Ladies and gentlemen, good day and welcome to the Orient Electric Q3 FY23 earnings conference call hosted by PhillipCapital India Private Limited. As a reminder, all participant lines will be in listen-only mode. There will be an opportunity to ask questions after the presentation concludes. If you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phones. Please note that this conference is being recorded. I now hand the conference over to Mr. Deepak Agarwal from PhillipCapital India Private Limited. Thank you and over to you, sir.
thanks. good morning, everyone. On behalf of PhillipCapital, I welcome you all to Orient Electric Q3 FY 2023 earnings conference call. Today we have with us, Indian management Managing Director and CEO, Mr. Rakesh Khanna and Mr. Saibal Sengupta, the Chief Financial Officer. Without any further delay, I would like to hand over to Mr. Rakesh Khanna for this keynote. After which we will open the floor for Q&A. Thanks. Over to you, sir.
Thank you, Deepak. Good evening, everyone. A very warm welcome to all of you, and thank you for joining us for our Q3 financial year 2023 results discussion. I'm Rakesh Khanna, and with me I have our CFO, Mr. Saibal Sengupta. We are pleased to share that the company registered record high revenue for the quarter with a growth of 8.9% year-on-year to INR 739 crores in Q3 financial year 2023. Point growth in the ECD and lighting and switchgear segments. Our three-year CAGR for Q3 performance is 13.2%, while the five-year CAGR is 16.4%. The gross margin was 28.6%, improving by 234 basis points quarter-on-quarter and 102 basis points year-on-year, driven by better cost savings initiatives.
The EBITDA margin registered a decline of 37 BPS year-on-year, partly due to one-time costs on account of investment in growth, but grew by 550 BPS quarter-on-quarter in Q3 financial year 2023 to 7.4%. Although pricing pressure and high cost inventory weighed on margins, better operating leverage resulted in expansion of the EBITDA margin on a sequential basis. Excluding one-time costs, the normalized EBITDA would have been 9.1% in Q3 financial year 2023, a modest decline of 17 BPS compared to Q3 financial year 2022 normalized EBITDA. The profit after tax margin was 4.4% in Q3 financial year 2023 compared to 5.6% in Q3 financial year 2022. Our working capital improved 20 days in the quarter from 35 days in Q3 financial year 2022.
The increase in revenue to a substantial extent was supported by 11.9% year-over-year and 73.8% quarter-on-quarter growth in the ECD segment like the fans and air coolers. The fan segment recorded the highest Q3 sales ever, which increased by 15% year-on-year following aggressive restocking by trade channel ahead of BEE star rating implementation on January 2023. The current restocking of fans, combined with severe cold weather in the north, may cause some temporary blips in the retail offtake in the coming months. We expect the trade to normalize as soon as consumer off-take starts in February, March. The EBIT margin for the ECD segment was 12% for Q3, registering an increase of 755 BPS quarter-on-quarter and an increase of 89 BPS on a year-on-year basis.
The company has been able to sell its entire non-star rated fan inventory amidst the transition. Presently, we have upgraded 360+ SKUs from non-star to star rated fans and have attained B rating certification for 400+ SKUs. The company has in the BLDC fan segment with its established product portfolio, further supported by planned rollout of new SKUs in quarter four. In quarter three, air coolers registered a 2x sales growth Y on Y, while water heater sales grew by 21% YOY, supported by a 2.5x sales growth in e-commerce compared to last year. We are happy to share that our direct distribution strategy has generally stabilized in states of Bihar, UP, Orissa and Karnataka and has started yielding positive results as sales in these states grew by 60% in Q3 financial year 2023.
Andhra Pradesh and Telangana, the two states which came in later, still have to stabilize and yield positive results. We expect them to stabilize by quarter four financial year 2023. Our focus is on the expansion of distributors, direct dealers, and retail touch points in these states. The lighting and switchgear segment recorded year-on-year revenue growth of 1.6% for quarter three financial year 2023. The overall lighting growth was stagnant in quarter three financial year 2023 due to the preponement of demand in Q2 FY 2023, GST increase, and the diversion of liquidity towards stock filling of non-rated fans by trade channels. The growth in the B2C segment remained flat due to subdued demand and high base of last year.
The B2B segment grew by double digits year-on-year, driven by infrastructure spending and robust growth in the facade lighting space. EESL restructuring is complete, and we expect tender business to improve in line with government infrastructure push towards highways, airports, railways, and smart cities. The professional luminaire space saw record revenue growth with high teens year-on-year growth and improved margins over last year. The company has successfully executed multiple projects for NHAI in Chennai and Chhattisgarh, UP street lighting, HPCL, Jaipur Development Authority, and Delhi PWD. The inquiry and execution levels in the building facade lighting segment remained healthy. The company has successfully completed three projects, the Indira Bhawan project , the Varanasi Cantt railway station, and the Puducherry smart city project. We continue to make progress on Srinagar smart lights project.
