Ladies and gentlemen, good day and welcome to Havells India Limited Q2 FY23 earnings conference call hosted by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.
Yeah. Thanks, Aman. On behalf of ICICI Securities, we welcome you all to Q2 FY23 results conference call of Havells India. We have with us entire senior management of Havells, represented by Mr. Anil Rai Gupta, Chairman and Managing Director, Mr. Rajesh Kumar Gupta, Full-time Director Finance and Group CFO, Mr. Ameet Kumar Gupta, Full-time Director, and Mr. Rajiv Goel, Executive Director. Now, I hand over the call to the management for their initial comments, and then we will open the floor for question and answer. Thanks, and over to you, sir.
Thank you, Aniruddha. Good morning to all of you, wishing you all a very happy Diwali. Hope you have reviewed the results by now. The second quarter saw decent revenue growth considering the inflationary environment. It's encouraging that majority of the sales growth was led by volume. Margins in quarter two were impacted by full absorption of high-cost inventory against falling raw materials and stale sales prices. The impact was more pronounced in cables and Lloyd. While high-cost cable inventory is now exhausted, Lloyd absorption will continue through Q3. We believe that margins have hit the trough and are expected to improve hereon. Real estate and infra presents a good opportunity. Overall demand outlook remains positive. Aniruddha, we can now proceed to Q&A.
Thank you very much. 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 touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets for asking a question. Ladies and gentlemen, we will wait for a moment while the queue assembles. Our first question is on the line of Aditya Bhargava from Investec. Please go ahead.
Hi, good morning, sir. Wish you a very happy Diwali. My first question is on the inventory level that we are seeing at the end of Q2. With the historical levels, it appears to be still fairly high. If commodity costs were to continue declining a little, does it mean that the benefit of raw material costs would not be entirely visible in Q3 even?
Well, overall inventory levels are higher because of the buildup of the festival season. Primarily most of the businesses, the production has happened in the second quarter, so these are not old inventories. Except in case of ACs in Lloyd, which, you know, could not be sold completely because of the low season in the second quarter. This will be absorbed in the third quarter, and eventually this will all be fresh inventory going into the third and fourth quarter.
Understood, sir. Secondly, sir, how should we really be looking at Lloyd's profitability from here on? When you say that high-cost inventory would get liquidated by fourth quarter and normalized margins should start coming back, what are the kinds of margins that you consider to be normal? Do you see it more at the gross margin or contribution margin level or at the EBITDA margin level after all the operating leverage?
I think overall Lloyd is, you know, a lot focused also on the growth of revenues. If you would have seen that we grew more than 50% in the first half, and this momentum will continue to be there. We do see a huge opportunity for revenue growth, market share gains in air conditioners, but also revenue growth because of the addition of new product categories which are gaining strength in the marketplace. It will have its own journey. There's a huge opportunity for revenue growth, and that focus will continue to be there going into the next financial year as well. There will be an upward trend. As I said, you know, the margins in the second quarter were low because of very different reasons.
Going into the third quarter, practically most of the normalized margins will come back. Fourth quarter we should expect, you know, normal levels, which should be in the range of about, you know, low double digits contribution margins. However, you know, there will be continued eye on the fact how the competition continues to behave. Our first focus will be, you know, the market share gains and revenue growth in Lloyd. Also at those levels, we do believe that we will be fairly positive with on the profitability side also with good advertising inputs.
Understood, sir. Thank you so much.
Thank you. Our next question is from the line of Sonali Salgaonkar from Jefferies India. Please go ahead.
Sir, thank you for the opportunity. My first question is again on Lloyd. You did mention that by Q4 you expect low double-digit contribution margins from Lloyd. Sir, could you throw some light on the market share gains that we have had in Lloyd on a year-on-year basis? This Q2 versus the last, because we have seen that consistently over the past three quarters you have had a very good revenue growth, but margins unfortunately are consistently falling.
I think let's maybe not even look at the quarter-on-quarter kind of revenue share, the market share gains, because it's also difficult in this industry to actually get the exact numbers. Overall, we have seen that we have been able to garner market leading growth in the last few quarters, which does give us impression, and we also believe that we are amongst now the top three players in those AC categories. Hopefully we would like to continue that position and continue to grow faster than the market.
Understood. Any price revisions that we have done, any material price revisions which we have done over the past few quarters, especially for Lloyd or any other category?
Lloyd is undergoing also a transition during the third quarter because energy efficiency norms will change from first of January. Both in case of fans and AC, there will be a price hike coming in the third quarter and going into the fourth quarter. But that is actually, you know, higher cost products being sold at higher prices in the market.
Understood. Sir, my second question is, could you throw some light on the festive trends, initial festive trends that you are looking at, especially if you are seeing anything, you know, different in any of the categories?
I think when we started getting into the festival season, we saw some slowdown in the pickup because I think the trade was actually a bit slow to pick up in inventory. In the last couple of weeks, we have seen some good pickup, which is happening, which is also meaning good secondary sales are happening and which means good primary sales are also happening. We've seen a good uptake in the last couple of weeks. It's still early days. Let's see how the third quarter pans out. You know, it's a positive outlook.
Sure. Lastly, CapEx guidance. That's it from my side.
