Ladies and gentlemen, good day and welcome to the Q3 FY 2022 earnings conference call of Havells India Limited, hosted by DAM Capital Advisors. As a reminder, all participant 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital Advisors. Thank you and over to you, ma'am.
Thanks, Steven. Good morning, everyone, and welcome to the Q3 FY 2022 earnings call of Havells India. We have the management today being represented by Mr. Anil Rai Gupta, Chairman and Managing Director, Mr. Rajesh Gupta, Whole-time Director Finance and Group Chief Financial Officer, Mr. Ameet Kumar Gupta, Whole-time Director, and Mr. Rajiv Goyal, Executive Director. I now hand over the call to Mr. Anil Rai Gupta for his initial remarks, afterwards we'll open up the floor for Q&A. Over to you, sir.
Thank you, Bhoomika. Good morning, everyone. We hope everyone is staying safe. You would have reviewed the results by now. Revenue for the quarter grew in mid-teen, while volumes were flat owing to a strong base and moderation in demand in later part of the quarter. Festive demand was encouraging. Seizing the opportunity, we increased the spend on brand promotions, which we expect to continue. Overall contribution margins were sequentially maintained. High commodity costs continued to impact the margins in consumer durables. Last few weeks have seen the return of COVID-led uncertainty in the demand market, but it seems that unlike last year, the recovery could be swift. We remain positive on demand resilience. We may now proceed to Q&A.
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 touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets when asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Yeah, hi. Thank you and good morning. My first question was essentially, you know, because this COVID wave three, mid-December, early January, the price hikes, you know, to take that in third quarter again would have been difficult. Could you explain, as in, you know, what are your thoughts? Has the price hike actually already happened in January, or we are still lined up for third? What could be the range to cover the margins up here?
The price hikes are generally not timed along with the December, January, because, you know, the expected season is anyway February, March, April. There are price hikes which are already announced in the market, and hopefully that should start taking effect from February and March when the season starts kicking in. This will be a gradual increase because of the fact that, you know, ultimately it has to be absorbed not only by the trade but also by the consumers. It will be a gradual increase over the next two or three months. However, I must say here that you know, the raw materials are continuing to show some volatility even in this quarter, starting from the second half of December.
There is, you know, it's difficult to exactly, you know, say how much will be the requirement for the price increases, but there will be a gradual price increase in the coming months.
Got it, sir. My last question was on Lloyd. Congratulations for the washing machine unit, you know, start commissioning in third quarter. How is that ramping up? The commentary in the press release mentioned that there is very high competition in larger appliances. Could you help with some color in terms of, you know, demand, supply and how is that moving? Thank you so much, and all the best.
Thank you. Well, I think one quarter is difficult to say, but if you see Lloyd's performance over the last couple of years, CAGR has been impressive. Last year there was a high base in the third quarter because of the import ban on air conditioners from China. The trade had picked up extra stocks during the third quarter. We do believe that this year the demand scenario should remain strong because, you know, the season should start to come in now. Last couple of years have been very tough for the summer products like air conditioners, fans and all. You know, last two or three quarters are not the season products, so the real demand scenario would be known in the coming months.
We do believe that not only, you know, with the COVID scare not being there, as well as the pent-up demand over the last couple of years, there should be a strong demand in the coming season.
Perfect, sir. Thank you so much and all the best for the rest of the year. Stay safe.
Thank you. The next question is from the line of Sonali Salgaonkar from Jefferies India. Please go ahead.
Thank you for the opportunity. My first question is regarding the price hikes again. You mentioned that there will be gradual price hikes over the next two to three months. Any quantification on an average, how much of that has been announced so far? What is the sustainable margin profile for the business that you foresee post the current fiscal year?
The extent of price increase is between 5%-10% in consumer durables, both fans and air conditioners. This could be possible that there could be further price hikes when the season starts kicking in. You know, post this fiscal year, we do believe, you know, it will. It all depends a lot on how the raw materials pan out in the coming quarter. In fact, in the third quarter, we did see some cooling off in the raw material prices. You know, the fourth quarter has started off again with some volatility. It's difficult to say what kind of, you know, contribution margins would be there in these product category.
We do believe that, you know, it'll be now moving north from here. It should be coming back to normalized levels, you know, if not in one or two quarters, but definitely it should be coming back to normalized levels in the next fiscal.
Right. By normalized levels, we mean 14%-15% for the overall business. Is that correct?
No, I was specifically talking about consumer durables and air conditioners. I'm not talking about the company as a whole. As you have seen that we have been able to come up to the contribution levels in switchgears, cables and wires, lighting fixtures. Some of the past cost increases have been passed on. Some of them have been taken care of by the increased production and efficiencies. In these three businesses we are taking care of the margins. Where the margins were weaker, that's where I'm saying that things will come back to normalized levels in the next fiscal.
