Ladies and gentlemen, good day, and welcome to Havells India Limited Q1 FY22 conference call hosted by Batlivala and Karani Securities India Private Limited. 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 this 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. Kunal Sheth from Batlivala and Karani Securities India Private Limited. Thank you, over to you, sir.
Thank you, Mallika. I would like to welcome the management of Havells India Limited on the call and would like to thank them for giving us this opportunity. From the Havells management, we have Mr. Anil Rai Gupta, Chairman and Managing Director, Mr. Rajesh Kumar Gupta, Director of Finance and Group CFO, Mr. Rajiv Goel, Executive Director, and Mr. Ameet Kumar Gupta, Whole-Time Director. I would request Anil sir to give us some opening remarks, post which we will open the floor for Q&A. Over to you, sir.
Thank you very much, Kunal. Good morning, everyone. Hope you would have reviewed the Q1 results. We are satisfied with the operational performance. As COVID recedes further, we expect the demand environment to stabilize and improve. The structural shift in favor of the organized sector and recovery in projects in the institutional segment augurs well for the demand outlook. We will now proceed for Q&A, Kunal.
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 the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. For participants to ask a question, you may press star and one now. The first question is from the line of Ravi Swaminathan from Spark Capital. Please go ahead.
Hi, sir. Good morning. Congrats on a good set of numbers. My first question is with respect to the margins in the switchgear and cable segment. They have seen year-on-year improvement and even sequential improvement in spite of the fact that input costs have gone up. If you could explain what is behind the reasons for the margins going up. Is it because of price action, or is it because of mix improvement? If you can throw some light, it will be great, sir.
I think switchgear, generally speaking, our margins have remained in this band, depending upon the certain quarter, depending upon the demand. This quarter, what we saw as compared to last year, same quarter, was that the demand for the switchgear had been better as compared to last year. Last year, if you remember all the projects, the contracting and everything was stopped. This year, because that continued, we could get a good traction in switchgear, which actually helped maintain the margins also. We were able to compensate some sales from the exports also. That has helped.
On the cables and wires, I believe, this particular quarter, there was a little bit of a better pricing because generally speaking, when the commodities are rising, then you get some advantage of some stocks which are lying at the lower cost, and you pass it on to the market. Otherwise, that's the reason for the expansion in cable and wire margin. Over the next one or two quarters, things should come back to normalized levels, which we have been getting in cables and wires in the past. The switchgear margins have generally remained in this band between 38%-40%.
Got it, sir. With respect to ad spends, basically this quarter is around 1.7% of sales, whereas the normal run rate used to be 3.5% of sales. Last year, obviously, first quarter wasn't that much high in terms of ad spend. Do you see this 1.7% of sales normalizing, say, over the next few quarters in terms of ad spends? If so, will it go back to the old levels?
It will be increasing because this year also when we started, before the lockdown, certain advertising decisions were taken, which were slowed down as the lockdowns happened. We will now continue to review the markets, how they open up, because certain markets still are not fully opened up. We will continue to review that, and g oing forward, yes, this will increase. May not be at the same levels fully in the next one or two quarters, because that will take some time to recover fully to the normalized levels. Plus, in the last one or two years, the media is also changing, the digital spends are increasing. We just have to review in the next few quarters what is the normalized levels of advertising.
Got it. Any further price increases that might be on cards across all the products, switches, switchgears, fans, lighting, that might be taken over the next six months?
I think pretty much because the commodities have stabilized now in the last one or two months. Pretty much most of the actions have been taken. Some of them maybe with lag effects will affect in this particular quarter. Otherwise, the actions have already been taken.
Got it, sir. My last question is with respect to cash flows. Cash flows this quarter had been negative. Should we read too much into it, or can you give an idea as to why it was negative this quarter?
As you can imagine, the first quarter, the production levels were down, hence the purchases were down. We have always maintained during the first lockdown as well as in this lockdown as well, that we've never delayed the payments to the vendors. The trade payables actually contracted in this particular quarter, which when the production levels come back to normalized levels. Plus, the inventories were also at a higher level because the summer season build-up for air conditioners and fans was not able to achieve the full sales, which will again normalize in one or two quarters.
Got it, sir. Thanks.
Thank you.
Thank you. The next question is from the line of Ankur Sharma from HDFC Standard Life Insurance. Please go ahead.
Yeah. Hi, sir. Good morning, t hanks for your time. A couple of questions. One, just on the overall demand recovery, and clearly, we've seen a very strong bounce back in the last quarter. Just wanted your thoughts. One, how do you see this recovery compared to the first wave? Is it broad-based? Is it more B2C? Because last time I remember B2B was very late to recover. Just wanted your thoughts. More importantly, do you think this will also sustain? Because last time also we saw Q2, Q3, Q4, the rapid recovery happening. Would you expect a similar trend?