I'm sorry.
CapEx. Your CapEx guidance.
Our water heater plant capacity is now fully online, and we hope that the new air conditioning facility would start some production in the fourth quarter as well. That is on there. We are also setting up a new facility in Sriperumbudur. Overall, I think in this financial year and next year put together should be anywhere between 1,000 crore- 1,200 crore. But some of it, most of it which will come in this financial year and some of it will be carried over in the next year as well.
Sir, how much of the 1,000 crore- 1,200 crore is already done in FY23?
I think 165 crores was shown in the numbers which we have done.
Got it.
It will be 700-800.
Around seven.
Around 700.
700. Got it. Thank you, sir.
Thank you. The next question is from the line of Charanjit Singh from DSP Mutual Fund. Please go ahead.
Yeah. Hello, sir. Thanks for the opportunity. Sir, I just want to check first thing on the ECD segment. There our growth has been, you know, muted, and margins have also taken a, you know, significant hit. If you can highlight, you know, specifically from fans and the appliances, segmental perspective, how has been the, you know, market scenario? And what's the outlook going forward from growth as well as the margin perspective in the ECD segment?
I think, specifically if you look at the ECD segment in fans, we did see some slowdown, primarily because there's some de-stocking happening because, you know, trade also wants to clear out their old BEE norms products. So there will be a little bit of slowdown in fans even in the third quarter. Going forward, in the fourth quarter, we should definitely see, you know, market coming back. Third quarter is generally a high season for water heaters and appliances, which should take care of the growth in ECD in the third quarter as well. Second and third quarter is generally lower for fans.
Sir, from profitability perspective, because, you know, if I look at the EBIT margins, last two quarters have been, you know, severely impacted. This, you know, segment used to see, somewhere around 17% kind of a EBIT margin in couple of quarters we have seen. Here, the recovery in the margin, how long it could take, sir?
You know, because of a complete consumer nature of these products, you know, as the raw material prices went up high, all the prices were not passed on to the market. With the raw material prices now stabilizing, we will continue to see improvement in the contribution margins and the EBIT margins in this category. Now, if you're comparing it with the highest quarters, I think that also was a little bit of a, you know, on the other side, there were, you know, lower costs associated with that as well. We will continue to invest in our deeper penetration in the market as well as advertising.
Okay. Just last question from my side on the ad spending. Like you had earlier also highlighted that some of the costs will start normalizing and ad spending is one number which is normalizing. Throughout the full year perspective, what's the kind of ad spending as a % of sales we should look at and what it could be, you know, on a sustainable basis going forward in FY24?
Yeah. You know, ad spend, we have actually continued to normalize ad spend except for COVID years. We started off last second half and this year with normalized ad spend. We definitely believe that it'll be anywhere between 2.5%-3% of the non-Lloyd sales . That is something to note.
Okay, sir. Thanks for taking my questions. That's all from my side.
Thank you. Our next question is from the line of Siddharth Deora from Nomura. Please go ahead.
Yeah. Thanks for the opportunity. My first question is on the price increase you said will be taking in third quarter in the AC and fans category.
Yes, not very clear.
Okay. Is it better now or still weaker?
Please use the handset, Siddharth.
Sure. One second. I just wanted to check on the price hike side, which you indicated that you will take some in AC and fans in the third quarter. Possible to highlight what will be the quantum for that, and
I could not hear your question, please.
You had stated that you will be taking some price increase in the third quarter in the AC and fans, because of the higher costs. Possible to quantify how much will it be? Will that be sufficient enough to achieve the double-digit margins along with the contribution margins, along with the lower cost of input materials?
We're still evaluating the entire impact of that, and that will be passed on. Actually, it kicks in in the fourth quarter, but the revenues and inventories will start coming in the third quarter. Yes, that will not impact the margins positively or negatively for both the businesses.
The margin, if I look at contribution margins, which have also declined quarter-on-quarter in quarter two, is there any element of price cuts or discounts also because commodity costs have been largely stable, but our contribution margins have dropped? Any other factor here to look at?
No, it's primarily the high-cost inventories which need to be looked at.
Okay. Sir, lastly, on the wire and cable side, I think last quarter we had seen some bit of channel destocking and this quarter we had reported the strong growth. Any impact of the in channel inventory buildup which is there, if you can highlight, and whether this growth is sustainable or we should look at a more normalized number?
This is a more sustainable growth because, you know, there were no any major price fluctuations in the current quarter.
Okay. Got it, sir. Okay. I will come back and get to you, sir.
Thank you. The next question is from the line of Atul Tiwari from Citi. Please go ahead.
Yes, sir. Thank you a lot for the opportunity. Congratulations on continuing market share gains in wires. The question is actually more medium term. Obviously in AC industry there are other players. MNCs are also present, Chinese and Japanese.
Hi, Atul. I can't hear.
Yeah. Your voice is not clear.
Atul, your voice is not clear. Request you to please use the handset as well.
Yeah. Sir, the question is on wires. In the AC industry, obviously the competitive intensity is high, and there are certain large players present. If these players, you know, decide to respond, are you okay to continue to operate at negative margins in wires, say, for an extended period of time, to gain and increase market share?