Our company has been awarded the prestigious contract to design and provide facade lighting for Baroda Bhawan in Delhi. The switchgear segment continues to grow with healthy traction in the mass premium segment. We have also launched house wires in 6 states, namely Rajasthan, Haryana, Delhi, UP East, Bihar, and MP during Q3 financial year 2023. The company's exports grew by double digits despite the geopolitical challenges in key markets, Sudan, Sri Lanka, Ghana, and moderating demand because of monetary tightening in the Western markets. We remain focused on driving the growth through lighting and switchgear portfolio, increasing the digital revenue, go-to-market strategy, and cost reduction initiatives. We have augmented our leadership across various functions to expand our market plan and segment outreach. On the Sanchay P roject, we have achieved INR 37 crores in cost saving through December 2022.
Our new Greenfield Hyderabad factory's construction is on track, and we have incurred INR 78 crores in 9 months financial year 2023, out of the budgeted INR 175 crores still date. That is being funded out of internal generation. We continue to expand our digital revenue, which witnessed 3x growth in quarter three, although on a low base. In the quarter, the lighting category in e-commerce witnessed improving traction on the platform. In the quarter, we were awarded the CII Supply Chain and Logistics Award for 2022, along with the FAME India Safety Excellence Award and the FAME India Environment Excellence Award in the consumer goods electrical sector category. With this, I would like to open this forum for question and answer. Thank you.
Thank you very much. We can now begin with 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. The first question is from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah. Thanks. Thanks for the opportunity. Sir, now considering the direct to market route, what is the total sales of the company coming via this market route? What is the total potential, that is, what is the total scope to do the investment in expansion just in wake of the distribution for the company? Again, secondly, what is the total savings that the company has achieved from direct to market route? Yeah.
Well, Aniruddha, as I said last time also, the total potential that we have addressed through direct to market is around 25%. We are now significantly gaining to that side. We are coming closer to our average All India market share. In some parts of the market now we are even higher than the average All India market share that we have. Our kind of experience that we have gained in the direct-to-market is a great experience, and we feel that we can continue to further expand and take the market share in these states to the highest market share that we have in any of other states. It's a great experience that we have. Idea is not to do cost savings. There are no cost savings involved. There are no extra costs also. It's cost neutral by and large.
It is only about setting the best ground rules from 0 base in these new states, and creating the best practices. That's what we are gaining.
Okay. Okay. Thank you, sir. Considering that industry has been good sales in Q3 itself on a retail plan. Could you see any likely impact that the industry may have relatively muted growth in Q4 as well as Q1?
There would be some kind of an impact. I see this to be a small impact. Really speaking, it is the entire industry. The growth in Q3 is not so great that it's likely to impact Q4 and Q1 in the season. It's a small growth that has happened. It's a small trade pickup that has happened. We should not forget that the channel was also reasonably empty in the last few months and maybe two quarters. Therefore, so much of pickup is not likely to seriously impact the trade going forward. I personally believe that as soon as the consumer off-take will start, the trade pickup will again become normal very quickly.
Okay. Thank you. Thank you, sir. Very helpful.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. We have the next question from the line of Bhargav Buddhadev from Kotak Mutual Fund. Please go ahead.
Yeah. Good morning to you, and congratulations on the good performance. My first question is on the fact that wherever you have seen direct-to-market, you've also rolled out a DMS and FSK. What are the key benefits of this which you're seeing? Is there a probability of this seeing a Pan India launch also in the fan market for us?
Yes, Bhargav . What the digital DMS and FSK allows us is to have a complete visibility. Our objective is to reach the last mile where the consumer buys from the customer, from the retailer, we would want in every state to have a retail viewership of at least 2,000 to 2,500 every state. That's the target. How this helps us is to ensure that the counter shares on each of these address retailers are well managed and well influenced. A retailer is an important customer for us in that sense, we would want to ensure that the retailer is very well serviced. This visibility helps us to ensure that every retailer is well serviced and everything is correct. Finally, that is what leads to good market shares.
We will be rolling out a similar DMS in the other states also. Let me clarify. We will roll out the DMS and FSK for the transparency in other states and not necessarily the direct-to-market.
Sure. Sure. Understood. Just wanted to know, how has been the pricing for these star-rated fans? What we're hearing is that the same have been priced very competitively, compared to erstwhile non star-rated fans, and hence, the consumer demand may not be significant impact. Is that assessment correct?
Yes, you are right. Although the cost increase is there, we are working hard to ensure that the impact is minimized. Through our cost reduction initiatives, through pricing initiatives, we understand that we do not want the consumer to get significantly impacted.
Okay. Sir last, this data related question. You mentioned EBITDA margin of 9% plus. What was this one-time cost, and can you quantify this? That's my last question.
There are a few one-time costs.
