformation roadmap that will end by October 2024, CY 2024. Those are also costs that are getting built in right now. Yeah.
Understood. And just one more question, if I may, with respect to the refreshed range across categories. Is it possible to get a number as to how much is that contribution? What SKUs you have launched in last, say, two years? What is the contribution now, and how do we see that trajectory moving going forward, given the step up in terms of R&D and the NPD you are talking about?
Number of SKUs for this quarter, we put in this quarterly deck. We have done that every quarter, so I do not remember the full number for FY 2023. If I remember correct, CPE was about 160 SKUs, and lighting, I do not remember offhand right now. It would be 500 or so in that range, if I recall. The two-year number I will have to see, but I think your prior also similar, slightly higher for CPE if I remember correct. I think it is a two-year number. In terms of contribution, if your question is NPD contribution to total revenues, while we do not publish that, internally, we do track that. Three, four years ago, that used to be in single digits. It is well above 20% right now, NPD contribution.
Understood. Thank you. I will come back in the queue. I have more questions.
Thank you, Achal.
I will come back.
Thank you. Next question is from the line of Praveen Sahay from Prabhudas Lilladher. Please go ahead.
Yeah. Thank you for giving me an opportunity. It is related to the fan and where you had mentioned that, and also in the PPT, it is around 8.5% of a decline in the value terms. Similarly, also, you had mentioned that your premium fan contribution has also increased. Is it fair to assume that the volume decline is in the double digit kind of?
I have not done the math, but yeah, I think it should be in the very early double digits, yeah.
Okay. Also, if you can talk on, because you are one of the largest players in the fan segment, and that too in the economy side of a business. Is there any change in the market share on that front as well?
For us, you mean, obviously?
So as the volume decline is in the double-digit range. Is that a competition is a-
No, that's why, okay, I did mention, I think in the opening comments, one of the other answers. We are growing market share. May not be on Q1 in particular, because everybody has. Since the January star rating regime, there's a lot of, what should I say, disruption in the fans market overall between the primary players, the distribution, and the retail network, et cetera, and how stocking is happening of everybody's portfolios. If you look at six months, we've looked at a six-month trend from Jan to now, we've only gained share. That is true of last year and before that also. What I'm trying to say is post the transition to star rating regime also, we've looked at, and our share has continued to grow.
Okay. The next question is, sir, if you can give the contribution in the consumer product segment for appliances, fans, and motor retail.
We don't break up contribution by these categories. We don't share that.
Okay. That's it, sir. Thank you all.
Thank you, Praveen.
Thank you. Next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah, thanks for the opportunity. So two things. One, can you share the update about Nex brand and what are the products that we have introduced, the categories that we have introduced? How premium is the price point, compared to our existing range of Bajaj? Second thing is Nirlep that we are launching. Post Nirlep, what will be the positioning? Will it be a premium end of the market or low end of the market? Also at some point of time, it used to be a pretty strong brand in Western India, so I'm assuming it might have lost some brand appeal since there were almost no sales. How do we plan to rejuvenate the brand?
Since we will be investing in two categories, Nex and Nirlep, do you see that taking additional ad spend and initial launch expenses and impacting the margins also? Yeah. That's it from my side.
Yeah. Let me answer all your questions. One is Nex is a soft launch right now. It's time to actually grow and be a more pushed launch by next summer, which is largely fans category that we've launched. Not largely, it's entirely focused in the fans category. We've launched about, I think, 8- 10 SKUs in that category. The price range for that starts at about INR 2,500 and goes up to about INR 7,500 at an MOP level. Therefore, if you see versus Bajaj sweet spot mostly was at an INR 1,300 kind of a range. While Bajaj did have, and now does have a broader range, that also goes up into INR 3,500, INR 4,000 kind of a range. So Nex clearly starts at the top end of Bajaj and goes much higher. In terms of Nirlep positioning, tagline is everyday health.
Positioning is going to be around health and nutrition. All our brands, we believe the positioning is never at a price point. So premium economy is not the positioning. That can be a price offering of different products. The positioning of a brand is on a proposition layer. So Bajaj is built for life, Nirlep is on feel the future. Sorry, Nex is on feel the future, and therefore Nirlep is on health and nutrition, tagline of everyday health. The products, in terms of which segments they appeal to, based on the different product categories, whether it's cookware, pressure cookers, et cetera. We'll have a different range of products that we'll cover. But then again, in the case of Nirlep, it will be a wider range of coverage than historically we had. To your question on the brand strength historically, you're correct. It was historically a western region brand.