This year, the sales build-up has been different than last year on many counts. One, last year when things opened up because the markets had been completely closed, there was a pent-up demand, more so from the consumer side. There was a contraction in demand for the industrial and infrastructure projects. Because of that, also because the projects were slow, the A category cities took more time to come back, and B and C was compensating that downtrend, and plus the rural markets. This year, actually, if you see, the markets have opened up in a very staggered manner. In the middle of June, things started opening up, and still there were intermittent lockdowns. Even now, there are certain markets where there are lockdowns, and certain markets are still there. That's been slow.
The second thing is that there is no pent-up demand because the markets were generally open at least for a few hours in a day or a few days in a week. They were open. There is no pent-up demand, especially on the consumer side. Third, there is I would say, a secular growth in whether it's A-class cities, B-cities, or rural areas. The kind of jump that's happened in the rural areas is not seen, but it is also compensated by the fact that A-category cities have not come down drastically. Fourth, very importantly, the projects and the industrial segment has done well in the last quarter, which should continue. Last year, it came down, and it took a long time to actually recover. I think there are many factors which are very different than last year.
Overall, if you see in the last few weeks, we are definitely seeing growth over last year.
Perfect. Okay. Sir, just going back to your opening remarks, where you said something on market share gains from the unorganized, and that's something we've seen over the last 3 to 4 quarters. Our assumption would be that that continues, right? In terms of the large getting larger and the smaller players actually losing share.
Last year post the lockdown, again, because of the supply chain disruptions, there was a sudden shift in market share from the unorganized sector to the organized sector.
Yep.
Which actually sustained during the year. I would not just attribute the market share gains only from the unorganized sector to the organized sector.
It also happened because of many initiatives and the actions taken by the company, not only last one year or two, the last couple of years, addition of channels, whether it is e-commerce, modern format, rural areas, addition of product categories, enhancement of distribution reach. Many actions were taken which actually have helped us gain market share in the industry overall, per se, not just from the unorganized to the organized.
Right. Just one last question, if I may, on Lloyd. Again, this year we've seen lockdowns in the peak summer season, right? If you could talk about the inventory situation both with the company as also in the channel maybe at an industry level and also for Lloyd, and by when do you think the situation normalizes? That's all from my end. Thank you.
I would say that the inventory levels are high because end of March, the inventory was built up for the season.
That didn't happen this season. April and May are the biggest months for air conditioners, t hat sale was washed out. The inventory levels continue to remain high at the end of the quarter. At least in the trades, the inventory levels are not high because that's also a time when the trade starts destocking the product. Their secondaries have been better than what the primaries have been for the company. I would say that for the company, the inventory levels are high, which will get normalized within a quarter or two.
All right. Great. Thank you so much.
That's okay.
Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Yeah. Hi, good morning, t hanks for the opportunity. A questions, sir. One is on the demand outlook. Could we discuss that more elaborately on the five key segments you have, let's say switchgear, lighting, cables, Lloyd, and ECD? Would you want to highlight which one is doing better than the other, and how do you see that for the full year? That's the first question.
It's a very general question, I would say, very difficult to answer. I think I've given you the market trends which actually give you the demand outlook. I would not say there's very different between these segments.
Okay, got it. The second question was on the ECD margins. It did 11.7% for the quarter on the EBIT level. You've highlighted that adverse operating leverage actually hit. Assuming that the price hikes have already been taken, would we see it going back to 40%-50% for the full year?
Difficult to say for the full year. In the coming quarters, yes, it will go up. It will take some time because this segment has been impacted by the commodity price increases and to continue to remain competitive and gain market share, we will take calibrated decisions on the price hikes. Definitely because of the operating leverage and not the entire price hikes being passed on, these margins have remained low, which will come back.
Got it. Lastly, on the CapEx, l ast quarter we discussed about INR 500 crore for the year and about INR 1,000 crore plan for next two years. Any change in this plan?
Not at the present moment. We'll continue to evaluate, as the markets are opening up and looking at the demand scenario.
Thank you so much. All the best.
Thank you.
Thank you. The next question is from the line of Charanjit Singh from DSP Mutual Fund. Please go ahead.
Hello, sir, g ood morning. Congratulations on your great set of numbers. My first question is specifically on the real estate market, because that's one of the key end markets for most of our product categories. If you can highlight, from maybe next two to three years perspective, how do you perceive this market? Are we seeing kind of bottoming out and then pick up in terms of this market, which will have more implications for different product categories?
Charanjit voice was not very clear, but I assume you're talking about the real estate.
Correct. Yes.