Got it. My second question is any update on the PLI scheme? Also lastly, what is the current inventory position in the channels right now, especially for our summer products?
As far as PLI is concerned, we are participating in the air conditioners PLI for certain components. As far as the inventory is concerned, you know, till about end of December, I would say these were normalized inventories both for summer products because, you know, people were a bit skeptical because of the third wave kicking in. You know, I would say inventories are at a lower level in the trade in January, but I think that should start coming back to normal levels from the month of February.
Understood. Sir, any indication of the possible upside from the PLI? That is my last question. Thank you.
As the PLI has come for certain components, and not necessarily, not for the finished product, so it's a very small component and it's not, I would say, extremely meaningful.
Got it, sir. Thank you.
Thank you. The next question is from the line of Siddhartha Bera from Nomura. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Sir, in coming back to the Lloyd business, we have done a lot of automation and backward integration in our plants. From here, how do you expect margins to be on a sustainable basis? Can we look to achieve the mid to high single digit margins we have talked about in the past or at the EBIT level or how to think about on a sustainable basis?
As I've already mentioned, you know, the raw material crisis is the main issue here. It's not just the cost of production here, because cost of production was achieved with the plant coming in. I would say, you know, a lot depends upon the demand cycle, demand scenario from here. You know, we believe that the demand should remain strong in the coming summer season, and hence the cost increases should be. We should be in a position to pass on. We should be coming back to double digit contribution margins in air conditioners, you know, hopefully in the coming season.
Got it. From the washing machine plant, which we have just inaugurated, can you broadly indicate any what share of revenues to look at or the quantum of revenue we are targeting for the washing machine segment for the next couple of years?
Yeah. You know, the whole idea of washing machines and entry into refrigerators is to make Lloyd a complete brand for consumer durable. It's still, I would say it's a two-year to four-year journey, and it will take its own time. Air conditioners continue to remain the mainstay. The only reason for getting into manufacturing for washing machines is also to, again, just like air conditioners, have a complete control on innovation as well as in cost. I think the whole idea would be to get a meaningful market share in the next two to three years and hence become a complete portfolio of products in the consumer durable category.
Got it, sir. Lastly, on the financials, if I look at other expenses, it is down on a YOY basis by about 7%. Seems that a large part of it has been offset by a higher ad spend. Current levels of expenditure is sort of sustainable. How to understand this part of the cost when it normalizes also from these levels? Hello.
You're saying that the other expenses are lower than last year?
Yes.
I think, these are normalized levels, I would say, going on from here, and the advertising trends are also coming back to normalized levels as the percentage of sales.
Yeah, because other expenses, if you look at percentage, it was about 14%-15%, two to three years back. It came down to 13% last year, and now it is at 10% of sales. Just wondering, we take this as a sustainable number of 10%, or it can revert back to normal levels. Thank you.
I think we'll have to look at the sequential expenses, other expenses, and they are same as last quarter. You know, a lot also we've mentioned is we're talking about two or three years ago, the expenses. You know, there is benefit of volumes also going up. You know, 14%-15% is a high level of number. I think we should be looking at normalized levels from here.
Okay, sir. Got it. Thanks a lot.
Thank you. The next question is from the line of Charanjit Singh from DSP Mutual Fund. Please go ahead.
Hello, sir. Good morning. Thanks for the opportunity. My first question is, if you look at Q3, Q4 last year, we had talked about 10%-15% price hike across product categories. Right now, when we are looking at the top line growth across categories, be it switchgear, lighting and fixtures, ECD, it is to the tune of 13%-15%. If you can touch upon the volume growth, you know, because I think volume growth has not been there in this quarter. How the volume growth can pan out going forward across these different categories. My second question is on the room AC side. Now, room AC, we have seen already, you know, two seasons getting impacted and Q4, now we'll see in January restocking happening.
How is the channel, you know, looking forward to restocking and any major impact you are seeing because of this Omicron on the room AC business? Those are the two questions. Yeah.
I think your first question, yes, you know, in the third quarter, if you see, the volume growth is flat, but we have to see it over two years, the CAGR. You know, if you were to ask me what is going to be the volume growth from here, it's very difficult to say, right? We have to see how the demand we are expecting to continue to remain strong. Hopefully we should be looking at volume growth and value growth from here. You know, putting down a number to a volume growth, it's very difficult to give those kind of numbers. As far as room air conditioners are concerned, as I've already mentioned, the last two years have been you know bad summers for the air conditioners business.
The trade as well as the companies are looking at a strong summer going forward. Hopefully the third wave scare should also be gone by then. We are looking forward to a strong summer in the coming months.
Okay, sir. That's all from my side. I'll circle back in the queue. Thank you.