Maybe I will take that question. Basically, there were one-time costs around as you have seen our employment costs have gone up. There were a lot of senior management recruitments which have happened. The one-time recruitment costs have gone up. We are doing this McKinsey project, which was not there on the pace. That has added to the increase in the costs. As well as, though it is not one time, still in terms of advertisement promotion, we have seen significantly pocket on a year-on-year basis. All that put together has caused this impact. I'm not talking about the other normal expenditures which have rolled back t o pre-COVID levels, including international travel and all that. I'm not regarding that. Yes, one time comprises of the McKinsey consultancy and recruitment cost. Those were the bigger ones.
Those together with the advanced brand investment. All these we look up all together investment for long-term sustainable growth.
Sir, can you quantify the McKinsey cost and the ad spend as a % of revenue?
We don't give that kind of a detail. All that put together, if you can estimate around 1.7, 1.8%, all this put together.
Okay, sir. That's clear. All the best. Thank you very much.
Thank you. The next question is from the line of Nitin Aror a from Axis Mutual Fund. Please go ahead.
Hi, sir. Thanks for taking my question. Can you talk about a little on the secondary sales, how it has moved? Because, it's a large part of your volumes, and large part of the ACP portfolio is still fans, where you've done inventory addition. Plus there was a change in states, you know, related to marketing, which may have also resulted in the high inventory and pushing the volume to the dealers. Can you talk about more on the secondary sales and as we get closer to the ban end, how the secondary sales is moving, if you can throw some light on that.
Yeah. The secondary sales are in line. They are quite satisfactory, from whatever we understand the market also. The secondary sales, there's no growth that one can talk about, but it's not small. Secondary sales are going well. Consumers are buying. We're just waiting now for summer to come up. We will see a spike in the you know, the next level of sales going up.
Getting it. The, the change in the distribution which you have done, any other states which you will be taking going ahead, or is it largely done, the first four and five states which you have gone through?
See currently, we will be focusing on just putting these states absolutely right. We will be putting the learnings in the other states. As I said, there are some great learnings that we're coming across. We will always be open to taking any decision anytime. What is important is whatever is most suitable in a given state, those actions will be taken in the interest of the market shares in the state.
Getting it. Just one clarification on this cost element. The employee cost, which is INR 57 crore now, suddenly we have been in the range of INR 46 crore-INR 47 crore or INR 45 crore. In that, how one should take the recurring costs on the employee side? Because you said there is some recruitment cost. I didn't understand what is this one time recruitment cost. I mean, it should get normalized, right? Can you throw some light what is the normalized employee cost one should assume?
Maybe Sai can take this question.
Hi, Nitin. Basically, the employment cost which has gone up, this you should see it as a recurring cost because now most of the quite many of the senior management team members have already been onboarded. Their costs are coming. One or two will be added in the current quarter as well. What is published is the recurring cost, and it'll slightly increase as well. The recruitment cost which I talked about is the one time recruitment for the not only senior management or at all levels. A lot of vacancies are also getting filled up at the junior levels as well. All that put together is the one time recruitment cost.
Sir, let me also add. The way you need to see it is, all of these are upfront costs for the future growth. As we start growing, you will start seeing the advantage of these costs. You can see them, the increase in the cost is an upfront cost which we are putting in building some part of the organization, which is a growth lever of the organization. For example, we're building a very strong e-commerce team. Now we know that this is an area where we want to significantly grow. In future, as a percentage of revenue, you will start seeing this coming down.
That's a well point you can say. I was just trying to understand, you know, where this INR 170 crores coming from a one-off. It doesn't look like a one-off recurring cost. I understand the future benefits will come as a % of sales. On an absolute basis, I was just trying to understand that we should assume this number or not. It doesn't look one-off. That's what I was trying to understand.
The one-off is the other recruitment cost, which is this other cost and not in the salary cost.
That would be INR 80 crores roughly?
Difficult to say.
Difficult to say. Got it. Got it. Thank you very much, sir. I'll come back to you. Thank you.
Thank you. The next question is from the line of Rahul Gajare from Haitong Securities. Please go ahead.
Yeah. Good morning, gentlemen. sir, I have a question on fans. You did indicate that fans has grown by 14%. Can you clarify the volume growth that you've seen in fans for the first nine months for the fans business?
Volume growth and unit growth are nearly similar.
Okay, fair enough. Now, lighting, I'm probably seeing similar volume growth in the lighting business. Because it's been flattish in this particular quarter. In the full year, in the first nine months we've seen a 20% plus growth. Just want to understand the volume growth in lighting.
In lighting, it is very difficult to give a volume growth. It's comparing two, three very different products. On one side you have street lights, on the other side you have a bulb. Very difficult to put the volume to value. I think one has to see only value.
Let me put it differently. There is some decline in realization in the B2C lighting, some large amount of lighting. Is there a significant decline in realization that we've seen in the B2C lighting?
No.
Okay. My last question is, you know, on the demand and what you've done on the e-commerce, you know, to increase?