And has been a brand that has been quiet and out of consumer mind for quite a few years now to come. So therefore, now as we relaunch, I think it will take two, three years for that brand to get fully resurrected. And when we do that, we will not keep it as a western region-centric brand, but it will become a pan-India brand. But that will require investment and consistency over the next two, three years. We will give it that growth. Again, in that brand, it is not just a brand, but product category expansion is something we are doing. We are starting with pressure cookers, and you will see us launch in September at a consumer level. So we will keep expanding that portfolio in Nirlep also. I am sorry, remind me your last question. You had one more question.
Pricing.
Aniruddha, the answer on, I think you had one more sub-question to this.
Yeah, sir. Pricing of the Nirlep range compared to the existing brands.
More around health and nutrition. Pricing will straddle based on all the So pressure cookers will be different, cookware will be different also. It will straddle various price points based on where we see the different portfolio play out there. But it will be broader or wider than it used to be in the past year.
Okay. Sure, sir. Understood. Lastly, initially you indicated that we have gained market share. If you can indicate, as far as in detail possible, the key market share gains in the key categories for us.
Yeah.
Thanks.
Yes, Aniruddha, unfortunately, we do not share or publish that, the only reason being there is no official accurate data available for that. While we do subscribe to all the data, Markets funds, GfK, et cetera, that shows us that. But till it is not accurate data, we do not publish that data.
Okay. Sure, sir.
Yeah. Thank you.
Thank you.
Thank you. Next question is from the line of Rahul Gajare from Haitong Securities India Private Limited. Please go ahead.
Hi, Anuj. Good evening.
Good evening, Rahul.
Yeah. My first question is on the margin. Now the road to double-digit margin will necessarily come through operating leverage. Given your A&P is higher than peers, obviously, when the revenue picks up, that operating leverage will kick in. But you are spending on four brands, and some of those brands are at a very nascent stage, like Nex and Nirlep. How do you intend to really see the benefit of operating leverage? You did talk about R&D spend, but what are the other levers you have in your hand to see the double-digit margin journey that we have been waiting for?
Rahul, a little bit of repeat of what I've already said. One is operating leverage. Clearly, we are spending on brand and R&D, but also if you look at logistics, to my mind, is one yet remains where over two years I should have yet to have about 2%-3% optimization. Some of that will start kicking in from Q3, like I mentioned there. Also lighting, if you see and look at us consolidated now as an FMEG company. Lighting already seen a healthy uptick in margin that will continue to grow also based on product portfolio mix starting to become better. So let me put it in three buckets: operating leverage, product portfolio mix becoming better, and attacking some of these inefficiencies such as logistics there.
Okay. Now, my second question is on Nex. Do you see Nex as only a fans brand, or do you see that as a premium brand or extension of Bajaj products? What is really the product position as far as Nex is concerned?
So for now, it remains focused on fans. We will see in the future what we do. We think fans are a large enough category for us to focus on and with two brands.
Okay. Thank you.
Thank you, Rahul.
Thank you. Before we move to the next question, a reminder to the participant, anyone who wishes to ask a question may press star and one. Next question is from the line of Anirudh Agarwal from Valuequest Investment Advisors. Please go ahead.
Yeah, thanks for the opportunity again. Two more questions from my side. First is on the general trade channel. GT obviously has seen significant decline in this quarter. Is there anything to read into the urban versus rural GT performance? I am asking this question because alternate channel has done really well in a quarter where GT has degrown significantly.
Sorry, I didn't fully hear. You spoke of GT degrowth and what is the question on the urban?
Yeah. So is there a difference between how urban GT and rural GT has done?
There is a difference, and I've seen that now. I will say this, but take this with a little bit of a, don't take it very literally. We are seeing a little strengthening of rural, but not being fully reflected because urban is actually starting to be weaker than it was in the past. If you look at most of the commentary last three, four, five quarters, not just from us, from FMCG, et cetera, urban was holding up, rural had been weak. Some of the commentary has been about rural green shoots, et cetera. We are seeing some of that, but we are seeing the bottom half of the urban market exhibit a little sign of weakness on this discretionary consumption there. That said, the reason I'm saying is don't take that very literally because some of this data is too shallow.