You also track real estate. We do see certain traction in real estate. I think initially it was largely on the handing over of the either semi-made or the almost finished apartments. Lately we are seeing some traction even on the new sort of launches being announced. Again, I think we need to see this market. This market has been into sort of cold storage for quite some time. We believe, and we have also seen the leading real estate players being very bullish on the new launches and the demands being high for over last decade as well. I think we also need to watchful of that. As of now, the things look improving on the real estate front, which definitely augurs pretty well for a company like Havells, because a lot of our products go into homes.
Okay. Sir, on cables and wires front, if you can straight into the volume growth and the value growth. In terms of the price hikes, what's the kind of quantum of price hike which you have taken and any further price hikes which you're expecting in cables and wires?
Around 30%-35% has been because of the price increases we've seen to the cable and wire growth. Definitely there's been a decent volume growth as well. As you know, the commodity hikes have been pretty severe, particularly in this segment. I think around 35% of this could be attributed towards the price hikes. Others will be around 10%, because that's in cable wire.
Sir, sorry sir, can you repeat that? The 10%?
I think you talked about the cable and wire segment, correct?
Correct, yes. Yeah.
Okay. In cable and wire segment, around 35% of the growth could be attributed to the price increase.
Sir, just lastly on the switchgear part, we have also talked about the exports as a segment which would have picked up. On the exports opportunity, if you can highlight how you see that growing forward, not only in switchgear but in any other categories also. Yeah, that's the last question from my side.
Switchgear continues to be the leading product category for export, because this market is fairly concentrated and Havells is among the top 10 manufacturers in the world now on switchgears. I think the larger opportunity lies in switchgear, and the next big opportunity we foresee for ourselves will be air conditioners. Look, it's early days for air conditioners. Yes, we are very bullish on the export opportunity, purely because of China Plus One as well. We are seeing good traction happening. This will become meaningful in couple of years. As of now, on the switchgear side, we are having a good accounts opening, and this is that much we can discuss about that.
Okay, sir. That's all from my side, sir. Thanks for taking my questions.
Thank you. The next question is from the line of Sonali Salgaonkar from Jefferies India. Please go ahead.
Sir, good morning, and thank you for the opportunity. Congratulations on a great set of numbers. My first question is again an extension of the earlier question in terms of price hikes. Sir, could you quantify approximately what are the price hikes that we have taken, say, YTD across the product segments?
I think that will be difficult. The only thing we can say is that on the ex cable and wire, our price increases have been in the range of around 10 to.
10%-15%.
10%-15%. Most of the price increases have been taken, looking at, we just mentioned, the calibrated approach, the market competitive scenario, and how much has been the commodity increase. This is a mix of everything. Maybe all their commodity cost may not have been passed on. You see, these are decisions which are taken into account, several factors impacting the market and the demand scenario.
15% ex cables and wires. What would be the approximate quantum taken in Q1?
I think that will be difficult to talk about, but I think you asked what has happened in the last since the commodity cycle began, that what we have given. All we can say is that most of the price increase is effective because we see some stabilization in commodity cost as well. As of now, there are not much anticipated price increases in the offering.
Understand, sir. Sir, my second question is regarding your alternate channels, e-commerce and rural. Sir, could you help us understand or give an update on the development of sales into both these channels?
E-commerce continues to do very well. Part of that could be also that our presence has been limited in the past. As of now, we can claim the strength of the brand, which has been sort of demonstrated in the offline channel for last so many years. I think it's pretty much evident in the online channel as well. One of the leading platform, we already rank number one in terms of fans. I think we are extremely sort of satisfied, and we are very bullish on how this channel will pan out for us. Because we are doing everything, keeping the harmonization between various channels. This is what we discussed earlier as well. Even rural is tracking pretty well, and we are introducing more and more products into the rural channel.
Both these channels, I think, continue to do pretty well with a strong promise of how they will pan out in near future.
Understand, sir. Sir how much would the sales from both the channels would have grown in Q1? Because last year we saw phenomenal growth. Of course, the base was a little lower, but right now with the base catching up.
So we can reca-
What is the kind of steady state growth that we could envisage from these channels?
Look, these bases are very low, the percentage really will be sort of meaningless to discuss. All I can say is they will become meaningful in terms of the share of the sales in next sort of year or two. All I can say as of now are they are tracking pretty well, sometimes even exceeding our own expectations.
Understand, sir. Sir, last question would be on the distribution. Currently, what could be our distribution pan-India, and how much of that would be rural versus urban?
We have about 14,500 distributors all across India, for all product categories. We have a retailer base of about 185,000 retailers all across the country. This includes the rural channels, where we have close to about 25,000 outlets registered in the rural channels.
Sure, sir. Thank you.
Thank you. The next question is from the line of Siddhartha Bera from Nomura. Please go ahead.