Thank you. The next question is from the line of Renu Baid from IIFL. Please go ahead.
Yeah. Good morning, sir. My first question is, if you can give some more insights on the demand pattern. You did mention that there was softness or moderation in demand during the second half of last quarter. More insights in terms of where did this pocket of weakness or moderation come through. Largely, was it rural, urban centric or more, concentrated in certain pockets of the market?
I think the weakness was overall, and it was mainly related to the fact that there was uncertainty in the demand in the coming months because of the third wave coming in. The trade, you know, suddenly started slowing down the purchases. The treasuries and the movements of the customer in the marketplace was also going down a bit. There was uncertainty overall, which continued even in the first half of January. I think now the trade is also realizing hopefully this third wave is not going to be a long-term thing and, hence, things should come back. This is what we're expecting, should come back in the end of January or February, early February.
Got it. At least there is no concern on slowing demand, especially from the smaller towns and the so-called semi-urban or rural kind of markets. We don't have a large direct rural exposure, but from those segments of the markets, those structural demand concerns are not witnessed.
No, I would say it was, you know, structurally, I don't see any major difference. You know, in fact, I would argue that, you know, the project segments continue to remain strong. There was no stoppage of construction. We are actually seeing that there is no slowdown in the project demand. You know, as far as the semi-urban or rural areas are concerned, that is also going through the trade and hence there was uncertainty in the overall pickup for stocking for these product categories. Hopefully that should again, as I said, should come back to normal levels in February and March.
Sure. Secondly, can you help us understand what is the quantum of cost underrecoveries or the gaps that you're seeing on the ECD and the Lloyd portfolio, especially the RAC portfolio? And you have indicated of some likely price increases in February-March. So what are the quantum of pricing actions we are expecting in the fourth quarter, second half? If you can give some insight here.
I think we may have to at least increase 5%-10% depending upon each product, you know, SKU. I would estimate 5%-10% increase from here.
Sure. Lastly, on the Lloyd portfolio, there have been significant competitive pressures as in the market leaders and newer MNC entrants. I mean, some of the Korean brands have been back with lot more price aggression. How do we see pricing power or as in ability to take on the price increases and pass it on in the market as the summer kicks in? Especially in the backdrop that A&P spends, which were relatively weak in the last or soft in the last two years, are now coming back to normalized levels. Especially on the Lloyd portfolio, how do you look at the EBIT margins panning out in the next, say 6-12 months?
While contribution you have said positive, but then there are a lot of other expenses the company will incur. Where are we looking in terms of operating profitability overall, to normalize for Lloyd?
Well, you mentioned about competitive industry. I think the industry overall was going through a hypercompetitive, you know, scenario, mainly because of last two seasons not going well for the industry. You know, there are manufacturing pressures for every company, and hence the cost increases or the price increases that should have happened in this industry were not happening. Hence, there was a feeling of hypercompetitiveness. I believe that in the coming times, because reinvestment into brands, channels will continue to happen from the overall industry, there should be an expectation of price increases. Whether it is any other brands, so people...
You know, the fact is that, you know, it is not really. It's the brand and distribution. The cost increases were not passed on, which we are expecting it should be, should get passed on. Lloyd, because of the low base, we are definitely expecting good growth. You know, there we don't see a major impact of high expenditure, you know, eating out the complete profits of contribution. I think we should be in a comfortable position as price increases start happening and booking growth kicks in.
Sure. Thanks, sir, and all the best.
Thank you. The next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah. Thanks, sir. Thanks for the opportunity. Sir, three questions. One, we have seen in case of consumer companies, Lever, Colgate, et cetera, that there is a difference in trade margin offered to let's say general trade versus modern trade versus e-commerce. There is now, after a lot of years, we are seeing a lot of digitization of the trade also. How do we see that happening possibility in consumer durable industry also? Havells being the major player, how are we prepared to tackle this issue? That is question number one.
Question number two is that, obviously Havells is a large brand and Lloyd, you call out the numbers separately, but what is the revenue contribution of Crabtree and Standard brands at this stage, and how it has moved over past two to three years? Because I guess, probably in the Lloyd discussions somehow these two brands are taking relatively slight backseat, or it might be just my wrong observation. That is second question. Third is, in case of Lloyd, what will be our share of voice versus the share of market, and how it has helped over past two years, three years to gain the market share? Yeah. That's it from my side.
Thank you. As far as your first question goes, you know, Havells traditionally has been a strong player in the traditional general trade. Our relationships have been extremely strong. We continue to deepen not only the relationships. In the last four or five years, there has been you know, a renewed focus by the company on newer channels or alternative channels which are coming out, whether it is modern trade, e-commerce. Our belief is that we need to go where the customer is going. Some of the customer is moving towards modern trade and e-commerce as well, so we should be present there. As we have maintained that, you know, our policies or you know, our relationships with the trade has been extremely strong.