It's literally the last two months that we've cut that to actually deep dive into this thing. I'd want to always see a trend a little longer term and little broader before we take that as a genuine trend there.
Got it. That is good to hear. In that context, we had embarked on this SSG journey on the GT channel specifically. Does that still continue to hold, and it is just a function of macro revival according to you? Are there other things that we need to do to really get that SSG engine going on the GT side?
Yes. No, so that SSG holds. We are focusing on WD, which is weighted distribution, more than we have historically done. I think that is also a reflection of our product portfolios becoming more, I do not want to use the word premium, but filling in the product portfolio at the upper end, which we were lacking earlier. Because of that, it is helping us in our WD journey. The gap that we had in our context was we were under-indexed in urban markets, so that is also an area of focus for us. Both the WD focus and urban focus are pretty much corollary to each other. That said, it is not at the cost of rural or other markets, so that we will continue to defend.
I do think we will see over the next two years disproportionate growth for us coming from urban and higher value counters there.
Got it. One more question on the alternate channel front. This quarter, we have seen significant growth on the alternate channel. Are we seeing very significant market share gains, especially on the MT side?
Yes. It's been good traction for last couple of years, if you look at our earlier decks also. And again, that's a reflection of our acceptance in urban markets of the new product range of these MT that historically were not warm to our brands, actually are taking well to our brands. The most recent example of that is, the personal grooming range that we've launched from Morphy Richards online for now, has got very good traction right now. While that's a Q2 launch, it is publicly visible, therefore, I'm talking about that. I think some of that is where we'll continue to see expansion going forward also.
Understood. There is still a large pipeline of MT stores that you would have, which we've not tapped into regional retail, et cetera. Would that be a fair assessment, or would it be more SSG-led going ahead on the MT side?
Slightly both. Firstly, MT, it's not that we've not tapped the stores, but our presence in those stores or billing in those stores was less. I think the billing and presence in those stores is expanding, while we have a decent reach across MT also so far. But like I said, we're not going to go away from the SSG on GT because I think that will remain the core from a scale perspective. Therefore, as demand kicks in back from a broader environment perspective, we do think GT will also grow. The growth cannot come only from alternate channels.
Right. Understood. My final question on the margin. You broke down the margin expansion journey into three components. If we want to expand margins by 4% say, over the next couple of years, what part of that could be driven by GM expansion broadly in your assessment?
Very hard to put a pinpoint to that. But if I was to take a broad brush, I think about 2% more should come from GM.
Got it. And that is premiumization largely, right?
Mix of premiumization. I do think there should be some optimization on the costs and sourcing front also.
Understood. Thanks a lot.
Thank you.
Thank you. Ladies and gentlemen, anyone who wishes to ask a question may press star and one. Next question is from the line of Shrinidhi from HSBC. Please go ahead.
Yeah, hi. Thanks for the opportunity. Just one question from my end. On the appliances business, you seem to have done very well, about 10% growth. Wondering, would it be possible to share some color on how individual subcategories have done within the appliances?
Shrinidhi, unfortunately not. We don't break that up. But as I say, it is broad-based growth across the appliance categories.
Okay, fair enough. Just some color on how kitchen has done.
I will tell you leading categories are kitchen, coolers, and water heaters.
Yeah. A lot of peers have reported weak numbers in kitchen. Can we just put some order in which how they have grown, at least?
No, I cannot break that up further. We have had growth in kitchen also, and that is the positive news I want to share here.
Fair enough. Just on the gross margin.
If I may add, benefit also call-out in mixer grinders, et cetera, which had been subdued for a few quarters now. We started to see growth in mixer grinders category also.
Right. I just want to understand on the margin lever. I know on the gross margin improvement levers, the premiumization is one important lever. Just on the pricing itself, I want to understand, is there a scope to reduce the discount at which the like-for-like products are sold under Bajaj brand versus their market leader? Like even a certain kitchen product.