Sorry, your question is not understood.
I'm asking on the demand scenario. You know, give or just again talking about a slower demand I want to understand what is on board for the EC business and the lighting business.
The demand is not a high growth demand. I would not call it that way. There is no kind of a reduction. We're not seeing the demand is going down. I think it's fairly stable demand. Going forward, we are more hopeful about the demand to further pick up.
Yes, sir. Thank you.
Thank you. We have the next question from the line of Nikunj Gala from Sundaram Asset Management Company. Please go ahead.
Yeah. Good morning, everyone. Just want to understand in the last 1 month, what is the consumer behavior we have seen in the fan category? People are preferring buying 1-star, 2-star, or 3-star and above. Can you just help us with your, you know, understanding from the ground? What is the higher contribution from each star?
Currently, this will be lot influenced by the trade. In the trade, since there is a zero-star material, the trade will continue to push the zero-star fans. Going forward, as the inventory will deplete and the awareness of the star-rated fans will increase, it's very clear that consumers will start going for star-rated fans.
In the last month we haven't seen any, like, pattern of people moving from zero star to three star or something. Like, you must be having some order in backlog, you know, for the coming months.
No significant shift as of now, as I said. This is largely also driven by what the trade has stocked. The consumer first has to go to the retailer and speak there, and the retailers will show the stock that the retailer is carrying. Therefore, not a significant shift.
Okay. as of now, I just want to understand from your production perspective, how the contribution will be from the your production side. large chunk would be still you will be producing zero and one star?
No. There is a legal requirement and effective first January, the manufacturers cannot manufacture or sell the zero star.
Yeah. I mean for one star and two star sir. Large chunk of your production still will be one star and two star, sir?
Okay. Still will be large will be one star.
Okay. Thank you. Just one clarification on your comment when you mentioned in the nine-month period in fans, your volume and value growth are equal. In the last nine months, considering the kind of inflation we have seen, is there understanding that we haven't seen any price increases in the first nine months?
A lot happened because of the mix change. During this time, because there is a lot of stocking that takes place that has taken place, a lot of it has been on the lower price points. It's a mix change.
Okay. Thank you. Yeah. Thank you, sir.
Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Hi, good morning, Rakesh Ji and Saibal Ji. Two questions. Firstly, you know, our interactions during last quarter, with, you know, with the trade essentially indicated some kind of higher discounts and schemes for liquidating zero star. One time cost, you know, whatever you mentioned doesn't include any kind of costs related to that. Could I understand a bit more, exactly how was your experience in terms of liquidation? Did this discounting actually impact margins? What would the receivables really, because I think I heard, if I heard correctly, you said net working capital is actually better YOY? Just these two things, please.
Yeah. The, the thing that happened with us is that we cleared the inventory and we planned well ahead of time. Therefore by December itself, we had sold most of the inventory that we had. We were not under any pressure to discount to liquidate our inventory. We were much better off. In terms of the credit, you would have seen our working capital. The stocks have improved, receivables have improved. I think we have done very healthy selling. We are happy for that.
Got you. The second question essentially was on margins. So it looks like obviously 3Q has been better based on in the past history in terms of channel spending on fan side. Gross margin and operating margins have not, you know, really reverted to long-term averages. Obviously, that's a function of some of the costs incurred right now. How should we look at margins over the next 12 months? Any indication, any direction will be really helpful. Thank you so much.
In terms of gross margins, we have improved our gross margins. Of course, the pressure continues. There is a lot of competitive pressure in the market, but we have improved our gross margins. Going forward, we do hope that our gross margins will further come up. There are a lot of cost-saving initiatives that we have worked on the pipeline. They will help us to improve our gross margins going forward. And we have not put any separate one-time liquidation costs. You see, the entire pricing is a part of the total pricing in the gross margin. There is no separate thing called that there is a liquidation cost for those, and it's sitting somewhere else. Nothing else is sitting anywhere else. It's the total gross margin earned is what it reflects, which has improved.
EBITDA should improve to it 19% or will it take like real time because we are investing quite a lot on, you know, on e-commerce, on Pearl, on a lot of other things, right?
Yes. We expect the whole thing to start giving results fairly quickly. As you noticed when we took the call of go direct to the market, our lesson was that we recovered the whole thing paying back in a matter of two to three quarters. The whole GPM is a three quarter cycle. Most of these also should start showing results fairly fast. We're already seeing in e-commerce 2x and 3x growth, which is already coming. I'm sure this will stabilize and will continue to give us the benefits. The Spark projects in which we have McKinsey working with us is also a two-year project of which one year is gonna get over soon. We're already seeing the kinds of benefits that it is bringing in. That is what is helping us maintain our margins.
With that confidence, I'm saying that the margins will further grow. These kind of very scientifically done cost reduction initiatives are really showing good results. We should be seeing the profit margins improving as things come.
Thank you so much for answering my questions.
Thank you.