Atul, your voice is still not clear. I may request you to use the handset for the next question.
Hello. Sir, is it audible now? Hello?
Yeah, better now.
Yeah. The question was on the wires. Because obviously the competitive intensity is quite high in AC industry, and obviously other players also want to maintain or increase their market share. Are you okay to operate at negative margins for, say, next few years in case other players also decide to respond?
No, but, Atul, you have also seen that the second quarter negative margins, we've enumerated the reasons for that. It's not the competitive intensity that you're talking about. I don't understand the tenor of your question.
Sir, basically, obviously second quarter of margins were very low because of one-off events. That I understand. It was like fourth or fifth quarter when the wires has operated at negative EBIT margin. It was not like the first quarter it was happening, hence the question that is the intent to kind of gain market share, you know, despite negative margins over extended period of time.
Yeah. The whole idea is to actually look at the market share gains and for long-term investment in the brand and distribution, you know, investment because of, you know, we needed to change the perception of the brand as well as we change the distribution channels. Yes, it's over a medium period of time, that will be the first focus.
Okay, sir. Great. That gives a lot of clarity. Thank you. Thanks a lot.
Thank you. The next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
Sir, thank you for taking my question. Again, sir, more medium term, I mean, we saw this period of COVID where, you know, demand went down, and then we saw last 12-18 months where there's an element of pent up and a lot of things happening. Now from here, if, you know, you were to look at the next couple of years of demand, any sense you have, given the capacity that you've built in, we've set up factories, what is a realistic sort of demand that I think as a country some of your segments could deliver? Just some ballpark thoughts about how you are thinking about demand.
I think in the last couple of years we've seen post-COVID especially the industrial and project segment things have started actually post-COVID very nicely and which continues to show good growth in the interim even till now because of the high level of focus of the government. Now new CapEx coming up you know because of the slowdown in CapEx in the COVID cycle. Things are happening there on that side. We all know that you know post-COVID suddenly the real estate demand started doing well. One of the only negative factors there could be the high interest rates, but still, even today, the real estate cycle continues to do well.
I think in the medium term, we're quite hopeful because all our products, whether it's, you know, consumer side or industrial side, focus on this. This will be definitely a good run for demand cycle in the coming times. Also, the fact that, you know, electrification has now reached all the villages, so you'll see more and more tier three towns and rural areas, you know, their aspirations to buy higher quality products also increasing in the coming times. I think, you know, going forward in the next two or three years, this should all result in a decent growth outlook.
I have a follow-up to that. I mean, given the fact that rural has not been doing that well and urban, obviously, that pent-up part at some stage will start slowing down. I understand the real estate story. Still, you feel that growth could be decent for us? That's what I'm trying to get to.
That's right. You know, you talked about medium term, but real estate, the rural demand will, you know, have slowed down more because of the inflationary pressures. We do believe once that is taken care of, things should come back to normal for rural as well.
Sure, sir. Thank you.
Thank you. Our next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Good morning. Thanks for the opportunity. Just two questions, sir. Firstly, on the fan side, I understand that the channel is not really comfortable with the changes. I think the understanding is still limited more on the B2C side. The phenomenon should be different between, you know, fans priced between 1800 to, let's say, you know, 2500, and then something above that. Could you elaborate a bit, like, what is the exact concern there? Like, you obviously mentioned that Q3 should, you know, still be volatile and fourth quarter would see a lot of channel restocking with all the new stuff, new ratings. Just if you could elaborate between segments, between fans, like what is exactly the concern there? So what do you mean by the concern?
The cost of the product will rise when you make the products with the new BEE norms, right? That will have to be passed on to the market. The channel would definitely destock because they can't sell the old product after the first of January. They would destock, they would try to clear off their inventory and then start buying the new products. This happens in all the segments of the fans business, not just the lower end of the cost markets. My understanding was the production has to stop from first January, not the sales, right? They can still sell in January for the old inventory. Is that correct? That's right. We can't sell from there on.
You know, channel definitely wants to take a view that they also want to clear their inventory, which is the right thing to do actually. Okay, got it. We should see, like, some pre-buying happening in third quarter, and then fourth quarter should have more of new product sales. Is that correct? Sorry, I think we were crossing each other. Second and third quarter is not a high season for fans anyway. Generally, there are high levels of inventory. You know, you're building up the inventory for the coming season. You also want to not manufacture the entire inventory at high cost for the fourth quarter. You also want to push the material in the market, but the channel is also slow in picking up the material. It's a combination of many things.
We do see some sort of a slowness in pickup for fans in the third quarter as well. Got it, sir. Lastly, on lighting, any specific reason for lighting EBIT margins coming off QOQ by 200 basis points? I thought this segment was relatively doing better in the past six months. First of all, you know, we had an accident in the factory in the lighting business. And thankfully, it was only half of the factory. We have some other factories where the production should have to happen over a period of time. You know, because of two reasons. One, the switching had to happen, and secondly, some amount of outsourcing is also there. We do see some sort of a pressure on the margins in the lighting business.
Hopefully it should be coming back to normal, very soon. I mean, the good thing is that we have not lost sales in lighting because of the accident. Got it, sir. That answers my question. Thank you so much, and I wish you a very happy Diwali with the Havells team. Thanks. Thank you.