We believe in a scenario where we don't let any channel take advantage of the other channel or overpower the other channel. There has to be a completely great relationship among each channel, so that consumer is not shortchanged by going to one particular channel as against the other. We have been maintaining that and hence we do not believe in passing on higher margins to certain kinds of channels only because of the fact that they can probably give bigger volumes in one go. Our belief is that we want distributed sales, but also we want to be present wherever the channel is. We do not believe in price competitiveness among the channels.
Uh, so Crabtree and Standard-
Sorry.
Sir, our trade margins are more or less same across all three channels. Is that understanding correct?
That is true. Certain channels have higher costs of operations that the company takes care of. You know, for the company, it may not necessarily mean lower margins because, you know, there is a distribution cost also to channels where, you know, there is distributor scale. For the company, it is not really a higher or lower margin business. We are quite comfortable in selling to alternate channels as well.
Okay. Okay, sir.
Crabtree and Standard cater to certain kinds of customers. As we have always maintained, Crabtree takes care of the architectural segment, as well as Standard is very focused on certain parts of India as well as a contracting segment. These are sizable brands and have a good growth trajectory over the past few years. Standard, in fact, is now becoming almost like a, you know, a multi-product brand within the portfolio. We're looking at INR 1,000 crore number in the next one or two years in Standard. We are already doing close to about INR 600-INR 700 crore business in Standard, as well as Crabtree in the architectural segment continues to remain very strong, contributing almost INR 250-300 crore sales.
As far as the share of voice is concerned, you know, we maintain that Lloyd will continue to invest in brand building over the next two or three years. It has helped us in the past as, you know, we've moved from a certain category of brand to a different category of brand. This expense will continue in the future as well.
Sir, just a follow-up. How much is the SOV versus SOM? Any percentage or any number that you can share in case of Lloyd.
Not on this call.
Okay. Sure, sir. Thank you.
Thank you. The next question is from the line of Achal Lohade from JM Financial. Please go ahead.
Yeah. Thank you for the opportunity, sir. My first question is, you know, with respect to the lighting business, we've seen last couple of quarters have been extremely good in terms of the momentum. What I wanted to understand is, you know, in terms of the growth, is it driven by the price action, and also in terms of the professional or industrial luminaires?
Yeah. Lighting has actually seen less price action as compared to the others because the components going into lighting is not necessarily witnessing a high level of inflation. In fact, what we've seen is the deflation which was coming in the LED chips, that's actually slowed down. There's no major inflation in lighting business. Whatever growth that we are seeing is structural growth which is coming through distribution, reach enhancement and product addition. I mentioned earlier that industrial and infrastructure segment has also started kicking in better volumes. The professional lighting business has also seen decent growth in the last one year. All this contributed towards a decent growth in lighting business.
Understood. Any update on the PLI for lighting? Whenever it comes, do you see a substantial revenue contribution from exports?
No. Again, both for air conditioners and lighting, PLI is going into components rather than finished products, so we are not applying for lighting PLI.
Got it. Just one more question, sir. In terms of the product categories or within product categories, the sub-segments, is there anything missing, given the diverse portfolio we already have? Any thoughts on the same, sir?
Well, there are growth opportunities in each product category of Havells. I can give you many examples, but maybe that's a different discussion. Let's say, let's even take the business of lighting. You know, there is so much scope to get into facade lighting, museum lighting, stadium lighting. There is scope of growth opportunities in every business that we are in. I would never be able to say that we are a complete product portfolio company. We have a comprehensive product range as against many other brands, and our focus has always been to you know focus on every business rather than just treating it as a brand addition or a product addition. Within each product category, there are extremely good organic growth opportunities.
Got it. Just last question, if I may, with respect to CapEx, if you can talk about FY 2022 and FY 2023, what is the CapEx number one could work with and in which area will it go?
We are looking at about INR 250-INR 275 gross CapEx in FY 2022. CapEx plans for FY 2023 are still, you know, under the making.
Got it. Thank you and wish you all the best.
Thank you.
Thank you. The next question is from the line of Naval from Emkay Global. Please go ahead.
Yeah. Thank you for the opportunity. I have question on Lloyd's. What we can understand from the channel, basically Lloyd has seen market share gains on YTD basis this year. Can you please highlight on the touch points what was that number when you ended FY 2021, and what we are right now? Any plans for future in terms of numbers, if you can state that as well.
Actually, one of the, I think key feature of air conditioner market in general, and then I come to Lloyd, that the last two years, you would appreciate have been sort of fairly tough on this industry because for some reason the COVID has decided to strike at the sort of heat of the moment or sort of peak of the season for the air conditioning. So I think a lot of things have gone slightly awry, and we are hoping that even this wave three will sort of peak out in January itself, so that at least in three years now we have a proper season, summer season for air conditioning. I think the real sort of the mettle of every brand would really come out in this season.