Thank you. We have the next question from Mr. Achal Lohade from JM Financial. Please go ahead.
Good morning, sir. Thank you for the opportunity. In terms of the, you know, the mix can you help us with respect to the fans mix, in terms of premium and non-premium for nine months or one year?
See, I have always maintained that the premium way we define is very different from the way industry defines. For us, the premium is the top 10%, is what we call premium. We continue to change the definition of our premium. Premium is not a fan which starts at INR 3,000. At one time it was INR 3,000. Today it is INR 5,000. Anything less than an Aero Series, we don't call it a premium. What I can tell you is that the premium is continuously increasing. It is in the range of 10%. With the new 5-star now coming in, the definition will once again change. A lot of premium will come in the decorative segments for us, and the premium will once again move upwards.
In the premium category, as we define, we are clearly a dominant player with more than 40% market share in this particular segment. I'm glad to say that when it comes to aspirational products, Orient is by far the leader in the aspirational products.
Right. If I were to ask in a different fashion, if you were to, you know, categorize fans in terms of three or four buckets, what would they be and what their mix would be as we speak?
The way I would look at is one is the basic white and brown fans, and we call them the base fans. The second would be the decorative fans that brings metallic colors, et cetera. Third will be the premium fans, and the fourth will be the BLDC fans. Then will be the TPW fans or the exhaust fans. It's a little different way of looking at the product category. I think coming out of a pure trade-based, price-based categorization, I think if we see it from the consumer perspective, the buckets will change, and that's the way we place our buckets.
What would that mix be, sir? Approximately.
The basic fans, the white and brown fans will still constitute approximately 50% of the total sales. Then will be 10% for us will be the premium fans. Today the total BLDC will be in the range of another 10% and the balance would be the executive fans.
Right. The second question I had was in terms of the seasons, you know, A, is there any possibility of a price change that are upward or downward for these two categories? B, any new SKU or differentiated products which or new product in this particular?
Category?
Fans and air coolers, sir.
View of the season.
From the season perspective. Yeah, from the upcoming season perspective.
Pricing is already announced. I think there is not likely to be any change. And in new products, yes, in France there is definitely a strong rollout that's happening. And in coolers we have a very strong lineup. Yeah, in both of them, lineup is strong and prices have already been announced.
Got it. Just one last question, if I may. You know, with respect to the gross margins, you said the cost savings initiative. Yeah, I think you mentioned INR 27 crores. I don't know if it tends to only raw material costs at the gross margin or the other costs as well. What is the target here? You know, is there any particular number in mind, what you aim to achieve every year? Or is this just a one-time thing?
Yeah. The target is in 12 months' time, including this, we should be able to save INR 100 crores. That's the target. We'll be moving fast towards the target.
How much have you saved for nine months now?
As we said, INR 36 crores.
You're saying the fourth quarter would alone have INR 60 crore plus savings? Have I got this number right?
No, no. We talk of 12 months, rolling 12 months.
Rolling 12 months. Okay.
Yes, yes.
Okay. Okay. Sorry my bad, sir. Understood. Just in terms of market share, if you could help us in terms of fans, lighting and air cooler.
Actually, I, we normally do not talk much about market share because there is no very reliable syndicated data on market share. So if you ask me my understanding of market share, depending on which brands and how many players do we take in, count each category. I think if I take all the known, well-known brands into account, then our market share in fans would be in range of around 18%.
I presume you're talking about 18% of organized market, right? Essentially.
Let's not get into market share because there is no syndicated data, it's very difficult to define what is an organized player, what is an unorganized player. There are different perspectives there. What's important is this is our market size, you can compare with the market, the size of other peer group and arrive at your conclusion.
Got it, sir. Thank you for follow-up. Thank you.
Thank you. Ladies and gentlemen, we request you to please limit your questions to two per participant. The next question is from the line of Balasubramanian A from Arihant Capital. Please go ahead.
Good morning, sir. Congratulations for good set of numbers. I have one question and lighting and just share your plans. Like we are doing projects with Srinagar Smart City project. How we are selecting the projects, what is the minimum criteria in terms of margin or IRR and other criteria. If you please share, thank you.
Yeah. When we select the projects, basically we are looking at margin and payment securities and payment terms. If the payment terms are secure and the margins are good, we take up the project.
Sir, any particular minimum criteria like?
The, I would not be able to answer that question because that's, you know, competitive research that you can understand.
Fine, sir. Fine.
Yes, we want healthy margin, and we want to ensure that our payment is well secured.
Fine, sir. Sir on the ECD equipment , could you please share breakup for fans, water heaters, air coolers, that would be really helpful.
Some share from fans, water heaters or ECD, sir. Basically the fans, as I already mentioned earlier, it occupies around 61%-62% of the business, and that is continuing. The water coolers and water heaters remain the same trend as I had mentioned earlier, between 10%-12%. That trend continues. As you understand, there will be seasonal lifts into this. As far as lighting is concerned, it's 7.8%. This ultimately this is a trend which has continued, and the same trend continues in the quarter three as well.