Thank you. Our next question is from the line of Srinidhi S from HSBC. Please go ahead.
Yeah, hi. Thank you for the opportunity. Two questions from my end. Sir, Switchgear business revenue growth appears a bit soft, particularly given that you're highlighting that the real estate cycle also seems to be an upcycle. There seems to be good infrastructure investment. Just wondering what is really happening, that the growth is slightly slower than what we can achieve.
I don't think there's nothing much to read there. You know, overall, quarter-on-quarter things can vary a little bit. Overall, you know, if you look at the CAGR, this has probably been a good run for Switchgear in the last few years.
Okay, sir. Sir, second question, sir. You're guiding for a low double-digit contribution margin in Lloyd. Just wondering, does that presume a material fall in commodity prices from the current level or, significant product price hikes by the industry as well as Lloyd?
I think this is quite a moving, you know, thing right now because we are also going through a transition of the BEE norms.
Mm-hmm.
A lot will depend upon how things pan out in the fourth quarter. Yes, it does assume the present raw material prices.
Okay. Thank you for answering some of my questions and all the very best, sir.
Thank you. Our next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Yeah. Hi, thanks for the opportunity. I just wanted to understand your comments on demand, you know, a little better. It seems, you know, B2B demand is where you're more positive on. B2C side, you mentioned, you know, demand is little sluggish but stable. Just want to, you know, understand this better in the terms of are you commenting this more from a fading of pent-up demand or are you seeing incremental impact of inflation affecting consumer spending? Any color on consumer behavior, particularly on the B2C side that you're witnessing, even in terms of product mix? If you could, you know, elaborate a little better on this. If you could also share the volume and price differential, you know, for the quarterly growth rates for the key segments.
Yeah, I think to your first question, I see this more as an inflationary pressure on the demand rather than a you know slowing up of the pent-up demand which happened in the past. As a consumer trend, I would actually say there's not a whole lot of difference which was expected that the consumer will start downtrading or downgrading towards a lower quality and lower spec product. It's actually not happening. Havells is catering to different segments of the market through various brands. We actually don't see a major shift happening in the various brands per se. The mass premium or the premium category continues to do well. What was the third question? Sorry.
Volume growth.
Volume growth, you know, overall we see that, almost 80% is, you know, from the volume growth rather than the value growth. Fourteen percent overall we've done, in this quarter. Almost 12% is coming out of, volume growth.
Sure. You know, in a scenario, if for the next six months, you know, not getting into the medium-term growth potential, but just looking at, you know, next six to 12 months, if you find that, you know, consumer spending is constrained, do you think that industry will be willing to pass on pricing benefits to the consumers to drive market shares or to drive growth? I mean, that in any way constrains the ability to deliver margins, you know, which used to be in the 13%-14% band in the past. Would you be willing to operate at lower operating margins considering, you know, market shares and growth is prioritized here?
Yeah. You know, first of all, we do not know what will happen and how the competition will behave. We definitely do, you know, the way we balance the businesses, we do react to how the competition would behave. Also we have a very long-term strategy on where we want to position the brand. In the past, if you've seen, you know, most of the businesses, you know, other than very fluctuating kind of businesses where we have seen very high intensity in Lloyd or television models, generally our margins have been quite stable. This was only in the last one year where the fluctuation was extremely unprecedented.
I don't feel that, you know, reducing prices or increasing prices really changes your market share a whole lot, so in which you really have to spend a whole lot of investment both on brand distribution and all that. I think we do expect stability in margin, but we have, you know, if there is high intensity in the competition, one has to adjust a little bit. That does not really change the profile a whole lot.
Okay, thank you. The last question is on Lloyd. Just wanted to understand what is the absolute level of brand spend you make on Lloyd today, and what's the split between air conditioners versus, you know, the new segment that you're entering in? Even if the contribution margins move up, you know, to double-digit levels, could there be a disproportionate increase in these spends and hence the EBITDA margin expansion might not happen at a similar pace?
First part, you know, almost 25% of the ad spend go towards Lloyd. We don't really differentiate within Lloyd. Because, you know, we treat it as a brand positioning rather than just product to product at this present moment. There will be, you know, spikes for non-AC products during the season time and AC products. But we don't really distinguish within the Lloyd category. Sorry, I missed your second part of the question.
We're trying to understand, do we expect, you know, a disproportionate increase in these spends as you know, scale up these new categories and, you know, you expand, and hence the operating margin expansion could be a lot more limited versus, you know, what we're seeing at the contribution level?
I think for Lloyd, we are definitely, you know, wanting a bit of a long-term play here, where we want to build a certain category. It's almost like, you know, where Havells was about 10 years back. We do see a huge opportunity where not only the market is very large, but also the growth is high. The discussions then with the consumers are indeed moving towards these products. There will be a continued investment in the next two or three years on the brand side. If to use your word, yes, there will be a disproportionate investment in the brand building.
All right. Thank you so much.
Thank you. Next question is from the line of Chinmay Ganatra from Reliance Nippon Life Insurance. Please go ahead.