Yeah. Hi, sir, and thanks for the opportunity. Sir, my first question again is on these ECD and Lloyd segment. If you can just talk about a few product introductions you are working in, which can help us in the growth in these segments and on the margins as well, on the Lloyd side, how do you think we should look at maybe next year in terms of the improvement from last year?
On the ECD side, there are continuous product introductions which are happening. Despite the fact that the fans was a truncated quarter, there were very good new models which were launched on the air purification side as well as on the aesthetics side. Technological and aesthetics new product innovations have happened. Even in air conditioners, even in Lloyd, there have been huge revamp of the washing machine range, refrigerator range continues to enhance. There has been a continuous innovation process in both these product categories. Going forward, I believe, actually the new product innovations will definitely help increase the sales. As far as Lloyd margins are concerned, last couple of years have actually been a bit of a dampener because the sales in the seasonal time were affected. I think from next year, we should definitely see good traction of margins in Lloyd as well.
To be specific, so in Lloyd, we had introduced this entire range of washing machines and refrigerators. By when can we see meaningful pickup in some of these segments? I think on the margin side, should we expect close to double-digit margins we should aim for in Lloyd in the next one, two years?
When you ask this question about meaningful contribution, it will take at least two or three years for them to start making a meaningful contribution. Look, Lloyd will continue to be our growth engine. The main focus there would be to gain market share, gain entry into each segment. Yes, of course, because of the volumes, the margins will improve. It's difficult to say how much margin will it be, but it will improve from the present rates.
Okay, sir, u nderstood. Thanks. I'll come back.
Thank you. The next question is from the line of Naval from Emkay Global Financial Services. Please go ahead.
Yeah. Thank you for the opportunity and congratulations on good set of numbers. My question is on revenue distribution, the way you elaborated on tier 2, tier 3 towns and how urban is picking up. Any sense you can provide on how geographical mix was in the last quarter? Not the exact numbers, but if at all qualitative trend, which geography would have outpaced the growth number, and how trends are happening in current month as well. Because you also stated the way there are localized lockdowns in South, so that are still impacting overall recovery.
Yeah, there has been a variation in the, let's say, the extent of pickup in sales. The South and East have been weak in the first quarter, and North has definitely been much stronger. West has been fine. South and East are quite slow. Actually, even East, the biggest market for us, West Bengal, took a long time to open up. That will start improving in the East, has started improving in the second quarter, but South is still a bit weak at the present.
Anything specific on Lloyd because of the strong heat wave in North? How traction would have been, say, last 20, 30 days because of this? This would have accelerated channel inventory liquidation far more exceeding your expectation. Was that also the trend in Lloyd?
Yeah. In the North, actually, you're right. The channel inventory reduction was beyond our expectations because the lockdown actually opened much later as compared to last year, this year. The North saw a good pickup in sales for air conditioners because of the heat wave. Now because of the monsoon coming, things have started normalizing back again. The first quarter saw that benefit. The losses which happened in the East and South were compensated by North.
Understood. Thank you, and all the best.
Thank you. The next question is from the line of Aditya Bhartia from Investec. Please go ahead.
Hi, sir. Sir, if you could just share some insights on how 3 months of the quarter have panned out. May, I guess, would have been very weak, but how strong was exactly the growth that we saw in June?
Yeah, I mean, this is quite general. Till the 15th of April, things were quite normal. Suddenly the lockdown happened. The COVID, the ferocious COVID wave started around the 15th of April and continued till the middle of May, when things started opening up on a very cautious manner. I think June was the month where things were much better as compared to April and May.
Sure, sir. Sir, this has been a year where we have seen the reduction in number of employees. I mean, FY 2021 was the second consecutive year where we saw a reduction in total number of employees. Which are the areas or verticals wherein we are seeing employee reduction, and why exactly is it panning out? Thanks.
Sir, there is no reduction. I don't know where are you getting this impression from. If it is driven from the value, you see, these are because there are a lot of variables which are also included in the value. I think this impression is not correctly placed. There is no reduction in the number of people. In fact, we have added the number of people.
Sir, I was just taking the data from the annual report, wherein it is the manpower number that you have mentioned that appears to be going down, which is why the question.
No. If you compare with last year, numbers are the same. Maybe you can take it offline with Manish.
Sure, sir. Will do that.
I must correct it because you're asking it on this call. Let me say it very clearly. There has been no reduction in the number of people in any discipline. With all the numbers are going to increase because we are fairly sanguine about the growth which is now going to happen in this country, and I think we are very well positioned to take advantage of that.
Understood, sir. Perfect. Thank you so much.
Thank you. The next question is from the line of Balaji from Aarohi. Please go ahead.
Thank you for the opportunity. Congratulations on the good set of numbers, sir. My question is relating to ECD.