Okay. Okay, sir. Thank you so much, sir. That's all my time.
Thank you. The next question is from the line of Ashish from Infinity. Please go ahead.
Thank you, sir, for taking my question. Sir, couple of questions, sir. One is that, as the transition happened and the dealer restocking happened, entry happened. Do you believe that some of the sales this quarter were one-off kind of, or do you not think there's anything there?
If you see the total sale in the quarter, it is not very high. Therefore, I don't think it is wise to say the sale is one-off. Yes, the retailers, depending on the geography, have tried to overstock a few brands, models, specifically the lower end, where they expected the brands are highly priced. The total stocking is not very high, and therefore I do not see much impact in coming quarter.
Right. Secondly, sir, in terms of the slightly longer term, the more immediate term, where do you think our EBITDA margins could stabilize? Could we get back to a double-digit low teens kind of margins or maybe in a year or two years? Do you think that, because we went through a lot of pain the last two years in terms of market disruption, commodity prices, et cetera. I presume a lot of that is behind us.
Yes. If you see, if you take out the one-time investments that we are doing, we are already fairly close to the double digits. Yes, we are very clear that we will be hitting the healthy teens in some time as these one-time costs will go away and leave behind the benefits that these one-time costs will give us. All the benefits that the one-time costs are gonna give us are going to be ongoing basis blocks of benefits. When the cost, once the cost is removed, you will see, healthy EBITDA margins.
Sure. Secondly sir, on the other income side, is this a sustainable or is there a one-off in that other income?
No, other income has a one-off, which you would have seen the disclosure that we have given. There's a past due which was already fully provided for earlier, four, five years back, from one of the distributors for which we were into a litigation. That has got close to a one-time settlement, and that is a provision reversal which has got done, which is from an accounting perspective, it is disclosed as other income. That's a one-off. Out of the INR 10.5 crore that you see, INR 5.7 crore is a one-off, which has been disclosed separately in the results also.
Sure. Okay. Okay. Thanks a lot and wish you all the best.
Thank you.
Thank you. Participants who wish to ask a question may press star and one on their touchtone phones at this time. The next question is from the line of Saptarshee Chatterjee from Centrum PMS. Please go ahead.
Good morning, sir. This is Saptarshee Chatterjee . One question is on the direct to market. Our contribution, revenue contribution from these, four markets could be closer to 10% or it would be around mid to high digits?
It is more. As I said, we have addressed nearly 45% of our potential, and now we are fairly close to the average market shares across the country.
Actually, the reason I'm trying to understand is, basically if I calculate then for the rest of the markets is like it is kind of a single-digit for growth. What would be the reason for the same? If that is the case, then is it not good that we really accelerate our pace and do this direct to market across other states?
First thing, you will have to double-click on your calculation because I've also said that AP and Telangana today have not given us the growth. The growth that I said 60% is without AP and Telangana. Having said that, you are right that the growth that we would expect from direct to market states is high. At the same time, we have some, the states where we are already very strong, and they are those normal MD operations. I maintain that our MDs are a very strong strength and a great asset that we have with us. We really value those relationships. Will there be some other states with low market shares where we may take advantage of the learnings of this? Answer is yes.
We will see as and when it is required. However, we will also be implementing the learnings from these direct to market states into the MD states and try and further take up the shares in the MD states also.
Understood. Very, very helpful. Can you please give the breakup of revenue between B2B and B2C in lighting?
B2B is around 10%-13% of the total lighting portfolio.
What would be the margins differential between B2B and B2C?
Margin differential is nothing because it's at par because we do not have investments and other costs sitting. There would be a small delta in the gross margin, but that trickles down to the EBITDA, which is at par in both B2B and B2C.
Understood. That's very, very helpful. Thank you so much.
It's from the line of Aakash Javeri from Perpetual Investment Advisors . Please go ahead.
Good morning. Thank you for the opportunity. My first question is that, once BEE grading is complete of non-star rated fans at the state level, and we stock the channel with star rated fans, how do you see the market changing, especially with respect to BLDC penetration, and how does that change our profitability as a company?
It's difficult to say how the market will behave, we can draw parallels from other products that have moved similarly from non-star to star rated product categories. Water heater being one of them, air conditioners being another one of them. We see that the consumer tends to settle between the two sides. On the lower side is the price sensitive side, on the higher side is the switching side or the efficiency side. Similarly, in this fans category, we see the one star will be the price sensitivity side, and the five star will be the power efficiency side. Somewhere in between the two, the consumers will settle. Fans being more a price sensitive product, the upfront cost is critical for a customer.
