Ladies and gentlemen, good day and welcome to the V-Guard Industries Q3 FY25 earnings conference call, hosted by Investec Capital Services Limited. As a reminder, all participants' lines will be in 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. Aditya Bhartia from Investec Capital Services Limited. Thank you, and over to you, sir.
Thank you, Tessy. Good afternoon, everyone. A warm welcome on behalf of Investec India to the Q3 FY25 earnings call of V-Guard. We have with us the senior management team, represented by Mr. Mithun Chittilappilly, Managing Director, Mr. Ramachandran V, Director and Chief Operating Officer, and Mr. Sudarshan Kasturi, Chief Financial Officer. Now I hand over the call to the management for initial comments, after which we'll open the floor for Q&A. Thank you, and over to you, sir.
Yeah. Thank you, Aditya and Investec team, for hosting today's call. A warm welcome to everyone joining us today to discuss our company's operating and financial performance for the third quarter of FY25. I trust all of you had the opportunity to review the investor presentation that we had shared earlier. In Q3 FY25, we reported consolidated net revenues of INR 1,269 crore, reflecting a YOY growth of 8.9%. Overall consumer demand remained moderate during the quarter. Our electronics segment continued its strong performance with a revenue growth of almost 28% YOY, building on a robust first half. This segment maintained the momentum well into Q3. In the electrical segment, we registered a growth of 1.2%. Demand for wires, which is the largest category under the electrical segment, was impacted due to commodity price fluctuations. The consumer durable segment grew by 8.1% YOY during the quarter.
Demand for kitchen appliances continued to be muted, while water heaters also were impacted by late onset of winter. Sunflame reported a top-line growth of 4% YOY Q3. The general trade business registered a healthy growth, while the orders from CSD continued to be lower. In Q3 FY25, the non-South market demonstrated a strong performance with 15.8% YOY revenue growth, contributing now 48.4% of total revenue, while the South market grew by 3.7% YOY. Gross margin improvement is sustaining on the back of a higher share of in-house manufacturing, cost-saving initiatives, and a gradual shift to premium portfolio. We have reported a gross margin of 36.2% in this quarter, compared to 33.7% in Q3 last year, an increase of almost 250 basis points. EBITDA, excluding other income, was INR 104 crore in Q3, an increase of 2.5% on a YOY basis.
Higher A&P spend, particularly in Sunflame, led to an EBITDA margin of 8.2%, which is 50 basis points below 8.7% in the previous year. Employee costs rose significantly YOY due to significant reversals in the previous year's third quarter. Working capital remains steady, ensuring strong cash flow generation. The repayment of long-term debt relating to Sunflame acquisition is progressing as planned. We are on track to fully repay the loans by the financial year. Our board has approved an INR 100 crore investment into our VCPL, V-Guard Consumer Products Limited facility at Hyderabad, which will produce both TPW and ceiling fans. It will be funded in phases through internal accruals. Overall, our performance for the nine months is in line with our annual plan. We look forward to the upcoming summer season with the expectation to deliver a robust performance.
With that, I conclude my opening remarks, and I would like to thank Aditya and the team at Investec for hosting this call, and would like to request the moderator to open the floor for Q&A. Thank you.
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 while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Natasha Jain from PhillipCapital. Please go ahead.
Thank you for the opportunity and good afternoon, sir, and congratulations on a good set of numbers. So my first question is on your southern region growth. Now, the growth has considerably moderated compared to the past quarter run rates. So any reason, any particular reason why such a low growth here in the southern region?
Actually, the South market has a larger contribution from the wire segment. So a lot of our categories, especially the well-established and older categories, we have a very decent share of revenues coming from non-South. But in the case of wires, due to the way the market is structured, the price competitiveness, our inability to offer differential pricing, etc., our revenue, a lot of it still comes from South. So the decline in wire has impacted South market more adversely than North, non-South.
Understood. Sir, our channel checks also suggest that, I think, barring Andhra Pradesh, central government has curtailed certain spending, which has led to a slowdown in a lot of southern markets. So is that also a phenomenon that you are also observing on the ground?
Ram, you want to take this?
Yeah. So fundamentally, what we are observing is the wire performance is more linked to commodity volatility. And typically, whenever there is a slow, I mean, whenever there is a commodity increase or decrease, there is a stocking or downstocking that happens, right? And this is related to that. If you look at our broader portfolio, which is a non-wire portfolio, we've had the challenges mainly in water heaters because the winter has been not as expected, particularly October and November. It was a delayed winter. So the summer category sales have been good, and winter category sales have been weak. Okay? The only area where we have observed underlying consumer demand challenges is in kitchen. Kitchen as a category, now, I think, is the third consecutive year we are seeing some challenges in growth. Yeah?