Sorry to interrupt, Mr. Balaji, sir. This is the conference operator. There is a slight disturbance coming from your line, sir.
Okay. Is this better now?
Sir, the disturbance is still there.
Hello. Is this better now?
Slight airy disturbance, sir.
Now?
Now it's better, sir. You may go ahead.
Okay. Thank you for the opportunity, and congrats on the great set of numbers, sir. My question is relating to contributions in ECD. When we are comparing it with FY20, last to last year pre-pandemic, we see that there's a drop by 700 basis points. Is that because of delayed price action or any other reason because of commodity price increase? Is there a mix change because you said that fans has seen a stressed quarter.
I think what you're comparing is the fan season quarter, which is Q1 of FY20. That obviously is a quarter where the fan sales are the highest, and hence it helps bump up the contribution. I would say that it's not really a good comparison. Yes, of course, because the commodity prices have increased, some corrective pricing actions have been taken. There is always a delay. I think going forward in the next two or three quarters, you'll have to see how the situation comes in. It's not a great comparison to do a full quarter, and that too the highest season quarter with this truncated quarter.
As a follow-up to that, I'm just doing the comparison because the revenues are comparable. FY 2020 revenues were around INR 562 crores, and this year ECD revenues are INR 576 crores. Was that truncation in fans?
There is growth in many categories, for example, water heaters, appliances. Fans, obviously, where the manufacturing is high and the season is highest in April and May, which was lost. Again, I'm saying, it is not a great comparison to do a full quarter comparison with this particular truncated quarter.
Understood, sir. Another question again on Lloyd's contribution. You did mention that the contributions will be going up 2 to 3 quarters down the line. In the longer run with newer product mix coming in, the refrigeration and washing machine, any sort of expectation on what it can go up to?
We don't want to give a number, but yes, there will be improvement.
Okay. Thank you, sir.
Thank you. The next question is from the line of Nitin Arora from Axis Mutual Fund. Please go ahead.
Hi, sir. Thank you for taking my question and I'm sorry I joined the call a little late. I'm sorry if you had to repeat and this question has been asked. Sir, this is the second quarter where the cash flow is negative. Just wanted your guidance, how long should look at it. If you can throw some light on how the secondary sales in the channel has moved.
Sir, I think the cash flow in this quarter is largely attributed, as we mentioned, the two products, particularly ACs and fans. We were keeping high inventory, which could not get liquidated as anticipated because of the, particularly Lloyd, the peak season got impacted by COVID. Second, maybe because of technical, since it was a truncated quarter, the purchases were low, only you kept paying the regular credit as payment. What happens, the credit goes down, which I think these things will just recover over a few quarters. I don't think that should be a cause of much worry. As well as secondary, I think secondary sales continue to track well.
We have said this earlier also, since demonetization, we have seen the channel inventory continues to be tracking pretty much the secondary sales, because I think there has been a repeated, whether it was demon, then GST, then COVID. I think there is a bit of a sort of semblance in the dealer channel where they want to keep the inventory, which is not too high compared to what they see the secondary trend. Secondary sales are pretty resilient, and we believe they should improve as we said, the COVID issues, and hopefully, there is much more reopening of the markets.
If you look at the inventory excluding cable and wire, the inventory is at an optimal level, not too high, not too low. Is that the right way to look at it?
Sorry. We were not in cable wire.
Our inventory is high for the mix seasonal products like ACs and fans.
ACs and fans, the inventory is high, not cable and wire that much.
No, sir. My question is, if I exclude the cable and wire business, the rest of the inventory in the channel is at the optimum level. Is that the way to look at it?
Yeah. That's right.
Okay. Sir, any comments of yours towards the market share gain from the unorganized sector, is it still happening or you think unorganized now is stable, coming back? Because that was a good share of gain you witnessed last year, and I think still continuing. Just some comments on that. Thank you, sir.
As you said, you joined late. We did mention this in the beginning, but maybe for the sake of repetition. We have mentioned that there has been overall gains for Havells, and t hese are the combination of efforts over years. These are not sort of one quarter or one year effort, rather efforts into new channels, seeding sort of new product categories, looking at a new customer category. These are what has helped to gain the market share, which we believe is overall, there could be something attributed to organized, something attributed to the organized as well. The pie of organized seems to be growing because there is a continuous shift from unorganized to organized, and one cannot judge really on a quarter-to-quarter basis, but we believe the trend which started initially because of COVID continues to remain.
This is the only way we can sort of, as of now, explain the same.
Okay.
Sorry to interrupt, Mr. Arora. Sir, I request you to rejoin the queue.
I'll come back in the queue. Thank you.
Thank you. The next question is from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.