Having said that, you see, there have been certain fluctuations on the Lloyd side. If you recall, we were around 8%-9% when we acquired the brand. This is where we've been sort of going around for last two years. As we speak, during this year and starting from early this year, we are now around 10% in terms of the market share. The market share I think we are holding and also slightly marginally improving. The reason for that is that our distribution reach has significantly improved. If you recall, when we acquired this sort of purely distribution-oriented business, we didn't call it distributor in every state.
Now we are not only deepening every city, we are also engaged with whether it is e-commerce, whether it is a modern format retail, whether it is regional retail. I think the entire infrastructure has been put in place. There have been sort of early signs of success there. As I said, I think this year should be something, I think we should really prove how the things are going, and hopefully we will not have further disruption in the AC industry.
Can you state any number in terms of touchpoints on the offline trade?
That's not important and that we will not talk on the call.
Okay. Lastly, what is the current contribution from e-com for Lloyd?
Lloyd e-com, we started this journey actually very recently. I think that one of the analysts before you also asked about the challenges between the online and offline. When we realized that we still need to be settled, we decided that Lloyd should only be launched when we are also able to bring the parity as with the other Havells products. We are very encouraged by the reception we have got on both the Havells and online platforms for air conditioning. Currently, again, I would say wait for this fiscal. This has been around the 6%-7% is our online as of now. But again, I would claim that this year should be the one we should give you the right numbers.
Because otherwise the numbers have been very sort of up and down because of how the seasons are played out.
Sure. Thank you so much and all the best.
Thank you.
Thank you. The next question is from the line of Nitin Shakdher from Green Capital Single Family Office. Please go ahead.
Hi. Good morning to the management. My question pertains to advertising expenses, versus last quarter. I think there is a significant bump up on advertising expenses, from INR 51- INR 100 crores. Now, is this because of the four new launches which were slated for this quarter? That is one. The second part to this question is what is the share of advertising expenses which goes to the Lloyd consumer business? Thank you.
No, we have nothing to do with the launches. As we have also mentioned in our commentary, these are the planned advertisements and we have to come back to the normalized levels. Because of the COVID, the advertising expenses also had to be evaluated in terms of efficacy. Because of the holiday festive season, I think there had been general increase. If you go two years back, that's what the numbers used to be. This is pretty much normalized. This is not something which shows a one-off or any launches for that matter. The Lloyd, whatever we spend on the Lloyd is really allocated to Lloyd. So Lloyd will be around almost 5%-6% of the sales will go into advertising.
Okay. Thank you.
Thank you.
Thank you. Before we take the next question, a reminder to the participants, please limit your questions to two per participant. Thank you. The next question is from the line of Srinidhi Karlekar from HSBC. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Sir, just one question from my end, again on pricing. Sir, it appears like the company is quite cautious, in taking price increases in consumer-facing businesses. I just want to know, sir, is it the strategic choice that company is opting in this high commodity inflation period, or is it also a reflection that the competitive intensity in the category that company operates has significantly increased in recent times?
I think it is got to do with remaining competitive. It's neither this or that. It is a business, Srinidhi, is an art, it's not a science. I think we remain completely sort of on the ground. We assess the situation on the ground. Sometimes when the unprecedented cost increases happen, you see there could be lag effect. I don't think that should be attributed to the change in the overall strategy of the management or how the company value system has changed. I think one has to be sensitive to what's going on. I think it's a combination of multiple factors. I will not just reduce it to one factor or the competition increase. I have never seen in my life that competition has been less in this country.
I mean, you are fully aware of the same. The competition has always been there. I think philosophy of management has been changed. In unprecedented times, you have to take decisions which could be gradual. I don't think it should be measured from the credibility of the management, or management has become very defensive. We do not think like that. At the right time, at the appropriate juncture, whatever appropriate action is to be taken will be taken.
Understood. That is really helpful, sir. Second, related, sir, like we have seen the prices of product goes up by like 20%-25%, right? Just wondering, going into next couple of years, would your margin that you strive at the contribution level would remain what it was before this inflationary period? Or there could be understanding that because the product prices have gone up, maybe we should have some bit of a lower contribution margin. Just wondering, pricing decisions, is it fair to say that you would continue to strive the same contribution margin that you used to strive before this inflationary period?
Yes. I think that will not change. That's what I was trying to explain to you. Maybe sometimes, you see the quarterly outlook could blur the long-term outlook of the business. Let me just confirm, the long-term outlook of the business has not changed at all. That will remain the same. Maybe it will play out in few quarters. That could be the only difference. Sometimes you see there's a seasonality in products. When you look at December quarter, when you look at fans, when you look at air conditioner, look at other sort of products. When the demand picture maybe there at the appropriate time, we believe there will be better receptivity in the environment, whether it is trade or the consumer.