Also, I think if you look at the three southern states, AP and Telangana seems to have a bit more challenge in terms of demand compared to the other three states. That's what we have witnessed over the last three, four months. Yeah?
Got it, sir. Thank you so much. So my second question, so just in continuation to that, so fourth quarter, you mentioned about wires. That's a high contributor in your southern region. So fourth quarter, are we seeing some kind of upstocking happening in terms of wires as a category?
Yeah, I think there has been an increase in copper prices in January, and there has been a round of price increases that has been announced in the market, and that has restarted the restocking for wires, at least in January. We are only one month finished in the quarter, so it's very difficult to talk what's going to happen in the quarter, but January looks good.
Got it, and so my second question is on your electronics segment, sir. Very good set of numbers. Congratulations once again for that. Can you throw some light as to what was the growth between batteries and stabilizers? And in terms of margins, are we done in terms of getting there where we wanted to, or we can still see some kind of expansion going forward in margins?
So the first part is we don't give out product-wise numbers due to confidentiality. The second part, I'll give a qualitative answer. Yes, we have invested in manufacturing batteries at our new factory near Hyderabad, and it's completely now online. All the equipment has been installed, and they have started to produce in good quality. So definitely, that is also helping us, so the margins in batteries have improved considerably because that was our hypothesis to set up the factory. So in that sense, yes, it is helping us in the electronics, but we have noticed that sales have happened across categories with maybe a slightly higher growth happening in our solar rooftop solution business, which is a very new business. It is small, but it's growing very fast. So apart from that, there has been growth across other electronic categories.
Got it. And sir, in terms of margin expansion, are we there, or we can still expect some more expansion here on?
So I think we have had continuous improvement in gross margin. I'm talking about a company-wide gross margin, and last two years, we have significantly taken up and improved our margins. I think most of our investments are over as far as manufacturing is concerned. There is one more plant that is coming up to manufacture TPW fans and ceiling fans that we are going to start work that's already started, and we hope to commission in the next 18 months. With that, a little more, maybe there could be some more improvement, but I think largely, I think our gross margins, we have increased. There is, of course, as we go forward, definitely, we will work on increasing it, but a lot of the initial reasons for us setting up the plants, they've all kind of a lot of it has come through.
Some is yet to come through because, like I said, as these factories mature, they will start producing more benefits for the company.
Got it. And sir, at least in a qualitative sense, can we say that room air conditioner was one of the stronger drivers for our electronics segment?
Yeah. That was in so Q1 and Q2, RACs were a very strong driver for the stabilizer business. But our other businesses like inverters and batteries have also done well. Our, like I said, solar rooftop solutions have also done well, so these are the three broad categories within electronics, and all of them have done well.
Inverters and batteries, I just want to understand, is it a more tier two, tier three-led demand? Because metro cities, I have not seen a lot of people picking up batteries. So is the demand completely coming from rural and tier three below?
Yeah. Inverters have a higher skew towards it. It is not only rural. Rural, like if you look at NCR, there are suburbs of NCR where there are power issues. Delhi, there is no problem, but I'm saying suburbs, you have whether it's Ghaziabad and all that, there are power issues there. So I think I wouldn't call it rural, but yes, it is more rural-skewed than other categories. That product and pumps, these are the two products that have more rural skew.
Got it. And sir, one last question, if I may. In terms of kitchen appliances, you did mention that we're seeing a continuous slowdown. So just want to understand at an industry level, so what is happening? Are we just over-penetrated because of COVID? Can we expect some growth in the next year? Because this year, the commentary was saying that we would expect growth, but none of the listed players really have registered growth. So what's happening in that category?
Yeah. Ram, you want to take this?
Yeah. Yeah. So I think, see, our hypothesis is that probably in the COVID period, right, people spent a significant amount of time at home. I think that is also the period when the growth in the kitchen was very, very strong. And possibly post-COVID, right, and as the country came out of it, I think that we are seeing a moderation in demand, right? The other thing is, see, particularly small kitchen appliances and all that, these are the highest penetrated items among all what I would say are durable purchases, right? It may be a reflection of some amount of stress in the lower-income segment, right? Probably as they came out of COVID, some of the household balance sheets may have been damaged, and probably their priority is to restore that to good shape.