A significantly large portion of customers will tend to settle for the upfront low price product category, which will be one star. A significant side will also move towards the five star. We will all see how the market pans out. The current growth in five star is very healthy. It's moving at a fast pace. There are some states which are already showing the BLDC fans in the rate of 25%-30% market share already. Whereas there are many other high volume states which are slow starters. They have not picked up the 5 star fans very fast. We will see how the total grows w ith good portfolio.
Sure. Sure. You know, what impact can companies like Atomberg and Superfan, who, you know, focus mainly on BLDC, what impact would they have on the industry as a whole?
You're right. For some time, there was a unique position for a few of the players, and they were enjoying a separate space to themselves. As the whole space opens up and all players will tend to come in just that space, it will become crowded. It will take a different shape. We will see how it goes. I can tell you 1 thing, the margins are more or less similar as a %. What you can be expecting is the market to grow in revenue terms. Because if the average selling price of the fan goes up by even 10%, we will see that kind of a revenue growth. If we start seeing replacement happening because of awareness of high efficiency, that will also give us growth.
This BEE star rating change is very likely to give growth to fans and give it a new life, give it more involvement from the consumer side, and we all should see a very healthy fan industry going through.
Do we see the cost of BLDC fans coming down? If yes, by how much can it come down?
Anybody's guess, I can tell you electronic products have the tendency of cost, coming down in cost. BLDC is would be categorized as an electronic product because a significant part, the cost of the product is electronics, this will continue to come down. Over the last three years, we all have seen a significant reduction in the cost of BLDC fan, that's going to be another reason for BLDC adoption to go up because the price difference between induction and BLDC is likely to continue to narrow down we will therefore see an upswing in this. That will lead to replacement demand going up and the average selling price going up.
Got it. If I could just squeeze in one more question. What are the advantages of keeping manufacturing fans in-house versus outsourced?
Make versus buy decision is based on a few things. Number one, how critical is the quality and cost in that particular product category? If we believe that technology is important and it requires investments, then this should be in-house. If we believe that there is, the technology is, can be very simply duplicated, then it can be outsourced. The organization has to see where the organization wants to put the bandwidth of the organization. If it can be, if whatever can be purchased can be purchased at a low cost from outside without affecting the design or the quality or the cost capability, then it can be outsourced. Otherwise, it has to be in-house. It's a little complex decision, but we constantly keep on evaluating and taking the decision.
I can also add that manufacturing is definitely very important, and it is reflected in our decision for setting up a completely greenfield project in Hyderabad. What we want to achieve from Hyderabad project is a top-class manufacturing facility which will give us technical ability to produce high quality products with high reliability at economic cost. We will continue to take make versus buy decision. It's a great question that you asked.
Thank you so much of answering all my questions. All the best in the future. Thank you so much.
Thank you.
Sorry to interrupt before taking the next question. I would just like to correct. I mentioned EPS to 15%. The correct number, it is 25%. I just would like to correct that. Sorry for that. Please continue.
Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Just one question on this Hyderabad greenfield project. My sense is it's going to come in phases. We're spending about INR 175 crores. Could you just give us some kind of understanding when does it start, and, you know, some idea on phase one, phase two, what are the kind of asset turns or sales contribution or, you know, products. I think you've explained in the past, you know, how do you want to ramp up fans. It's all premium, top class, low friction. Just phase one, phase two, what kind of products should we see? What kind of sales should we expect from this INR 125 crore investment?
The initial investment, I would say the large part of the investment of course, goes in manufacturing, et cetera, and then in terms of equipment. The equipment for the sale end is, will come in smaller phases. That doesn't really define the phases of the whole project. Initially we will take up all our EPW fans there, and we will significantly reduce the Calcutta production and take them here. One of the reasons for taking EPW here is that we would like to focus on the export market with EPW product, and we believe that market is large. In India, the ability to produce good EPW at that cost and quality is low. We have to fight with China as an alternate, this factory will give us the footing to deliver that kind of product at that co st.
We will also be looking at manufacturing the BLDC fans over there, although we have the facility with Hyderabad factory also. We foresee that BLDC fans as a percentage will start expanding. That's what is going to grow more. That will also come there. This is about the phase one, where we're talking about the fans. There will be a phase two in which we will decide to start manufacturing other categories beyond fans, that we will share as soon as we finalize. There is significant space left for that.
Just a clarification. That phase two which Mr. Khanna talked about is not all of this INR 125 crores. This INR 125 crores is exclusively for fans of EPW and ceiling.
Okay. Got it, sir. Phase one essentially is FY 2024, right? I mean, next 12 months we are all talking about phase I. Phase II will come, like two, three years afterwards. Is that the right assumption?
Difficult to say two, three years. As soon as we take a call, we will share with you. Currently we will be seeing the phase I, which is w e expect the commercial production to start from June onwards. With that we will see the manufacturing of the EPW fans and some ceiling fans in that factory.
Just a related question. If it starts in June and again, you know, this will be after the season, we'll obviously have the new plant costs coming into the PNL. Will that by any standard impact the margin trajectory which we are expecting to recover going into next year? You know, would we see some kind of pressure from that as well?