You see one has to integrate these data points, these sort of wisdom gained over the years, and then have to take a decision.
Very nice, sir. Thank you for answering my questions and all the value.
Thank you. The next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Hi. Thank you so much for the opportunity. Most of the questions got answered, you know, two things that I wanted to check with you. Firstly, you know, again picking up on Lloyd a little bit more. Clearly, you know, the industrial landscape has been fairly dynamic, probably more aggressive from a lot of players. You did overhaul your strategy here, you know, a few years ago, which kind of benefited you. Now of course, pandemic is clouding the overall performance as per you. Do you think that, you know, there are more structural interventions for your side which are needed, whether it's from a product perspective, whether it's from a consumer engagement perspective, a faster distribution scale up?
You know, who would you want the salience of Tier 3, Tier 4 cities, you know, where the penetration opportunity could be significantly higher? How are you thinking about that? Also versus, you know, two to three years ago, when you were overhauling this whole strategy for Lloyd, do you think that the sustainable margin trajectory over the medium term for this business is relatively lower or probably more volatile?
Starting with the structural interventions, you rightly mentioned, Latika, that this has been starting the day we acquired Lloyd. I think we have been largely successful in achieving. If you ask me if that process is over, certainly not. I think that will continue. Whether in distribution, I just talked about it before you asked this question, how we have become an omni-channel, how we have sort of deeply distribute the distribution system into not only tier one, tier two, but now also getting into tier three. That work will be ongoing. That work will continue. As I said, you see, we started our own factory. We have the largest factory now at a single place in India. But unfortunately, this pandemic you mentioned, it clouded everything.
Sometimes it also questions the effort one has done. I think those efforts are persistent. Yes, efforts will continue. This process will only accelerate. I think we remain very confident what Lloyd can achieve. Yes, I think industry is competitive. Maybe the intensity is higher than other product categories we always operated. I think that doesn't take away the long-term sort of attractiveness of this segment and how a homegrown Indian player, you see, can play out fully in that. I think that story remains very much intact. We believe these kind of competition will continue to sort of, you see, grow and go down. Overall, we believe the sanity is prevailing.
As I think, Anil also mentioned in the beginning, I think the competitive scenario, this is also changing. I think once we are also getting more and more stronger, I think it is something that we can play out, which is to our advantage going forward. In terms of the margin profile, yes, there could be certain variations. I think one product can't be compared to the other. Within Havells also there are different product categories with different margin profiles. I think it is a fairly attractive proposition in terms of, you see, what overall size this business can achieve.
I think some players in this industry have shown there is an opportunity to make double-digit margins, and we believe that is something we should also target, and we are pretty much in the realm of achievement. Structural or otherwise, we do see good growth as well as the margin enhancement opportunities in this industry and for Lloyd as well.
You know, you said double-digit margins are possible, but considering you are getting into new categories as well, so are we looking at, you know, a 7%-8% kind of a band, maybe even, you know, four to five years down the line? Or, you know, this double-digit is a serious long-term kind of a thing that, you know, you're very okay with that. It's okay if, you know, your focus is on top line and, you know, diversifying your portfolio. Just wanted to hear from you what is, what is more prioritized, you know, how does it fit in your scheme of things?
The growth will be definitely the priority. While we talk about the other product categories, if you could place some 4%. Now that could happen because sometimes the investments get expanded and that's why it is. I was talking, if you look at the big bulk, which is air conditioner, there is the opportunity to be double digit there. Maybe the other product category, the blended margin could be in the range of 7%-8%. That's something we should be fine with. Yes, the large opportunity is I think growing larger and larger in the AC sort of ecosystem.
Sure. Thank you. My second question was on the ECD business. You know, if you could give some color in the business mix for ECD segment in terms of key product salience. Also is there a way to read how share of the premium versus the middle of the market products is changing in this mix? How do you anticipate this trend to behave considering you are expanding this portfolio more in, you know, smaller towns and rural? Is it correct to assume that the margin profile might not get affected that much, you know, compared to where it was, you know, at pre-COVID levels despite, you know, the company expanding into newer geographies?
I would say that, you know, as far as ECD is concerned, the whole idea is to have a good mix, you know, have a base known for premium products. I would say the right way to look at it is that, you know, we are even taking our premium products into the semi-urban and the rural areas as well, whether it is water heaters or fans. I don't see that, you know, the margin profile would change a whole lot with our strategy of expansion into deeper penetration. What I would say that the major attribute toward reduction in the margin has been the raw material inflation.