And probably the pace at which in the past, either they would replace, so the replacement cycles have become longer, and probably also impulse addition of, let's say, newer appliances, right? Newer categories of appliances, which they are not in, have slowed down. I think these two can probably be the only major explanation. In fact, I think last 10 months, 12 months, even large kitchen appliances are seeing slowdown, right? So I think probably these are the two reasons that I could attribute to why we are seeing this phenomenon. Otherwise, fundamentally, other consumption categories are growing. And what we have witnessed is it's only when the weather is not favorable. In our case, at least, we are having a challenge in water heater because October and November were still warm. Okay? So I think that's what I would feel. And probably I think it should get better.
It's stayed down long. Yeah?
Do you think that competition from the unlisted space has increased in the kitchen appliance side?
No, not really. Not in the kitchen appliances space because the kitchen appliances space is already hyper-competitive, right? So no, I don't think so. Definitely, I don't think so, right? Because it is a fairly secular slowdown, right? So it's hitting everybody. Yeah.
Understood, sir. Sir, I have more questions. I apologize.
Stronger brands, no. It's not like stronger brands and weaker brands. That phenomenon is not there, right? And it's also not; it's broad, right? It's on small, it's on large. So I'm not so sure. I don't think so. Yeah.
Got it. Got it, sir. Thank you so much.
Thank you. The next question is from the line of Rahul Agarwal from Ikigai Asset Management. Please go ahead.
Hi. Good evening. Thanks for the opportunity. I was looking for some qualitative comments on specific products. Wires, I think you already spoke about. Could you talk a bit more on switchgear, switches, and fans, please? How are they in the quarter and what are the trends?
Switches and switchgear, in that particular category, it has been a decent growth. I think switches, there is some amount of slowdown, some amount of what do you call it? Sluggishness. But switchgear, we have done well because I think now we got as being seen as one of the go-to options. We have started to become large in many of the states. We have spent almost 10 years. I don't know. I mean, we have spent enough time for the trade and consumers to start recognizing us as a brand to be picked up. Fans, we have done well. We also had some launches and ceiling fans in the last three, four quarters, which has been well accepted. And that's probably so it has been decent. I think overall, these three have been decent.
So if you remove in the electrical side, if you remove wires, the growth has been decent. Switches, there has been some little bit of sluggishness, but switchgear has done well. But in the case of fans, fan also has done decently well for us, but we are, of course, smaller in terms of size when you compare with the market leaders.
The new factory for fans, should I assume that the Roorkee facility is fully utilized?
Yeah. I think by the time we start manufacturing ceiling fans in Hyderabad, we expect the Roorkee facility to be fully reaching its maximum in terms of capacity. Yes. So Roorkee is making two types of products. One is the liquid-painted and one is the powder-coated. In liquid-painted, we are having a capacity constraint. That is why we are building a second plant. Powder-coating, we have spare capacity. So that seems to be clear.
Mr. Rahul, does that answer your question?
Yeah. Yeah. Just one more question on Sunflame. I just wanted to know any specific defined goals in terms of top line EBITDA over the next two, three years. Obviously, the current numbers are much below par. Any thoughts, please?
So we won't be able to give out any figures in terms of what we are planning to do with Sunflame because it's kind of forward-looking. We still believe the brand, the strength, it's very much intact, and whatever we are facing is a result of industry-wide issue and a channel-wide issue. Because in Sunflame also, we have still managed to grow well in the GT business, especially during the Diwali quarter. Because the Canteen Stores Department part is really having issues because of prior period over-ordering, a significant number of new brands and new SKUs getting approved, and then there has been overstocking of some things, and they are trying to correct their inventories. So we don't think that there is anything fundamentally wrong with Sunflame. It's just an industry-wide issue. Ram, you want to take the other part on?
Yeah. Yeah. I think more or less in line with what you said. I think we are growing well in the other three channels, which is GT, e-commerce, and other stuff. There is a bit of sluggishness coming out of the CSD CPC, but we believe it's temporary and it should move forward going forward. Yeah. Yeah. I mean, we have a clear plan in terms of how to build and grow Sunflame. And I think it will be well-helped also if the category starts to grow, right? So I think that's particularly it is difficult to introduce a category to new markets, yeah, or a brand to new markets in a period of slowdown or degrowth, right? So there is that bit of a challenge. The headwinds are strong, right?