Yeah. Thank you for taking my question. My question is basically on fans. As you did clarify that channels are allowed to sell the current rating fans post January 2023 also. Normally historically in AC when these kind of things happen, normally we have seen that the channel kind of stock the older rating because they are also cheaper and basically they are allowed to sell. While that phenomena we don't expect to repeat in fans wherein the fans like the channel kind of de-stocking as opposed to buying the older rating.
Yes, channel will be allowed to sell. You see, while AC has seen these many changes very sort of regularly, for fans it has happened after a long time I think. I think that dealer behavior has still to be seen. I think as a reason we are cautious of how the reaction would be. I mean, that's why we have mentioned both in Q3 and Q1. I think we need to see how the reaction would be from the channel. Largely the channel is inclined towards having the new category of fans. Having said that, look, there could be some stocking at Q3. What we are trying to say, please differentiate between fans and AC. You see, that differentiation will continue to remain.
Sure. I mean, this thing also happened in genset and in genset also, like we see pre-monsoon. Anyways. Secondly my question is on price hike. Post the new rating, what could be the quantum of price hikes which would be required to take? I presume they would be quite different for different rating of fans, right?
That's right. That will be there. I think that is still being, sort of looked at because it will depend upon the, a lot of variables. Maybe in Q3 we can be in better position to discuss that.
Like, are they going to be quite material to kind of maybe have some impact on demand going into Q4 and, I mean, from there on, or the quantums are not quite that high?
Look, quantum, the percentage quantum will depend upon the base price of the fan. Clearly at the lower price kind of, the impact will be higher than the high price fans.
Okay, sure. Thank you.
Thank you.
Thank you. The next question is from the line of Ashish Jain from Macquarie. Please go ahead.
Hi, sir.
Yeah.
Hi, sir. Good morning. Sir, firstly, you spoke about, you know, growth being 80% driven by volumes. Can you give some color on segment-wise, you know, breakup of volume and value growth?
Ashish, largely it's consistent across. Like for example, we can say in Lloyd it will be almost 100% volume growth. You are aware that there has not been much price revisions during this quarter. That's what we have articulated as an encouraging sign. There is volume growth which is coming back. In last three years, volume growth has been lower because there is a lot of price hike. Now, only this quarter, and that's one of the reason why margins could have also not been what it has been. Because you see, the commodity cost continues to be high, but pricing has not been revised because now they are falling off. Mostly the growth you see across is led by volume, not by price.
Okay. Also, can you speak about your market share trend in the fans segment? Because from what we understand, you know, the competitive intensity, you know, there has gone up quite materially. Any color on how our market share is shaping up on the fan side?
I think market share-wise it's, you know, over the last, again, as I said for the other business also, we have to look at it over a longer period of time. We believe that we have gained market share, in fans, and not only necessarily from the big brands, but also, you know, there were a spate of new brands which came up in the last five or seven years. You know, which grew at a certain pace, at a very fast pace to a certain level, and then eventually we've seen them slowing down. You know, I think, you know, again, the big brands with the national brands have tended to do better over the last couple of years, especially post-COVID. We do see some consolidation of market shares happening in the fans business.
Okay. Sir, lastly, you know, just, you know, like a few quarters back, you know, at the peak of COVID and then commodity prices, you know, we were also talking about the smaller players being at a relative disadvantage in terms of their ability to manage cost and supply chain. So are they now completely back, you think, in terms of the business side? Or, so how is that part of the supply chain shaping up in your view?
Yeah, I would say they are, you know, pretty much. We are back to pre-COVID levels, yeah.
We are not seeing that disrupting our market share on an incremental basis?
No, it depends upon business to business. As I said, you know, in fans we are actually seeing the other way around, that we are seeing some consolidation.
Even larger.
For the larger players. You know, overall industry-wise, if you see certain disruption which happened for many players, it's now back to normal.
Sir, if I may just squeeze in one more question. You know, on your switchgear business, what led to the margin contraction on a sequential basis? You know, on a segmental margin basis. Anything related to material cost, or is it just quarterly deviation, volatility that is?
It's related to product mix.
Okay. Okay. Got it, sir. Thank you so much, and best of luck.
Thank you.
Thank you. The next question is from the line of Manoj Gori from Equirus Securities. Please go ahead.
Thanks for the opportunity, sir. I have only one question here. We are talking about taking some price hikes in Lloyd portfolio during Q3. What gives you this confidence that the price hikes would be absorbed, given that during March to May period, where the demand was very strong, and even the RM prices were witnessing inflationary trend, and at that point of time, the price hike
Sorry, just to clue you in on the product, the price increases will happen in the fourth quarter.
Okay.
When the new industry norms are coming? Yeah.
Okay. I just wanted to understand, like in the period where the demand was very strong, the price hikes taken by the industry and by you were very limited. Given that now overall the consumer sentiments are relatively sluggish and demand is weak and the RM prices have also fallen. What gives you confidence that the channel would be ready to take that incremental price hike, and it should be absorbed in the market?
I think that the confidence is because of the, you know, continued change in the brand and the positioning of the brand, you know, we will be able to extract the cost increase, at least from the market and the consumer.
in this case, one can assume that the industry itself, at the industry level also there would be price hikes that one can expect?