I will put it differently. I think a lot of the discounting that you are seeing now is desperate reaction to a weak demand situation. Therefore, I think getting that tailwind in demand up is very important because it is not just operating leverage in terms of a P&L. A lot of this desperate on led discounting will go away from the market there as that kicks in. So, which is why I believe that these are not normal, but these will have far more significant impact for all of us in a positive sense.
Right. Thank you for answering my question and all the best.
Thank you, Shrinidhi.
Thank you. Ladies and gentlemen, to ask a question, you may press star and one. Next question is from the line of Achal Lohade from JM Financial. Please go ahead.
Yeah, thank you for the follow-up opportunity. Is it possible to get some idea, say, from FY 2023 data, in terms of the sales mix, how much would be e-com, modern retail, and GT? What we gather is that there is slight rethink about the TOC or RREP. Any color in terms of how the mix is going to change?
Achal, if I got your question right, firstly you are asking FY 2023 overall channel-wise mix, right?
Channel mix, yes.
FY 2023 on a full year basis, trade, which is GT, was about 65%, and therefore rest being alternate. In that, I can call out e-commerce was about 12%, and then modern trade and government. Right now in the June quarter, trade is down to about 61%, and therefore alternate is up to 38%-39% here. In that again, e-commerce is about 11% here because modern trade and others have grown well there. I am sorry, your second part of the question was?
With respect to the RREP or.
Yes. RREP, no. There is no rethink on RREP, but I think the way we were applying RREP is something we have made a little more evolved or sophisticated, what we are calling RREP 2.0. Earlier, we had applied the principles of TOC as a one-size-fits-all, so across all categories, across all geographies, urban, rural, et cetera, and across your states. I think we made some modifications to that to where it benefits us in the categories or markets we have kept it. I think there are some nuances that were required. For example, lighting business has different nuances. Fans has certain nuances. Kerala market has some nuances. As we try to go deeper down on rural or absolute top WD counters, I think we need to cater to some of their unique requirements.
All we are doing is creating a more sophisticated RREP 2.0 is a full grade internally that we have, and where what fits and there is a little bit of a, what I would call a hybrid or evolved RREP that we are rolling out right now.
I will give you one more example of that. In the RREP, we had collapsed all BUs and all product categories into one CP, and therefore all distributors also, one distributor for all product categories. Quite honestly, that was not doing justice to us or the distributors because they did not have either the bandwidth or the inclination or focus on all categories. So there again, when I say hybrid, we started doing a hybrid depending on each market and each distributor. Where a distributor has inclination and capacity to service all the product categories, we maintain that. Where distributors or markets require different distributors for different product categories, we have differentiated on that there. So that is what I mean by RREP 2.0. We have just re-looked at the model. It is still RREP, but a slightly more sophisticated model around that.
In that case, do you see, A, the conflict, and B, any impact on the sales in the transition, and how long will this transition or changes which will take place?
No. I would not call it as conflict, but I think we will see upsides on that. For example, consumer lighting. Now you have some cases, common distributors for consumer and lighting, in some cases different. Again, when we are talking Nirlep or the new Nex brand, we are going to again have a similar hybrid thing where some places common, some it is not. But the upside is not fully visible for the reasons that I explained earlier. In this market, distributors not necessarily investing in the lighting go to market fully, particularly in the new people getting into this business. They are established, that is fine. When they are newly getting into that, you wait for a little tailwind for that to come. So in Nirlep, once the launch happens, then we will start seeing that. In Nex, by next summer you will start seeing that, et cetera.
I would put it not as conflict, but this model takeoff will start happening as each of these segments or markets or categories start taking off there.
Got it. Just last question. With respect to the in-house, what is the mix as of now? How do you see it evolving over next three to five years, given now we are as good as a pure appliances company, how do you see that mix evolving, given the cash flows and the focus on the business?
Our mix on consumer stays between 15%-20% in-house. On lighting, our mix has gone up. That is about 30%+ that is in-house. More important is the mix within the in-house. What we are making in-house and what we are making outside, that is constantly evolving. Lighting, for example, we pushed out some of the consumer lighting and brought in more of the professional lighting, higher value-add products. Similarly in consumer lighting, focus on the higher value-add products. We have stopped doing so much the lower value products. On the consumer side, for example, and I think I have shared this in the past, while our mix in fans is changing at a product level, so too is our manufacturing mix.