So that's a bit of a challenge, but I think it's a transient phase, and I do hope as things recover, I think we should be able to do better with Sunflame.
Yeah. Got it, Ram. Thank you so much. All the best.
Thank you. 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 Achal Lohade from Nuvama Institutional Equities. Please go ahead.
Yeah. Good afternoon, everyone. Thank you for the opportunity. Sir, first question is, if you could give a sense in terms of insourcing across key categories, that would be my first question, sir.
We don't give out the category-wise split, but I think as a company, we are at about 65%.
65%.
As a company, 65% of V-Guard sales are sales coming from products manufactured in our own plants, and we believe in the next three years or four years, it should hit 75%, 70%-75%.
Okay. But is it fair to say that so wires is 100%? So stabilizer, I presume we are moving closer to full insourcing. Is that understanding right?
Oh, no. I don't think so. I think wire is the only one which we manufacture 100%. The balance all has a mix of outsourcing, including stabilizers, even today.
Okay. Understood. The second question I had.
Just let me elaborate. These categories are highly seasonal. So there is obviously merit in also having some amount of production coming from outsourcing because otherwise we are able to vary the production and plants to some degree, but we can't shut down the plants fully in off-season. So there are those kinds of reasons why we will continue to have a mix of both.
Fair point. Fair point. The second question I had with respect to Sunflame. So obviously, in terms of margins, we are seeing for the last three, four quarters, the margins have been low. Can you help us understand in terms of how do you see this margin playing out if one were to assume normalized growth playing out? And first of all, what will be that normalized growth?
So Sunflame, there are a few reasons why this has happened. One is that see, once V-Guard has taken over the brand, we were aware of this when we did our DD that a large part of the NPD work, a large part of the design, product development, etc., was done by the promoter himself. So obviously, we needed to staff it with more professionals than what Sunflame had. Of course, we also staffed it with the view that the Sunflame team will also contribute for V-Guard. In certain categories, Sunflame will be the lead category, even for V-Guard, in terms of whether it's a chimney or whether it's a gas stove, etc. So some of the staffing has been done to ensure that we are looking at the very long term. We are not very worried about what's going to happen in the next one or two years.
We believe that kitchen will continue to grow. The second is Sunflame had a very thinly staffed sales team because Sunflame was working only with super stockists for every state. So they had very few people on the ground, and we wanted to slowly introduce Sunflame to the V-Guard model where we are staffing it with more people, and we directly approach retailers. We also work with modern trade where Sunflame was very weak. So some of these staff costs have started to come in and hit, and we are not really seeing the some of it is showing results also, but I think the decline in CSD is kind of negating a lot of those growth. So Ram, you want to add anything?
Yeah. Yeah. I think there are other expenses, right? Like consulting expenses because we are doing a lot of projects, right, to align the systems and also to develop the going forward strategy and for the integration. So some of these costs are also sitting there. There is also, of course, I mean, overall, the way Sunflame was managed before and the way it's being managed now, right? There is some of that cost also, which is sitting. So some of this is transient. I mean, it's not permanent and will go away. Some costs will go away with integration in the future. Okay? And yes, some costs will remain. Yeah? There have also been some delays in price increases. Yeah?
We've also had to clear out what I would say some of the older platforms, which were slower to move and replace them with newer platforms, right, so that sales growth can start. So some of those kinds of expenses are also one-off kinds of expenses. So it's a mixed bag. Yeah? And things will definitely get better, much better compared to what you may have seen in the last one or two quarters.
In terms of the growth, first of all, CSD, would this have grown in high single digit or double digit or?
Yeah. Yeah. It would have grown. It would have grown. Yeah.
Okay. So is it fair to say that we can hit back to double digit starting from next year?
See, I think it's very hard to predict, right? See, none of us anticipated that a slowdown will hit. Yeah? In fact, the slowdown in kitchen started probably in the quarter of our acquisition. Yeah? So none of us anticipated that. I think it's a forward-looking statement to be able to say what we will do. Yes, of course, our endeavor is to grow the business in single digits to high teens. Yeah? That's our endeavor. But I think realizing that endeavor will also require external support, right, a more favorable, what I would say, demand environment, which will certainly make our job easier to achieve this kind of growth. Yeah? We have to grow this business because we have made investment in the business, but I think it is hard to say how it will take shape because it's also a function of external environment.