You can expect that, but as you have mentioned only that, you know, we really can't be seeing what the industry will be doing. We do believe that whatever cost increase is happening, we'll be able to pass on in the market.
Okay, sir. That was very helpful, sir, and wish you a very happy Diwali. Thank you.
Thank you.
Thank you. The next question is from the line of Rahul Gajare from Haitong Securities. Please go ahead.
Yeah, hi. Good morning, everybody. Sir, I have a couple of questions. First, you know, when I look at the overall EBIT margin for the past maybe two or three years, you know, they have been trending downwards. Now, if I were to exclude Lloyd, even then, you know, the trend has been pretty much similar. So there appears to be more broader weakness in profitability across verticals. So in this scenario, besides the price hike, you know, given the BEE norm change, what are the other factors that you are having or looking for, you know, in order to aid improvement in overall margin? We are not talking about Lloyd right now, you know, the other business. That's the first question.
Okay. I think we don't see it like that because we definitely believe that there are product mix, there are certain products which are growing at a faster pace as compared to, you know, maybe the high, very, very high margin products. Within the businesses also there has been, you know, enough focus on getting into newer channels and newer kind of customers, maybe project customers, maybe rural markets where there are high investments in sales. We are not deeply concerned by the fact that there is any sort of competitive intensity or, you know, positioning change which is happening in markets. But we are trying to cater to a larger set of customers which would require initial investments going forward. I mean, this will continue in the coming years as well.
Okay. My second question is, you know, given that we've seen slowdown in the channel, have you resorted to lower utilization at your factories, you know, to manage the inventory better?
No. In fact, you know, most of the inventory buildup is happening because of the season, and I don't see that. We are not actually envisioning that the next couple of quarters will be a slowdown. Hence we are keeping good inventories for the coming season.
I meant more in the first half. Given that there was slowdown that we've seen, you know, did you resort to lower utilization at your factories?
No, not really, because, you know, the slowdown happened because of the seasonality and we were building up, whether it's fans or ACs, building up for the season, for example, even for water heaters or appliances.
Okay. My last question is again on the CapEx. I am actually a little confused, you know, because you did indicate that you're looking at about 1,000-1,200 crores of CapEx over the next between FY 2023 and 2024, of which you already spent closer to INR 700 crore in the first half. When I look at your balance sheet.
No, sorry. 700 crore for the entire year.
Okay. How much you would have spent on your in the first half? Because I don't see much movement on your balance sheet on the CapEx side.
INR 165 crore in the first half.
Okay. Fair enough. I think that's very helpful. Okay, thank you very much and happy Diwali.
Thank you. Happy Diwali.
Thank you. The next question is from the line of Achal from JM Financial. Please go ahead.
Yeah. Thank you for taking my question, sir. My question pertains to cables and wires. You mentioned that, you know, as a broader comment, 80% is the volume growth, as a percentage of, revenue growth. What I wanted to check, if you look at the revenue growth of 18%, average copper price is down about 10%. You're talking about 25% or in twenties kind of a volume growth. Is that understanding right? Is it possible to give some more color in terms of, if the mix is changing in favor of cables given the, B2B strength you are talking about?
Sorry, I think, you know, there was some break here. I couldn't really follow your entire question. Could you please repeat it?
Sir, my question pertains to cables and wires business. You know, it did indicate the overall volume growth for the company about 10%. Specifically on cables and wires business, given the fall in the copper price on a Y-Y basis, is it fair to say that the volume growth is more than 20% Y-Y? Is that a fair assessment? If yes, you know, also if there is any change in the mix in favor of cables?
You're absolutely right. There was a little bit of dip in the prices, yeah. If you compare it over the second quarter of last year, not a whole lot of difference. Cables & Wires grew by about 18%, so we are actually seeing around volume growth of around 18% in cables and wires.
In terms of the mix, is it in favor of more cables, which has impacted the margins for second quarter?
Yes. Actually, wires in this quarter, because of prices coming down, had a little bit of a slowdown. Just a wee bit increase in the C&W, but not a whole level.
Understood. Just one more question. Sorry, a bit technical. You know, if we see in the June quarter, there was a drop in the copper price, and hence the margins got impacted. You know, that inventory got written down already on thirtieth of June. What explains the further margin contraction on a QOQ basis?
No, no. Inventory does not get written down on thirtieth June. Because
Okay.
If you know the inventory, how the inventory is valued, it is basically cost or sales price, which is lower. The cost continues to be lower, but obviously it has come down from what it was earlier, but you're still holding because you've already manufactured. When you sell, then only you book the differential. That's what explains and that's why we are also clarifying that since that stock is almost finished, you see, in wire, in cables. Now we expect the margins to improve because now the new inventory which we are getting is at a lower cost.
Got it. Basically the margin impact is only when it is actually sold or realized, and not really about inventory write down as of thirtieth of June or September.
No. That's why you have to remember in Q1 commentary also we had mentioned that there will be a ramification in Q2 as well.
Yes. The same again played out in 3Q when the copper prices further dropped.
Yeah. What will happen next? I hope there's some stability in the world so that nobody can argue right now. Technically, if you are asking me, yes, I think that's how it works.