Thank you for the opportunity and congratulations for good set of numbers. I have two questions. First is, if you could guide us on what is the expected capital expenditure for the current year, and if you could also highlight what it could be for the next couple of years, and the categories in which we are investing towards capital expenditure. Second is, if you could comment, we are expecting to see new energy ratings for fans as well as air conditioners from early 2022. Your comment on how is Havells positioned towards that, and will this also aid in terms of market share gains due to Havells' superior investment into research and innovation?
On the CapEx side, we did mention we had earlier guided INR 500 crore for the year and INR 1,000 in two years. As we said, we'll continue evaluating. There could be something shift because first quarter, due to COVID, there have been some reduction. The factories could not be open for all these kind of construction activities and all. As of now, we are not changing guidance on the same. We'll continue to evaluate that. On your second question on the BEE and all, in fact, we were already ready. The government obviously delayed the notification for right reasons. We were already ready in terms of our fans and AC, the preparation is also there. As of now, when government notifies, we are fairly well prepared with a new range, fully compliant with the new BEE norms.
We do not face much issues on that. You are aware, you see our CRI, our R&D efforts are pretty future focused. We have a large team as well. We continue to evaluate how the new BEE norms will affect not only the company, but also the customer orientation towards that. In terms of a specific question, the answer is we are already ready with the range. We are complying with the new BEE norms.
Sure. Just a follow-up on this. Do you expect these to be delayed further as they were last year because you've got a strong statement-?
As of now, there is no indication like that. We do not feel there'll be any meaningful shift, if any, by the government on the same now.
Sure. Thank you so much for taking my questions.
Thank you. The next question is from the line of Achal Lohade from JM Financial. Please go ahead.
Yeah, good morning. Thank you for the opportunity. Can you hear me, sir?
Yes.
Am I audible? Okay. Sir, congratulations for the great set of numbers. My question is, if we're looking at normalization in commodities and growth picking up, how do we look at the margins? What we have delivered in Q4, do we think that this is kind of a sustainable number? I know there is an element of seasonality here, from a annual number perspective, is it fair to say that these margins are sustainable?
I believe that if we don't say the entire annual, but on an annualized basis, yes, the margins should start coming back in most of the product categories. Like in cables and wires is from the higher side, and ECD is from the lower side. I think we should be coming back to normalized levels soon.
Understood. My second question is there any thoughts on the inorganic opportunity side? Are we looking at any opportunities or, given the kind of product profile we already have, we may not be very keen on the opportunities?
No. Look, first of all, we have a strong organic traction in our product categories. You are aware after the acquisition of Lloyd, the kind of runway we have in terms of product categories, it is fairly sizable. We have mentioned before also, we do not feel the need of inorganic acquisition to support our growth. There we see a strong traction in organically as well. However, again, if there are opportunities which fit into our portfolio at a right pricing, which again is a very difficult thing in India. I think that's something we'll always remain open. Let me just clarify once again that this is not something which we need to fulfill our ambition of becoming a much larger player in the industry. We will remain open, that's fine.
We feel very satisfied with the kind of opportunity we see organically in the entire portfolio we have at Havells.
Understood. Thank you so much, I'll come back in a little.
Thank you. The next question is from the line of Mayank Bhandari from Nirmal Bang. Please go ahead.
Thanks for the opportunity. Sir, my first question is on Lloyd. We have grown about 60% in YOY. Any idea how much industry growth has been?
Well, I think we have not much idea, because the results will come. We believe, I think we have pretty much sort of maintained and grown our market share in this. Look, the last year base was very different, maybe for others as well. Difficult to look at one quarter and then decide how others have done. I think let's wait for the whole year performance and then the picture would emerge better.
Sir, how has been the growth in the July month specifically, given there is extended summer in northern part of the country, any comment on that?
To July, I think they're difficult to comment and we like to stick to Q1 performances only.
Okay. Sir, in the Q1, as you highlighted, that the contribution from industrial has increased. How much would have been the contribution from the industrial side of the business?
Overall, on the Havells side, we see that almost about 27% of the business is from industrial.
27%?
Yes. Industrial and infra.
Okay. Lastly, sir, we have seen a dip in our other expense. Other expense as % of sales is pretty low when we look at last eight or nine quarters. Is that the savings which we have realized in the pandemic year is now kind of resulting in better margin for us?
I think in some sense this could not be comparable with last sort of three quarters because as we said, the quarter has been sort of truncated. Lot of areas there have been sort of local lockdowns as well. Maybe I think let's view them over next two quarters and then we can see the trends. I don't think these are sort of really comparison we can draw on this quarter, which has been fairly sort of lopsided in some way or the other.
Okay, sir. Thanks.