Understood. Okay. And just last one question, if I may, with respect to solar rooftop. Is it fair to say that over next, let's say, three to five years, could this be a 500-crore category, 700-crore category? Is that a roadmap one could imagine, or it could be much higher than this?
See, we are very cagey about giving out any numbers about our products because it is something that we don't want to give out. But I can say that we entered this business 36 months back in a serious way. We got one of our existing team members to head up this division and build a team around him. And the results have been phenomenal. I think there is a huge demand for a brand which is giving not only a product but impeccable service. I think where we found a huge gap in the market is that many people are selling this product, but very few of them are actually providing good after-sales support. So with V-Guard's impeccable reputation for this particular quality, we think that South India has definitely accepted this, and we are moving very fast. I don't want to give out any numbers.
So once it hits a certain size, we will tell you how big it is.
Understood. Thank you. I'll fall back in the queue for follow-ups. Thank you.
Thank you. The next question is from the line of Natasha Jain from PhillipCapital. Please go ahead.
Yeah. Thank you for the follow-up, sir. Sir, I missed your commentary on the TPW and ceiling fans. If you can just elaborate in a little detail as to what's the timeline in terms of when this plant is going to come alive and what's the CapEx that you've incurred for this?
The CapEx is INR 100 crores will be spent over three financial years. It will be like INR 50 crore in year one, that is next financial year, and then in phases in the following two financial years. The initial part of the plant will produce table pedestal wall fans and some part of ceiling fans, and the rest will be to scale up the production. We expect the first phase of the plant to be open in the next 14 months-18 months.
18 months.
18 months. Yeah. We have started work, so there is a time required. The groundbreaking was just happened a few weeks back. So 18 months, we expect commercial productions to start, and the plant will be in Hyderabad, near Hyderabad.
Okay. All right. And sir, in terms of margin improvement, how we have seen your margins improve in electronics because of backward integration. Likewise, do you have any numbers that you can share in terms of where consumer durable margins are expected to then move in the medium to long term because of the backward integrated fans?
Yeah. So I think in electronics, there has been substantial work that was done, and our hypothesis to set up the factories were also to actually substantially get the improvement in margins, especially in inverter battery space. Stabilizer, already we had decent margins. But in the case of fan, the issue is that pre-2020, I mean, till last year, last financial year, we were importing a bulk of our ceiling fans from Vietnam and China. First, it was China, then when China got kind of anti-dumping duty, people moved to Vietnam. But I think we are now very clear on how this will go. So this is roughly 25%-30% of our business, and we want to have supply security. We don't want to keep importing stuff because we do believe the government will bring in BIS, and then they will eventually block out Vietnam as well.
A lot of the fans that we are getting made in India, we have a lot of vendors which are making table pedestal wall fans for us, but we are still not very comfortable this way because these are not exclusive vendors. They supply to everyone in the industry. So we want to have our own plant so that we can come out with better products, innovative products, differentiated products, offering better quality. So that is the reason. So some of this is not done only for margin improvement. It is also done for our own long-term growth of the category.
Got it, sir, and I know this is too early to ask, but any mix you can share in terms of our manufacturing into premium and non-premium products here from this new factory?
I think it's too early to say that. I think what we can tell you is that after we set up our first ceiling fan factory in Roorkee about three, four years back, our share of premium products in fans substantially increased, and we are one of the best product mixes in the industry today. And we hope to replicate that with this factory as well.
Got it. Sir, I'll just leave the queue with the feedback we got for V-Guard fans on the ground. So we've got feedback in terms of the quality and the aesthetic appeal of your premium fans that you've recently rolled out. So yeah, the distributors are quite happy. Thank you so much, sir.
Thank you.
Thank you. The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance Limited. Please go ahead.
Thank you, hi team. So first, on the margin side, so we have been investing in many of the aspects, whether it is manufacturing or branding. And because of that, gross margin has not trickled down to EBITDA margin. So I just want to understand that whatever gains we have seen in terms of higher gross margin or in terms of higher electronics EBIT margin as well, I mean, when do you see, say, electrical and consumer durable margins improving, and what would be the, I mean, drivers? If you can just throw some light on those two segments, margin and thereby overall margins.