Higher value premium fans, whether it is Nex or Bajaj fans, is something that is more and more in-house, including putting up a very advanced paint workshop, et cetera, in-house. Similarly, on the mixers or water heaters, et cetera, we are upgrading the quality or profile of products that we are making in-house versus some of the more routine products is what we are moving out there. That churn will continue because every time as a NPD comes in, we typically try and balance out NPD production, put a higher traction of the NPD production in-house for various reasons there. Going forward, I do not have a number. I think lighting, that 30%, 35% may go up, I do not know, 40%, 45%, or more than that. Consumer will be much below lighting. It will be sub 30% is my guess, or thereabouts around 30%.
That said, to us, a driver of a lot of this decision-making also, RoCE metrics. We do not want to look at margins in absolute, but overall RoCE , what is healthier from an RoCE perspective.
Understood. This is very helpful. Thank you, and wish you all the best.
Thank you.
Thank you. A reminder to the participant, anyone who wishes to ask a question may press star and one. Next question is from the line of Rahul Agrawal from Incred Capital. Please go ahead.
Yeah. Hi, good evening. Thank you for the opportunity. Sir, first question was on lifecycle of a kitchen business. Nirlep, I am not very sure about when it starts, you already said it, but when it actually takes shape going into the rest of the festival season, how does it look like? Like it will be a three-year journey, two-year journey in terms of getting a top line right and the business profitable or like 18, 24 months of breakeven at EBITDA level and then it turns profitable. So I am a bit under-knowledged on kitchen appliances P&L. So that is one.
The sub-question to that was also that kitchen appliances largely is a very regional local play in India, and we have seen consolidation, we have seen other peers buying out larger kitchen appliances brands. Most business strategy we are talking about is taking them outside of their home market, right? So it is more pan-India network, more wider ranges of kitchen appliances coming up in the similar brand names. So largely, this is going to be unorganized shift to organized from an industry perspective, and then when we do this pan-India, when we increase our distribution channel, how do the margins actually behave? This is again tying up with the life cycle of the kitchen appliance. That is my first question.
Rahul, actually it is a very multifaceted, integrated question. I will try and break up them into different parts. One is Nirlep, to us is a three to five-year journey. It is not an 18- 24 months journey. Not necessarily meaning from a breakeven perspective, but I think from the potential and the target addressable market for that product categories, et cetera, I think there is a lot of expansion and diversification possible in Nirlep without losing focus across all of what I would call NEKA range or non-electrical kitchen appliances. There will be a step ladder to doing that. We cannot do all of it at one go, so we will do it in a staggered manner, but you will keep seeing us drive growth on Nirlep over the next three to five years, and actually well beyond that. That said, we will remain P&L conscious.
While there will be some investments in Nirlep, we do not expect it to be a huge drag on the P&L. There will be moderate investments that we will make. The way we look at it also from one of the larger areas of investments will be brand building. I think like one of the earlier persons asked on the call, it is a brand that has got a good legacy, but not necessarily a good immediate past. Therefore, it is something that we have to revitalize and rebuild. We will do that over the next three to five years, as we invest in that brand because we think the payoffs on that will continue into the future. In terms of your question on consolidation, et cetera, yes, there is some amount of that happening in the industry.
I think you will see a greater trend of that maybe two years from now, by 2025 or so. I do think you will see greater consolidation. I think consolidation will happen in 2 ways. One is maybe, M&A kind of inorganic actions, but also purely players shutting off. Even today, you are seeing a lot of the reported numbers. Look at the bottom lines and the margins. You cannot operate businesses at 0%, 0.5%, 2%, -2%, et cetera. Somewhere, people will have to make a call on capital allocation and what kind of returns and RoCE will you need from these businesses. That, I think, will trigger various forms of consolidation two years from now, okay? In that way, very clear on. The other lever or form of consolidation is unorganized to organized, which was another part of your question.
I think that trend is very clear and secular that you are seeing across product categories. Different categories are at different levels of unorganized and organized. I think the non-electrical kitchen appliances, that is cookware, et cetera, has amongst the highest levels of unorganized market share. I think that, and therefore, that goes in line with my earlier answer on Nirlep. Actually, Nirlep not just three, five years, but I think it is a seven, 10-year runway as this shift from unorganized to organized continues to happen, and we will continue to ride that shift here. To your question on globalization, I think that we have to understand globalization in these categories will not play out like in many other categories. While fans has got a certain level of export market, the moment it comes to kitchen nuances or preferences are very triggered by sociocultural factors.