Thank you. The next question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah. Thank you, sir, t hanks for the opportunity. Sir, one question on the distribution. We have around 155,000 retail outlets. Can you indicate what would be the universe or how much is the scope to expand the penetration further? Also in rural areas, we have just 25,000 outlets, how much can be the penetration expansion scope in that? We have started the initiative Rural Vistaar. Again, what are the initiatives that we are doing in that? Yeah, that is one question. Second question is, obviously in commodity link categories like cables and wires, we have taken steep price hike of almost 30%-35%. Let's say if the input prices decline, will the company be again reducing the selling prices or it will stick to the current selling prices? Means how it will be playing in that scenario? Yeah, that's it from my side.
I'll take your second question first. Normally, cables and wires, the prices in the market follow the raw material trends. Whether it is an increase or reduction, within a short period of time, it is passed on to the consumer. That has always been the case. Yes, you are right, that if it comes down, that will also be passed on to the consumer. On your first question, the base is still very large. I would say with the electrification going into smaller towns or villages, there is a huge scope to expand this retail network. Even within the rural segment, right now we have identified 3,000 towns where the population is below 50,000, where we are now, in a short period of time, we'll be covering that.
To cover the entire retail network, that will also take time with adding more and more new product categories within the rural segment. I would say that within the rural areas also, we would be still at a very low base at the present moment because it's just a 2 or 3 years old journey for us.
Okay, t hat's helpful, sir. Sir, just last question from my side. In case of Lloyd, what are the three key important things that we would be working on to expand the market share? I guess we already have a large product portfolio in place now. I guess distribution-wise also we would have already been reaching out to the distribution of most of the outlets that the market leader would be reaching. In terms of pricing also, we would be relatively more competitive compared to the pricing of the MNC products or even the market leading products. What are the 3 important things that you see will lead to better market share gains for Lloyd?
According to you, we've already exhausted all our options in the expansion of Lloyd.
No, sir. That is absolutely not the thing.
I think it's always a journey, whether it's Havells or Lloyd. Maybe five years ago you would have asked me, I would have said the same thing. Product innovation, branding, distribution reach, that is a continuous process in Havells and 10 years ago as well as now. Lloyd, I think gives us far more opportunity to keep investing on branding, product innovation, as well as distribution enhancement. That will continue as a process, I think whether it is FMCG companies or our kind of companies. Those are the three or four main key points that needs to be looked at all points in time.
Okay, s ure, sir. Many thanks, sir.
Thank you. The next question is from the line of Renu Baid from IIFL. Please go ahead.
Yeah. Hi, good morning, sir, and congratulations for the good results in 1Q. I have three questions. First, if you look on the demand side, last year, second half, we had a good pent-up demand in addition to the base market. When we look at the current year, given that you mentioned that you're not seeing any pent-up further, how do we target volume growth for the year in this scenario without pent-up? Any change in business mix strategy that should be there in place to ensure that we deliver growth or volume growth could be a challenge in your view?
Okay. I feel that I've always maintained, even last year, that the pent-up demand could never have been for the entire year. The pent-up demand is always for a short period of time when markets open up and there have been delayed purchases because of lockdown. The pent-up demand actually played out. The rest of the year was not really a pent-up demand, but increased demand from the consumers because of change in, I would say, consumer behavior. I would argue that this year, though there is no pent-up demand, but the growth in the sector, which is, let's say, without COVID, that growth will continue, and that's where the growth will come, the volume growth, plus of course, the pricing growth will come. We are quite confident that the growth will continue despite the pent-up demand not being there.
Sure. Broadly, given the fact that commodities have also started to taper off, we have taken adequate price increase. Do you believe that the gross margin headwinds are broadly behind now? How should we look at Lloyd specifically because volumes as they moderate post-season, what would be the strategy there to improve the margins, both in balancing ASP as well as relative pricing in the market?
Yes, the volatility has abated and that's helpful, but t here will always be pressure on the margin, t here is pressure on the margin because the commodities are at an all-time high, h ence, we are always balancing between the ASP and the market as well as market shares and the margins. Look, we have always been a growth and margin-oriented organization. We always have maintained balance between our growth in market share as well as margin. I think that trait will continue in the coming times also. We will have one look on the market share and the other look on the margin. We believe that the margins will improve from here, but it will be under pressure. It will be under pressure in the sense that it will require far more effort to achieve the requisite margins.
Sure. Also my last question is on the CapEx side.
I'll just request you to rejoin the queue for follow-up questions.
That's okay. She already mentioned that she had 3 questions.
Yeah. Just last thing, especially for Lloyd expansion in the South, one of the largest players has called off their South expansion plan. Do you think that the proposition of having another facility in the South makes sense given that PLI also is not focusing on finished products but components here? Are we looking for a second facility for Lloyd?