The whole objective will be how do we taper down the other factory and reduce the cost there and bring the cost here. There would be a little part transition cost, but our objective will be how do we minimize the transition cost.
The whole aim is to gain in terms of gross margins and cost excellence as Hyderabad is set up. Those efficiencies will bring in the margin benefits in terms of gross margin or COGS. To your point, Rahul, that obviously does not happen from day one. There will be a little capacity period, which is difficult to comment at this point of time. Yes, there could be a momentary few months of impact. That our aim is to utilize that through improvement of COGS and margins.
Perfect, sir. Best wishes for 2023, sir. Thank you so much.
Thank you.
Thank you. We have the next question from the line of Nikhil from SiMPL. Please go ahead.
Hello? Hello?
Yes. Go ahead, sir. You're on.
Yeah. Hi. Thanks for the opportunity. I have one question. You mentioned during the discussion that eventually the company should operate at a double-digit kind of EBITDA margin. For that, we've been doing a lot of investment both on the ad spend side as well as the employee addition which we have done. If you look at from an angle of the categories, fans we have a pretty strong strength, but some of the categories like coolers and all will probably be upscale. If you have to achieve that double-digit kind of EBITDA margin, would it be necessary for these upscale categories to become a larger part, or would it be more driven by the growth in the fan category?
How are you looking at eventually the mix for these categories and would you see addition of few more segments in our PNL or largely we will operate around these segments and try to scale up the segments if they are upscale? How are you thinking over a three-five year arc, mix of PNL and our direction for achieving double-digit margin?
If you see even as of now, if we remove the one-time exceptional costs, we are close to the double-digit margin. We have in the past delivered double-digit. We're now investing in some development projects. You remove those costs, we're close to double-digit. Double-digit is not a big concern for us. That will happen. How will it be driven? Actually, in all the segments we are in, the growth possibility is huge. In fans itself, the growth possibility is high because we still are not the market leader, and we do believe that we have all the capabilities to be the market leader, be it from the brand perspective or from the product perspective. Other categories, coolers, water heaters, yes, we are, a lot can be done over there.
Once again, we have a strong brand. We are getting a good traction. As I said just now, in Q3, the coolers have really grown very, very well. They did face a headwind because of the unfortunate two years where COVID hit during the peak season and the entire industry got hit. I think coming years are going to be great years for coolers as a category. Water heater is showing a very good traction for us, and we have good plans for water heater growth again. Lighting, you would see it is one of the fastest growing in the industry. We are continuously growing very well with very good margin. Lighting also is a high growth area for us.
Because of the low base of these categories, obviously the shares will start growing more, and we will see an organization which is not only fan dependent, but has a large share of other products. If we can brand, we can do a wonderfully good job. Margins are likely to continue to grow in all of them.
Okay. Just, I'm not asking for any direction or guidance, if you look at companies in the consumer durable brown goods segment, the kind of scale which companies achieve, say INR 3,000 crore or INR 4,000 crore, where would you say a company should operate at? Should it be like 13, 15 times the margin, which, with the scale the business has, a company can easily achieve? If the management can always take the call of investing to grow and all, we have to get a sense of where can a company or where the companies operate at a scale of INR 3,000 to INR 4,000 or INR 5,000 crore. What's your sense? Where should, as a company, you would say that we should be achieving or sitting at?
See, the rate of growth that we have been talking about, barring some period of COVID, otherwise we've constantly been talking of a high growth rate. We should be reaching in this kind of a terrain that you're talking about, INR 3,000-5,000 crores. We should be so reaching. In terms of profit, as I'm saying, we've already been demonstrating, you know, double-digit profit if you remove the exceptional costs. It's, it's all contextual to time zone. By the time we will be INR 3,000 crores, INR 4,000 crores, I'm sure the aspiration will be to reach INR 7,000 and INR 10,000 crores. It's all within the time zones.
Okay, fine. Thanks.
Thank you. That was the last question for today. I now hand the conference over to Mr. Deepak Agrawal for closing comments. Over to you.
Thank you. We'd like to thank Khanna for talking to us on today's call. Also thanks to all the participants for joining this call. Khanna, do you have any closing remarks? Thank you.
Thank you, Deepak. Thank you so much for hosting, and thanks to all the participants for continuously taking interest in Orient Electric. I would like to just reassure you once again that we are doing our best to ensure that we deliver the best performance in the coming period. Our investments are going to be giving us great results and a great trajectory going ahead, and we are very confident about our performance in the coming years. We do take up the kind of questions that come from you, telling us that there is a lot of expectation about growth and aspiration. We do take those aspirations, and we will want to deliver the best. Thank you so much. All the best.
Thank you, Deepak. Over to you, thank you.
Thank you. On behalf of PhillipCapital India Private Limited, that concludes the conference call. Thank you for joining us. You may now disconnect your lines.