So I would like to take a different view. If you look at five years back, the difference between V-Guard and market leaders in terms of EBITDA was 4%-5%. V-Guard's margin was 9%, and market leaders were at about 14-odd percent. Today, the gap has come down to 1%-2%. Not even 2%. I think 1% or something like that. So please also see this in the light of what has happened in the industry post-COVID, how more competitive it has become, how harder it has become for us to take price hikes and all that. So some of these things are also happening because the entire environment has changed. And if you look at many of our peers, you'll see a sharp decline over the last five years in terms of EBITDA.
So on one hand, yes, we are improving margins, but there is also additional costs related to that in terms of setting up the manufacturing, and there is a journey for maturing the plant and all that. In our view, I think of this year, I think when we see actual improvement in gross margin is 1.5% net of all the additional costs in the factory. But even that has not happened to trickle down. That is primarily because of some one-off issues, one-off write-backs we had last year Q3. So just I want you to put in perspective that if you look at last five years, how much we are not seeing as improving margins, but the gap with the market leaders are very narrow today.
I mean, just one follow-up. So then is it fair to believe that the margin should stay here only for you, or expectation for near-term is to remain here only, or?
We have always said we would like to get to 10% odd EBITDA margins when we are working on it. But many things are there. Many headwinds are there. But I think this quarter, especially, it was that there is a lack of operating leverage. The largest category, which is wires, has not grown in this quarter, which has pulled down the overall growth. So some of it is due to operating leverage as well. But I think we do believe that next financial year, we should probably come out of most of these issues unless we have some crazy inflation again happening, which I don't see any high inflation happening from here on.
Okay. So second question is on the demand side. So we are seeing this stocking and destocking and restocking based on the copper prices. But just want to understand how is the end user wire demand? I mean, just anecdotally, based on increased real estate activity, are you seeing a steady demand or improving trends, or the slowdown, I mean, the negative growth also indicates similar growth in the end user market as well? Just color on how the end user demand is.
See, I think V-Guard is primarily a consumer retail company. So our product sales are less than 5% of our wire sales. So really, but of course, real estate demand affects the entire market because when real estate does not do as well, the brands which are active there also come into the retail, and they create some kind of competition. So as far as the end consumer is concerned, if you look at the individual home buyer, individual home guys who build individual houses, not multiple units, they don't seem to time this. They come and buy whenever they want to buy, and they don't really so the end user really does not practice like the retailers do.
But if you're looking at a large developer building like 2 thousand -3 thousand apartments in a year or whatever, and those kind of guys, definitely, they will also see how the commodity is moving. And just like us, they will also time their purchases. So it has also depending on. I mean, it depends also on whether they're able to just to reduce or just to wait for a 2%-3% reduction in wire prices, they may not delay their purchase by 4 months-5 months because the products will also get delayed. So I think that usually, the retailers are the most sensitive with these price changes in copper, and then followed by developers. And then probably the last person to bother about it would be the individual consumer.
So do you mean end user demand continues to be healthy?
End-user demand, see, I think whatever slowdown we are talking about, I mean, this is not a slowdown only for kitchen, right? So there is slowdown in FMCG. There is slowdown. So what is happening is, yes, organized real estate is growing. But if you look at real estate as a whole pie, if you put organized plus if you look at the entire pie, you are not seeing any crazy demand for cement and all that, right? Cement demand is weak. So what does that tell you? If cement and steel demand is weak, that what means is that the entire market, the entire market is not growing. It's just that existing guys, existing small builders who used to submit 20 plus, 30 plus in a project, they have all folded up, and now it is only big builders. So it's really the market that is consolidating.
And probably the earlier guys, they were not doing business in an organized way. So it has never cracked.
Okay. Okay. So thanks a lot. We'll get back in the queue.
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 Archit Shah from B&K Securities. Please go ahead.
Thank you for the opportunity. Am I audible, sir?
Yes.
Yeah. So our first question is regarding margins. So you said 65% of your sales is now from in-house manufacturing. Now, let's say once your TPW in-house comes online and you start utilizing fully, and once you reach 75%, what kind of margins on blended business overall can we expect going forward, let's say in FY 2027 onwards? Assuming that that will be the time when all your 75% will be fully from in-house manufacturing.
I think every time when V-Guard decides to set up or ask this question internally, whether to make or to buy, we do a complete detailed working on the IRR of the project. We do only projects that are IRR and ROCE accretive. That's all I can say. I cannot give you guidance on how much our margins will go up or improve and excel. I think a lot of our journey is already done. Many of our plants are not working 100% capacity. We really hope that in the next two to three years, what we get to see is the operating leverage of plants kicking in, and there could be some benefit.