In fact, not just from a global versus India, but within India. Every region of India has very different cultural cooking, eating, lifestyle habits, and therefore, that is reflected in the kind of appliances and nuances that we have across these. That dramatically changes as you go outside India. I do think there are very different challenges and product profiles that work outside India than work in India for the kitchen. That is not easily replicable or scalable. The other factor I will put in there when people are talking about globalization or exports, a lot of this is today happening when it comes to cookware, et cetera, in the form of OEM business or contract manufacturing. That is something clearly we are not interested in. We don't see it as a strategic focus or priority for us.
We think there are many challenges with contract manufacturing models from an I will not put it out in the financial aspects, you all understand that well. Clearly, we don't think that's the way that we want to go into the future. Any exports or global models that we look at in the near or long term will be based on brand-l ed our own business, not on contract manufacturing. Hopefully, I answered your various parts of the question.
Yeah. Thank you so much for that. Just to conclude this question, basically, should we build in like 3 crore to 5 crore of EBITDA cap losses over the next three to five years? Is that fair enough?
I will not give you a number, Rahul, but you can build in small numbers like you stated there of any negative drag.
Okay, get it. On the mix or in terms of in-house and outsourcing, you obviously in the previous question explained a bit. Could you highlight in terms of incrementally, you said the shares are going to go up for in-house, overall for the company. What would be a CapEx plan and which are the products where you are investing going into next three years?
CapEx plan, I will tell you for the visible 12 months is within the range of INR 150 crore. Any large CapEx in terms of in-house or factory production, we put it off for 2025 discussion or review. Okay, so we will evaluate that at that point. We will share any details at that point. At least for the next 18 months, we do not expect significant CapEx there. This again, comes from two factors. One is we just think we have our hands full on doing many things and growth without resorting to any CapEx, operational product launches, NPD, et cetera, rather focus on that than the manufacturing end right now.
Also in terms of RoCE consciousness, as we build up our balance sheet cash, capital on the balance sheet, that capital allocation decision of high CapEx, changing our performance metrics on this or approach on this, we put it off for 2025 and later. We will review it at that point of time.
Get it. So we should build about INR 150 crore next 18 months. Is that correct?
INR 150 crore annualized.
Annualized. Okay, get it. Lastly, on consumer lighting mainly. We have seen some price declines on LED pricing. I hear that it is global, it is not only India problem, and there is no import dumping happening either on LED into India. Any thoughts on what is the exact trend here? Just a bit more detail on this. Do you expect it to stabilize now? Or if that continues, the channel will still be wary in terms of stocking up more LEDs and hence consumer lighting will continue to see a lower year, fiscal 2024?
My view is, Rahul, these are two separate issues. There is price erosion in LED. That has always been the case for many years. It continues right now. But I would say the magnitude of price erosion is single digits right now, unlike it used to be double digits in the past. I think the scale or magnitude of the sharp timelines on price erosion is definitely reduced. That said, it continues to be a headwind against growth. I think the issue of lower total sales or consumer demand on consumption lighting is more led to demand factors and the economy factors than the price erosion. As that consumption, consumer demand, discussion demand, housing, interiors, et cetera, comes in, I think that will pick up irrespective of price erosion.
You have seen that in, let us say, if you minus the last three quarters or four quarters before that consumer lighting business was growing in India, and I think that will come back. Irrespective of price erosion, I think, I do not know, whatever timeframe it may take of overall consumption demand coming back, you will see that trend also in consumer lighting. Therefore, our task really is to make sure our growth in this business is more than the deflation effect of price erosion. And we have done that in the past. If you minus the last one, we have done it. We will do it again. There is not a problem in that. Sorry, one last point to add to that.
The other counter to this price erosion is that price erosion is usually more accentuated at the lower end of the market in terms of commoditized products, the basic lamps, et cetera. The other solution to that is actually to keep adding more value-added products there, which is what we are doing in consumer lighting. In the past, we did not have that. So if you look at our product range on consumer lighting that we have been showcasing in the last three to four quarters, that value-added products are continuing to grow, and therefore the margins in those products also are healthier. You are seeing uptick in our lighting margins over the last many quarters. Even this quarter, while it is a margin uptick, despite revenue degrowth, you see the margin uptick. As revenue grows and consumer lighting grows, that margin uptick will be much sharper in lighting.