As and when things come back to normalized levels, either on the raw material side or on the pricing side, things should come back to better levels, from here, and hopefully coming back to the pre-COVID levels also. Neither is there an expectation that going deeper into rural areas would reduce our contribution levels or the fact that, you know, because of the past couple of years, you know, there is the premium percentage is actually going down. I would say that it is stable or going up only.
Sure. Thank you so much, Mr. Gupta.
Thank you. The next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
Sir, actually most of my questions have been answered, but since I've got the opportunity, let me just ask one. If we look at, say, the slightly medium-term outlook, say 2-3 years, and if we were to split our business into one which is related to, say, new home build and CapEx, things like cables and wires, switchgears, versus the other, which is related to more discretionary spend, would you have a rough sense of which of the two businesses in your internal estimate would grow faster?
I would say that, you know, last one year what we have seen that the, you know, the construction industry has started doing well, and this is after a very long period of slow growth in real estate. The other thing is that even the CapEx cycle or the infrastructure demand has started picking up extremely well. You know, going forward in the next two or three years at least, you know, what we felt is the discretionary spend products would outweigh growth, as compared to the, you know, more structural products. I would say it might be we might be investing similar growth. Now, it could be possible that we have different base in different product categories.
For example, our appliance category might be at a smaller base or smaller penetration as compared to our mature products like switchgears and cables and wires. That could affect the growth profile, but not necessarily because of the demand scenario. I think demand should remain strong in the infrastructure side as well as the real estate side.
Sure. Thank you, sir.
Thank you. Next question is from the line of Ashish Jain from Macquarie. Please go ahead.
Hi, sir. Good morning. My question again pertains to Lloyd. You know, you spoke a lot about you know, what the target could be in the next 12 months, 24 months. I just wanted to touch upon two things. One is, you know, from a distribution spread point of view, where are we currently, you know, versus, you know, what our end game is in terms of the distribution penetration. Similarly on the product launches and all, you know, especially on the AC side, you know, what do we see in terms of the product pipeline and all that we could launch? Are there, like, any obvious gaps which we think is kind of impacting our market share gain outlook and all?
I think as far as Lloyd is concerned, the distribution is very different from what it was a few years ago. We are far more deeply penetrated. We are present in, you know, the A category chain, A category outlets, you know, which are the modern format chain. Lastly, last one year or so, we are aggressive in the online space as well. I think from a distribution point of view, Lloyd is a far more available brand as compared to what it was two or three years ago. However, just like in any mature product category of Havells, this is an ongoing journey. Whether it is in the FMCG or FMEG, this is an ongoing journey, and distribution will continue to be enhanced over the next few years.
As far as product portfolio is concerned, in air conditioners, Lloyd is a complete portfolio of product categories. There will be innovations which will continue to happen, but I don't see that you know, Lloyd is in a position where we can't compare ourselves to any other major brand in terms of product offering. Yes, the new product categories, washing machines and refrigerators, we will continue to enhance our product range to be a complete play in those categories. That will happen over the next one or two years. In air conditioners, Lloyd is a complete player.
Sir, just for a follow-up on that, you know. When do you think, you know, Lloyd can do a double-digit contribution margin on an overall portfolio basis? I mean, I'm not looking for, you know, exact timeframe and all, but given the scale we are seeing in washing machine, the cost that we have currently, based on that, you know, if you wanna give a sense when Lloyd can see a, you know, more sustainable-
I think Rajiv has already mentioned that for us, the major focus will be market share expansion, product deepening, continue to invest towards brand building and distribution penetration in Lloyd. Whether it's a double-digit margin, whether it's a high single-digit margin, I think that's not something our focus is. We believe that Lloyd is a part of a very large industry. In fact, I would argue that it's larger than the electrical industry. Hence, there's a huge opportunity for a brand like Lloyd to grow market shares in this category. I think for the next two or three years, our focus will be on market share expansion and be a decently profitable business. I'm not committing myself to a double-digit or a high single-digit margin here.
We'll continue to invest, as Rajiv has mentioned, in brand building, in product offerings.
Great. Got it, sir. Thank you so much. Bye.
Thank you. The next question is from the line of Rahul Gajare from Haitong Securities. Please go ahead.
Yeah. I have two questions. Could you highlight the volume growth in the cables business, cables and wires? That is the first question. The second question is on the switchgear segment. You know, historically, this segment used to have about 35%+ kind of margins. Now with housing demand, you know, now picking up, do you see the company reaching the earlier levels, you know, or if that's the margin that you all are planning to get back? These are the two questions.
As far as cables and wires are concerned, the volume growth is flattish as compared to last year. In switchgears, we definitely see growth coming in. Now, I can't say whether it's 35% or 38%, but we've been achieving very high margins in this business. There will be, you know, as construction industry and real estate demand continues to go up, there will be project demand which will come in, which will maybe, you know, put some pressure on the margin front. Overall, I don't see that making a meaningful, you know, difference because we are participating well in the real estate segment as well. It's the margins thing is a bit different than the complete retail side.