But, like I said, we are not targeting margins more than today, we are only targeting the margins to our goal is to hit 10% EBITDA margins because we find that most of our market leaders are also not able to go beyond that. So, we have to understand the environment is also competitive. So, our first phase would be to target a 10% margin, and that's where we are at.
Okay. So in short, directionally, at least it will improve from FY 2024 or FY 2025 levels, but 10% is what you are currently targeting.
Yes.
Okay. And so the second question is some bookkeeping questions, sir. Since 4Q FY 2024, we have seen this unallocated corporate expense increase multiple. On a consolidated basis, it was at least around 5 crores in 3Q, then 30 crores, and it has been at this level since in last four quarters. So can you explain what has led to this increase?
Let me read statement.
Sorry?
Yeah, one minute.
Okay. Okay. Sorry.
So there were some one-offs in that. The revaluation gain of V-Guard came in during that quarter. So that's probably why. So last year, our other expenditures were artificially kept lower by a revaluation gain in one of the investments in a subsidiary, about INR 14 crores.
INR 17 crores.
INR 17 crores. So yeah, you'll probably have to add INR 17 crores to the previous year to get the factory comparison.
In these three quarters of FY 2025 also, it has been at around INR 36 crore, INR 33 crore, and INR 34 crore for each quarter. Is this a new normal that these are going to be our unallocated expenses, corporate expenses?
That is the normative level.
Okay. That's it. So thank you, sir. Thank you so much.
Thank you. The next follow-up question is from the line of Keyur Pandya from ICICI Prudential Life Insurance Limited. Please go ahead.
Thanks for the opportunity. Again, sir, two questions, two line items. First is employee cost, and second is A&P. So significant increase in both the line items. So just want to understand strategy or thoughts on how we should see these line items growing from here on. And specifically to employee cost, was it for specific SBU or headquarters or, I mean, where it is being targeted?
Okay. So A&P cost has been that we had done activity in Sunflame for Diwali. I think the previous year, that is last financial year, things continued to be rough for kitchen, but last financial year, we had not done any much activity because we were focusing on the integration part and product refresh and all that. So this year, there was some activity that was done, and not only in Sunflame, there was a 10%-15% increase in V-Guard's own A&P spend, V-Guard brand A&P spend. So this is as far as the A&P is concerned. As far as the employee expenditure is concerned, last year, I think there was almost INR 25-INR 30 crore worth of reversals in Q3. That's primarily two things.
One is that in last financial year for Q1 and Q2, we had provided for variable pay for employee costs for employees, and that was reversed in Q3 because by 30th September or by Q3, we kind of realized that we are not going to hit the parameters to achieve variable pay. Whereas this year, I think, and for the first nine months, we are on track to achieve the AOP and try to pay out the variable pay. So that is one. That's bulk of it, the difference. The other thing is this year is again the first year of new ESOP grants. Last year, it was not there. So that is INR 7 crore. Of this, INR 25 crore is belonging to the.
INR 25 crores. INR 25 crores.
So it's 25 plus 7. So INR 7 crores as ESOP grant expenditures that have come. That is not going to remain INR 7 crores over here. It is only the first year it's going to be elevated, and it tapers down in year two, year three. And the other one is the last year, the variable pay was reversed in Q3. So what we are seeing is employee costs almost as a INR 30-INR 32 crores worth of expenditures sitting in this year, which is more than last year.
It's a one-off year on?
It is a one-off. I think only variable pay will be happening at this. Yeah, it's a one-off next. You may not see this because the previous year quarters will also probably have some of this.
Okay. Okay. Thanks a lot. Thank you.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. A reminder to all the participants that you may press star and one to ask a question. The next follow-up question is from the line of Achal Lohade from Nuvama Institutional Equities. Please go ahead.
So just to clarify on Keyur's question, the ESOP charge INR 7 crores, is it per quarter or for the full year you mentioned?
Yeah. So it's for.
ESOP charge?
INR 7 crores is for the quarter, right? Yeah.
Sorry. INR 7 crores is for the quarter, so INR 21 crores for the three quarters. Is that so?
Right. So the ESOP grant issue only happens. So I mean, our ESOP cycle for bulk of the people who are under ESOP, the cycle happens in Q3 for whatever reason because it's the third round or something like that. So it happened.
The cost for the quarter this year versus last year, difference is INR 7 crores.
Yeah. For ESOP.
It's not that the cost itself is seven.
Okay. The delta itself is INR 7 crores.