Got it. Sir, one more question I had. You know, is it possible to quantify, I'm not talking about the Lloyd business, but ex of Lloyd, what is the reduction in the cost basket, you know? Is it in teens? Is it early teens, mid-teens?
That we can't comment upon.
Okay, okay. Because you know, the question is coming from the fact that you know, we are seeing in some of the appliances there is already a price cut initiated, or rather in the form of incentive schemes, et cetera, in the appliances. You know, I just thought of checking if you know, that will drive the price reduction even for the categories we are operating in and for us.
I think, let's wait for Q3 for these questions.
Understood. Thank you so much for taking-
Thank you. The next question is from the line of Naveen Trivedi from HDFC Securities. Please go ahead.
Yeah. Good morning, everyone. My first question is, how are you seeing the overall B2B side pick up, considering last two years we have seen this part of the business was under pressure. In the context of improving the CapEx cycle and the overall recovery in the B2B side, any comment on the B2B side recovery and how do we look at the coming quarters?
Yeah, I think generally we are positive about B2B. It's still a small portion about having almost 25%. We're seeing recovery. Cables has been doing okay. You know, professional luminaires is growing. The other businesses like the industrial switchgear is also at a decent growth level. It's showing positive signs.
Are we at a high in B2B sort of a revenue ahead of the pre-COVID level now?
Yes, definitely we are ahead of pre-COVID levels.
Okay. Secondly, you mentioned about washing machine side, you are seeing good traction. Are we in a position to share some volume number or market share number?
No.
Sure. Thank you so much, and all the best.
Thank you. The next question is from the line of Amit from Nirvana. Please go ahead.
Thank you. Anuj, hi. Congratulations, first of all, on, you know, excellent growth set, for first half on a three-year basis across categories. I hope everybody, especially at Vedanta, are safe and healthy. Sir, I just have one question on the capital allocation. Generally speaking, in cable and wire and electrical segments, we seem to have broadly, you know, our presence across the basket. But in the Lloyd portfolio, you know, we will have to gradually expand, you know, our presence as we ramp up our SKUs across whether it's washing machine or, you know, other ranges in the white goods basket.
Is my assessment correct that in the next two-three years that more than 50-60% of the capital allocation will have to be towards Lloyd portfolio? If you can give some color on the capital allocation, sir, across segments.
Well, there is no doubt that if not 50-60%, there will be a higher level of capital allocation towards manufacturing on the Lloyd portfolio. Pretty much, you know, we've completely allocated the air conditioner capacity increase, washing machine plant is already on board. The only thing once the buildup happens for the next category, which is refrigeration, that we can consider, you know, getting into the manufacturing in the next one-two years. So that's something which we can consider. But we have actually, you know, taken the bulk of the heavy lifting has already been done, but it will continue in the coming times as well.
Thank you, sir, and best wishes to the entire team.
Thank you. The next question is from the line of Swati Jhunjhunwala from VT Capital. Please go ahead.
Yes, thank you for taking my question. My first question is, your working capital days are currently at 42 days, and that is mainly because of the inventory. What do you think, like, will be the working capital for the second half of this year?
We expect them to come down. You know, especially March is one of the lowest for NWC or working capital days. Third quarter and fourth quarter, it should start coming down.
Okay. Secondly, what is the rural contribution to the total revenue?
It's only about 5%-6% of the consumer revenue.
Okay. Like, do you plan to ramp it up, the rural side? Or are you more focused on the urban, area?
No, no. As I said, different channels are being focused upon and good investments are being made there. In the rural side, that focus will continue. We are reaching quite a decent level of penetration there, but more and more products will now start going through the channels.
All right. Thank you.
Thank you.
Thank you. The next question is from the line of Ashish Jain from Macquarie. Please go ahead.
Sir, I just had a follow-up. You know, earlier in the call you spoke about a lot more focus on rural and institutional side of the business. Is this, like, necessarily coming at a lower margin for us? Or you think margins are comparable versus our urban or consumer side of the business?
No. Rural is not coming at a lower margin. Rural is, you know, it's not necessarily that these are lower-priced products. In the industrial side, you know, quite a sizable part of that is underground cables, which is definitely at a lower margin anyway. It is definitely contributing lower margins overall as well. The other businesses like switchgear and professional luminaires are high-margin businesses.
Sir, for this quarter, can you break down, like, the 14% growth into how much was the growth for industrial or institutional business and how much was consumer facing, if possible?
We are about 25% on industrial side.
17%.
About 12% on the consumer side and 17.5% on industrial.
Okay. Got it, sir. That's helpful. Thank you.
Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Yeah. Hi, sir. Thank you for the follow-up. Two questions. First one is to Anuj. Sir, you know, just utilization of cash, if the company is looking at M and A, so what could be areas of interest? Like, is there any product gap, which you want to fill, or would you look at new categories? And if new categories, what could those be? I think our focus would largely, as we have also articulated in the past, will be homes and consumer. It could be something in the on the regional side. It could be something on the electrical side which goes into the homes. I think that will continue to be sort of if we have to scout for M and A, I think we will look at that.