We are evaluating right now. I think if the PLI would have been on the finished products, maybe that could have fastened our entry into setting up a manufacturing facility at South. Now we will be taking it as and when the requirement or the market shares or volumes in Lloyd require it. It will not be a decision based on PLI, but it will be based on the fact that how fast we can grow into that market.
Got it. Thank you and all the best, sir.
Thank you.
Thank you. The next question is from the line of Ashish Jain from Macquarie. Please go ahead.
Hi, sir. Good morning. Sir, my question pertains to cash flows. Fiscal 2021 was the first year where our operating cash flows were much lower than our profitability and than our profits. We have seen the same trend in-
Can you repeat?
Sir, fiscal 2021, the operating cash flows were much lower than our profits because of working capital increase and all, and we have seen the same trend in Q1 also. Do you think by end of this year it will normalize and we will go back to a scenario where our operating cash flows are much better than our profits and all?
Yeah, I think you rightly mentioned that the last year and the trend continued because I think the disruption continued in Q1 as well. Yeah, we are fairly sort of confident that these things will improve over the next few quarters. Look, structurally, we continue to be a net operating cash flow company. Nothing has changed structurally in the business. Quarter to quarter, things can vary. I think if you say the trend-wise, we continue to be the same company we were earlier. I think we're only improving upon the same. I think you will see this pretty much reflecting in the numbers in the next few quarters.
Right. Sir, my second question was on margins. One of the comments which you made in the press release was that operating margins were impacted in couple of segments because of lower sales and all. What is the trajectory we are seeing for those specific segments like lighting and Consumer Durables? Have margins kind of normalized now based upon the commodity and the demand momentum that we're seeing today?
Look, under absorption overhead was one part of the reasons why they were lower. As we said, there are sort of competitive pressure as well. There are strategy about balancing the market share gains with our lighting. Part of that under absorption, I think they will get stabilized once we have the full quarters and hopefully there are no lockdowns going to happen in future. Part of the, I think, strategy will be compensated through the higher growth into the business. These are things which are fairly variable, I think that needs to be seen only when the quarter plays out.
Yes, I think that part where the under-absorption has been, hopefully now with the full quarter, that will get addressed.
Okay. Thank you so much, sir.
Thank you. The next question is from the line of Rahul Soni from SMIFS Limited. Please go ahead.
Hello. Yeah, thanks for taking my question. Sir, my question is on the refrigerator and the washing machine, the new product you have launched under the Lloyd brand. What kind of investment do you have regarding these products, and what is your current capacities? Going forward, will you be manufacturing these in-house or you will also outsource the manufacturing? That's it.
As of now, we are using the ODM approach, where the designs are proprietary. They are developed in-house through our consumer research. Whether we do in-house, that's something will be evaluated as we grow in the volumes. Yes, if you look at the way we work, is that we always prefer to do in-house manufacturing. I think that question is some time away. Washing machine, part of the washing machine product we already brought in-house. That we have done. Still there are large parts of refrigerators and washing machine, which we continue to outsource. As I said, that's something we keep evaluating, and at the appropriate time, we'll keep bringing them in-house.
Okay. What's your current capacity, sir?
Capacity, since we are not doing that much in-house, I think that has not much meaning. You see, we are doing an ODM approach. These are not in-house capacities. Capacities of the vendor who works dedicated on our behalf.
Okay. Thank you.
Thank you. The last question is from the line of Chintan Sheth from Sameeksha Capital. Please go ahead.
Thank you for the opportunity. Am I audible?
Yes, sir.
Yeah. Sir, I have only one question. If you can provide an estimated revenue loss for the quarter because of the second wave of what we budgeted when we started the quarter, and that would be helpful.
No, that is difficult to estimate because this time the lockdown has been sort of bits and pieces, some time in north, some time in east. I think, let's move forward on this. I think there's no point looking at the past now.
I was just trying to understand, because it was a very sudden lockdown issue came up at the middle of the quarter. We will have a very less time to rationalize our cost as well. I'm trying to gauge if we have ended up the revenue the way we have anticipated at the start of the quarter, how things would have looked from that angle. Not the particular number, if any revenue shortfall in terms of percentage would also help.
No. Look, revenue definitely is lower than what we anticipated. I think it will be pure conjecture if we try to put some number on that. Obviously, expenses, unlike last time, would not have been that much reduced except for the variable ones.
Right
What happened in state or travel and all. As I said, I think we would rather stay away from this, and let's focus on Q2, Q3, Q4 and way forward.
Sure, sir. I understand. Thanks, and very all the best, sir.
Yeah. Bye.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you very much for joining the call, and look forward to a great year in the coming times. Stay safe and healthy. Thank you.
Thank you. On behalf of Batlivala and Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.