Right. In the base quarter, I see somewhere around INR 83 crores of employee cost. That had some reversal you mentioned, right?
Actually, last year, ESOP, there was a reversal.
Correct.
This year, there's an additional cost. So the total delta is INR 7 crores.
Yeah.
Hope I'm clear.
Okay. Understood. That's all. That's all. Thank you so much.
Thank you. The next question is from the line of Aditya from Investec Capital Services. Please go ahead. Mr. Aditya, your line has been unmuted. Please go ahead.
Hi, sir. Please talk about competitive intensity in the sector going up and thereby margins for the entire industry. It's pretty much coming down. How are you seeing this shaping up going forward? Would you anticipate margins to be moving up to 10%-11% out of a range that you used to speak about without considering other income?
Yeah. Ram, you want to take this?
Yeah. I think, see, look, we will continue to endeavor to expand our margins, maybe 0.5% every year, but on the other side, this is also competitive, and that's a point that Mithun was making, which is basically the profitability for the industry overall has been under stress, and the margins, overall margins have come down for our competitors also, mainly because partly growth has been muted and partly commodity inflation. The pricing transmission has been weak. Yeah, so these are two factors which have caused this situation, right? Yeah, we continue. I mean, we have plans, and we continue to grow, and that's the reason why because we have these plans. We have been able to hold out our EBITDA margin, although the general environment has been one way over four, five years. There has been erosion.
So I think we continue to remain optimistic to be able to. We would like to grow 0.25%, 0.5% every year. I think that still remains our objective. Yeah. But as I said, it has to be seen in an external context also. Yeah. There are some efficiencies which will come through from our manufacturing programs and all because there is some operating leverage which is likely as we go forward because many of these plants are still stabilizing. But that might. That's there. But I think that we will also have to improve premiumization, and we will also have to do a better job with pricing transmission, right? And both these are competitive also.
Sure, sir. And sir, earlier, we used to speak about there being a scope of increasing margins in categories like batteries, but now you mentioned that a part of that benefit has already been extracted. Do you see further scope of expansion in certain specific categories, or it is now going to be, I mean, we have categories broadly at normal levels, and it's going to be broad-based expansion?
Okay. Let me answer like this. The benefits in electronics have largely come through, I think, because the battery plant is online, and it's delivering, and the consumer plant for electronic products is also online and delivering. This has come through. What has not achieved the scale and benefit transmission is the kitchen plant in Vapi. Obviously, the plant has yet to be inaugurated. We are inaugurating it next month. The kitchen plant will take some time to stabilize. Of course, the second factory for fans, that is TPW and ceiling fans, is also yet to be commissioned. These are the items where I think there is some operating leverage possibility on this. Maybe electronics margins may not be there, but in kitchen appliances, which is in consumer durables.
Finance, again, I think it's in consumer durables. For these, there is scope for some improvement in margins. So with this, I think, CD, that consumer durable segment margins, we also hope to take it back to the COVID levels.
Great. Great. Great. And one last question. The manufacturing facilities which we had started in the last two or three years, roughly at what utilization would they be operating? And do you see a big scope of operating leverage benefit coming through as utilization keeps improving, or largely this is now in the base?
So like I said, in the electronics segment, which is where the stabilizer and inverter plant and the battery plant, all of them are sitting in electronics, a lot of the benefits have already started to come in, and it's what we have seen in the last 18 months. Some more benefit could be there in the battery because the battery plant is still new, and there could be some optimization, some work could be done. But I think it's largely, I think, come through with some more benefits yet to flow through. Whereas in consumer durables, I think there is still scope for this to happen.
Understood, sir. That's very helpful. Thank you so much.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. A reminder to all the participants that you may press star and one to ask a question. Ladies and gentlemen, you may press star and one to ask a question. As there are no further questions from the participants, I would now like to hand the conference over to Mr. Aditya Bhartia from Investec Capital Services Limited for closing comments.
I would just like to thank the management team of V-Guard for giving us a chance to host this call. It was a very interesting and informative call. Thank you so much, sir, and thank you, everyone, for joining us. Sir, do you have any closing comments?
Yeah. Thank you all for taking out time to join our earnings call. I would like to thank Aditya Bhartia and team at Investec for hosting this call. On behalf of the V-Guard family, I would like to wish all of you a very wonderful year ahead. We look forward to interacting with all of you in the next quarter. Thank you.
On behalf of Investec Capital Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.