Perfect. And last, a small one on BLDC fans. I see the share going up pretty substantially. Obviously, more of that has happened since January, February. Your experience on after-sales, as in the quality of the product and acceptability in the market. Obviously, the sales have gone up. But from an after-sales perspective, are you receiving any more complaints? Is the traction very high, or is it very low? It is pretty smooth.
So no complaints right now, Rahul, but typically complaints in BLDC because of PCB and other factors, which start coming in two years hence, okay? And that is something we are very conscious of that while there is a positive side to BLDC in terms of energy efficiency, there is a positive to induction technology that is not an outdated technology. It is not a weaker technology. Maybe it is as good or better if you look at a longer five-year perspective on the product, et cetera. But the life of a BLDC fan, induction fan is different. And you will see across, it is not any particular manufacturer brand. You will see some impact on service and claims and PCB failures, between a two to five-year timeframe on BLDC fans. So I think a lot of that will start becoming visible again two years from now across the industry.
Coming back to my view on the market with the new regime. Today, you are seeing the market segment itself between one-star fans and five-star fans, and a perception that five-star is the go-to for energy efficiency. In reality, I think ultimately market will converge towards the three-star fans or four-star fans also, which today are seeing very less traction. When you look at every other product category, whether it is ACs, refrigerators, et cetera, actually three-star and four-star product offerings account for greater share than five star. And I think that will happen in due course as this category also matures then. And mind you, all of that will be induction motors, not BLDC.
Got it. Are we provisioning more for BLDC for facing those kind of expenses two year-ends?
No. We don't need to really provision higher, and I will not share some of our internal, how we've approached that, but we try to address that in different ways at a product level, et cetera.
Okay, no problem. Thank you so much, Anuj. This is really helpful. Thank you so much. All the best.
Thank you.
Thank you. Next question is from the line of Harshit Gulati, an individual investor. Please go ahead.
Hello.
Yes.
Hello, good evening.
Yes, please go ahead.
I just have two quick questions. Can we see any takeovers in the near future or say something like inorganic growth?
Harshit, even if I was doing a takeover tomorrow, I wouldn't announce it in a call like this.
No.
No, joke apart. I'm sorry. I was just saying that in lighter way. I understand your question.
Sorry. Yeah, my question might sound a-
You know M&A-
Are we-
So you go ahead with your complete
Yeah.
I will answer it.
Yeah. Are we interested or something like for any M&A or inorganic growth or takeover of any brand or something like that?
Harshit, my answer to that is, this is something that we have to be opportunistic about. It is not baked into a specific plan.
But you are open for it.
We are open to it. That's a change from two years ago, we were not open to it for various reasons, including balance sheet reasons. I think going forward, we are open to it. But it has to tick many boxes for us. We're not desperate or dependent or will not do it for vanity reasons.
Okay.
And just to emphasize that, therefore our growth will happen irrespective of inorganic. That is how we look at it.
Okay. When can we expect this EPC to get de-merged, sir, maximum timeline?
Again, like I said, hopefully soon enough. I mean, very soon. Not very long and not too many months from now.
Thanks, sir. That is
Well before the end of this calendar year. Well before that.
Oh, that's enough, sir. Okay, sir. Thank you. Thanks a lot, sir.
Thank you very much. Ladies and gentlemen, we will take this as the last question for the day. I now hand the conference over to the management for the closing comments.
Thank you very much. I'll just reiterate what I said at the start. We know it's been a soft quarter, but it is a soft quarter as a reflection of the market environment, not anything else. Quite honestly, if we compare that with our own level through primary data or if you look at all the results and compare us with ECD and FMEG results, I think you are seeing that as a common trend and theme across this segment. Internally, we are very clear that that is not stopping us from doing all the right actions. We will continue to drive the right actions. As you see markets improve or tailwinds come in, you will see margin expansion kick in, which is a right pick up the primary concern you all have, but we are as confident as we've always been on that front. That's all.
Thank you very much.