Having said that, we also believe there is a significant opportunity in our existing product categories as well. While M and A, just to use an often repeated phrase, which will be opportunistic, but frankly, we don't need M and As to really look for the growth in this current environment. We believe the medium and outlook is fairly positive for the country. I think we want to focus on leveraging whatever seeding we have done in the past few years. We are already seeing that they are bearing fruits. I don't want to get into few quarters here and there, but medium term things look very confident and positive. Sure, sir. Actually I was coming from a capital allocation perspective.
As you know, I saw the cheaper debt getting repaid, and my sense is internal accrual should be enough for funding CapEx over in this year, next year. Hence, you know, my thought was we obviously have a lot of extra cash, and hence I was thinking maybe we could, you know, utilize it to fill up something if there is a gap at all in the existing basket. That was what my intention was. Cash allocation cannot be the reason for M and A. I think so. They are two independent concepts. We will see as the time comes. We don't think we have unsustainable cash levels as of now. Usually we continue to pay 40% payout in terms of the dividend. I think these things right now, I think these will not sort of concern us.
If the time comes, I think we'll take a deliberate decision at that point of time. Got it, sir. Secondly, for the new AC capacity, you know, my sense is it's almost adding 1 million units next year. Obviously the market size is not growing to that much. Any thoughts on exports here? I mean, is that something which is really looked up to, or is that an opportunity at all on ACs? Definitely. I think, exports in general, and I think you are all fully aware of how China plus one business is playing out. Obviously, in developed market it takes time to establish the product. You know, their approval process is far longer than other countries.
Yes, I think not only ACs, all other product categories we are looking to substantively grow and export, and our efforts are dedicated towards that. Coming to this question on AC, yes, I think export will be big focus, both from the existing. Actually this could be a more conducive from the new factory as we have a port as well. So we could see like two-three lakh units going out of country from the new unit. Is that possible, like, next year itself? We're just putting another timeline to that, but I think, yes, substantive numbers are possible. Why just 2-3 lakhs? Okay, sir. Thank you so much. Thank you. Have a good Diwali. Thank you, sir. Thank you.
Thank you. The next question is from the line of Pranjal Garg from ICICI Securities. Please go ahead.
Yeah. Hi, good morning, sir. Thanks for the opportunity. Sir, one of your competitor tied up with Mahindra Logistics for third-party logistics services sometime back. As freight costs might be likely impacted due to fuel costs and Havells will also be penetrating deeper in the rural markets, will we also likely go forward for any such partnership for using third-party logistics to improve the efficiency?
No, no. These efficiency measures could be third-party logistics, could be independent parties. These are the optionalities we keep reviewing as a business process. Whether we tie up on a national basis or regional basis, these experiments keep happening. I don't know whether Mahindra would be one or who could be, but yes, these are the things we continue to evaluate. These are operational issues.
Okay. Nothing of that sort in our books right now, we can assume that.
I think these are in our books. Sorry? What is on our books?
Something that is not in our consideration right now for going for a third-party logistics.
I think these are a hundred things that are there in the operational configuration, which we are definitely not discussing on the call, what is our operational strategy.
Okay. Sure, sir. Very good.
Thank you. We take the last question from the line of Sumit Jain from ASK. Please go ahead.
Yeah. Just to clarify, because in the call, I think, you've spoken twice about this. The price hike in ACs will happen from fourth quarter, you said, when asked for the second time.
That's right.
Right. Cable & wire mix moved towards cables in this quarter.
A little bit, yes, because, you know, in wires because there was again saturation, prices were coming down, so there was some destocking happening in the wire segment in the second quarter. In fact, if you see the third quarter of last year, there was high amount of stocking because there was, you know, prices were going up. Actually in this quarter we are operating on a very high base of wires. Actually again, especially in case of cables and wires, one should not be really excited or, you know, deflated by the quarterly trend.
Right. The volume growth will be higher than the sales growth YOY for C&W, which was at 19% because of the price fall in copper.
Right. Because, you know, you're comparing over the last year, not just the sequential. YoY they will be almost same.
Okay. One last thing about Lloyd's margins. You said it will improve in Q4, contribution margin double-digit, which means when I look at quarter one.
I won't give you double digit because, you know, this is a trend which we have seen. It is upwards, right? Going forward in the third quarter, we definitely see a major improvement coming in. Fourth quarter, we are expecting normalized margins to start coming in, which we had been operating at in the past. As was discussed, you know, there will be a lot of changes in the AC industry in the fourth quarter. We will play it at that point of time. Definitely we would like to pass on the entire cost increase in the fourth quarter.
Yeah, I understand that. That translates into 4%-5% kind of EBIT margin.
That's something which you will have to translate into. Yeah. I mean, as I've said, we'll continue to invest in Lloyd for the next one or two years for gaining market share as well as creating a position in the market.
Okay. Sure. Thank you.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to Mr. Aniruddha Joshi for closing comments. Thank you and over to you, sir.
Yeah, thanks, Aman. On behalf of ICICI Securities, we thank the management of Havells as well as all the participants for being on the call, and wish you all a very happy Diwali. Now I hand over the call to the management for the closing comments. Thanks and over to you, sir.
Thank you very much. Wish you all a very, very happy Diwali from Havells. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. Thank you all for joining us and you may now disconnect your lines.