Overall, I don't think that will make a meaningful difference.
Okay. Thank you.
Thank you. Next question is from the line of Kunal Sheth from B&K Securities. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. My first question is pertaining to Lloyd. Sir, as far as our washing machines and you know, which were recently, you know, launched, what is the market positioning that we are targeting there? You know, are we targeting it at par with the market leaders, in terms of pricing, or we will be at a discount?
Well, you know, it's always a journey in every product category and brand. You know, Lloyd, I would say, is in the journey of becoming a complete portfolio. Rather than discussing too much about the pricing, you know, a lot depends upon the complete portfolio and how strong are you in distribution, how strong are you as a complete, you know, I would say as a range of product categories. You know, finally the trade has to accept your product and the consumer has to accept your product. It's a journey. It will take two or three years for us to get established in washing machines and refrigerators.
Sure. Thank you for that. My second question is pertaining to, you know, to pricing. While currently we are in an inflationary environment, I just wanted to get your view on historically, you know, once the, you know, raw material starts to cool off, do we get to retain some of the benefits or most of the benefits have to be passed on to the market?
What is your experience?
First of all, we have to see whether we are able to pass on the entire cost also or not. You know, again, depends upon product category to category. In cables, product like cables and wires or in customer segments like projects, a lot of times mostly you have to pass on both on the increase side as well as on the decrease side.
Mm-hmm.
Yes, possibly there could be, you know, some time or some retention of some margins, you know, when things cool off. Over a longer period of time, these things tend, you know, even out. I would say that, you know, if there was a meaningful reduction than just a cooling off, yes, that will also have to be passed on to the consumers.
Yeah. Got that. Thank you so much, sir, and best of luck for it.
Thank you. The next question is from the line of Amit Mahawar from Edelweiss. Please go ahead.
Thank you. How are you doing, and hope everybody at Havells is safe and healthy, first of all. Hello?
Yes.
Sir, you may please proceed.
I just have one quick question. In the last maybe around two years, if you see, broadly in the COVID phase, it seems our electrical business has significantly ramped up, and we've become far more stronger on categories like switches, branded wires. Roughly, you know, can you indicate what kind of, you know, market share gains you have accrued to us in the past two years as we consolidate our position in these segments? You can also give us some qualitative remark here, sir, of what we did here on these two segments.
I think we have strengthened our share, but as I said, in the pandemic, sometimes it's difficult to articulate what has gone. I think let the stabilization come, and then I think, Amit, it will be a meaningful discussion. Clearly, I think that we have been benefiting both by unorganized to organized transition, benefited how Havells has responded in the crisis, whether it's dealers or consumers, how our supply chain has been very resilient in this time. I think these things have sort of contributed to better performance by Havells. I think the things are only going to look sort of better in our view. The property cycle which has started after almost a decade, we believe that the momentum will maintain.
Maybe a few things have happened because of Omicron and all. There was a last part of the Q3 that has not been sort of that great. I think things will come back and the companies which are sort of committed, you know, to the long-term development of the business. I think that will gain. That's why we believe what you sort of attribute to maybe two products. I think that's something that will be clearly evident across the product category. Maybe I think in another few quarters we could have a more meaningful discussion in that. Clearly, I think that we believe that we have a good chance of outperforming.
Sure. Thank you, Rajeev ji. One last quick question, parting question. In terms of next five years of, you know, capital allocation strategy for Havells, can I say that, you know, it will broadly go into all the divisions in equal proportions? Specifically, I'm talking about electrical segments versus the ECD and Lloyd. Or we have some specific attribution in terms of capital allocation and capital capability for the next five year. Thank you.
The capital allocation will be very prudent. It will depend upon the risk state, I think, for the category. I think, every product category will get its due share. I think it also depend upon the demand scenario and category, what kind of maturity stage is there. It is, there can't be a single answer to this. Yes, I think our capital allocation will be beneficial to our stakeholders, whether it is shareholder or customers, whichever one I'm talking. That program, what we have executed in the past, we also will maintain in future.
Thanks, Rajiv. Thank you.
Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to Ms. Bhoomika Nair for closing comments. Over to you, ma'am.
Thank you, Steven. I would like to thank management of Havells India to give us this opportunity to host you. I would like to thank all the participants to join us. I would now like to invite Mr. Gupta for his closing comments. Over to you, sir.
Thank you very much, Bhoomika, for organizing this, and thank you for spending the time. Thank you, everyone. Stay safe.
Thank you. Ladies and gentlemen, on behalf of DAM Capital Advisors, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.