Crompton Greaves Consumer Electricals Ltd

NSE:CROMPTON

Earnings Call Analysis

Record Revenue Driven by Strong ECD and Cooling Products

This quarter, Crompton Greaves Consumer Limited achieved its highest-ever quarterly stand-alone revenue of INR 1,959 crores, boosted by a significant 21% year-on-year growth in its Electrical Consumer Durables (ECD) segment. Fans, pumps, and appliances saw robust increases of 16%, 13%, and 24%, respectively. The EBIT margin improved to 14.9%, driven by effective pricing actions and a focus on premiumization across products. The company also significantly invested in brand building and innovation. Butterfly Gandhimathi, acquired by Crompton, showed early signs of recovery, with improved revenue and a focus on fundamentals expected to drive growth from H2 onwards.

Strong Revenue Growth and Performance

Crompton Greaves Consumer Limited has reported its highest-ever quarterly standalone revenue, achieving INR 1,959 crores, marking a 21% year-over-year growth. The growth spans across multiple product categories, with fans increasing by 16%, pumps by 13%, and appliances outperforming with a remarkable 24% growth. Seasonal products, particularly cooling solutions like air coolers and fans, significantly contributed to this growth, benefitting from a notably intense summer.

Profit Margins and Cost Management

The company's operational efficiency is evident in its EBIT margins. Crompton achieved a standalone EBIT margin of 14.9%, up 1.6% year-over-year and 30 basis points quarter-over-quarter, excluding Advertising & Promotion (A&P) expenses. In the Electrical Consumer Durables (ECD) segment, EBIT margins reached 19.8%, an increase of 2.3% year-over-year. Management indicated a commitment to controlling costs and enhancing margins through value engineering and premiumization strategies.

Investment and Innovation Focus

Crompton is actively investing in its brand, with A&P spends up by 30% year-over-year. They believe these investments play a critical role in driving future growth. The company launched 41 new products in the last quarter and is pursuing innovation, evident from two recently filed patents related to cooling technology and kitchen appliances. The push for innovation aligns with the overall Crompton 2.0 strategy, which emphasizes market positioning and consumer engagement.

Consumer Sentiments and Market Dynamics

Management is closely monitoring consumer sentiments, noting some early improvements, although they caution that climate patterns can create unpredictable demand surges. Overall, commodity prices remain a watchpoint, with the company implementing price increases across categories to safeguard gross margins. The management indicated that the cumulative price increases across the last few quarters total around 4% to 5%.

Debt Management and Cash Flow

Following the acquisition of Butterfly Gandhimathi, Crompton has successfully reduced its debt burden from INR 2,000 crores to INR 300 crores within two years, demonstrating strong cash flow capabilities. They expect to clear the remaining debt by July next year. Their focus on cash generation continues to allow dividend payouts averaging around 50%, alongside re-investments into product development and supply chain enhancements.

Performance in New Channels and Emerging Products

Crompton's alternate channels, including e-commerce, have achieved revenue growth of 82% year-over-year, representing 17% of total sales. Key product segments, including small domestic appliances like mixer grinders, showed 20% growth. However, the large kitchen appliances segment remains in a developmental phase, recording revenue of INR 14 crores but continuing to operate at an EBITDA loss. New product launches, like premium water heaters, have also been introduced to capture market opportunities.

Looking Forward: Double-Digit Growth

Management expressed optimism about sustaining double-digit revenue growth across its portfolio, driven by strong market demand and a focus on premium product segments. They expect that as they navigate through challenges such as commodity price fluctuations and competitive pressures, their strategic initiatives, including enhancing supply chains and product premiumization, will yield positive outcomes. The company aims to enhance margins better than revenue growth, hinting at a balanced approach for future expansions.

Earnings Call Transcript 2025-Q1

[Aniruddha Joshi, analyst]

Yes. Thanks, and everybody, welcome to Q1 FY '25 Results Conference Call of Crompton Greaves Consumer Limited. We have with us senior management represented by Mr. Promeet Ghosh, Managing Director and Chief Executive Officer; Mr. Kaleeswaran Arunachalam, Chief Financial Officer; Ms. Swetha Sagar, Chief Business Officer, Butterfly Gandhimathi Appliances Limited; and Ms. Natasha Kedia, Head of Investor Relations.

From ICICI Securities, we welcome you all to the quarterly con call. Initially, we will have the discussion from the management on the quarterly performance, and then we will open the floor for question-and-answer session. Thanks, and over to you, sir.

[Promeet Ghosh, executive]

Thanks, can you hear me properly?

[Aniruddha Joshi, analyst]

Yes, sir. Yes, sir. Please go ahead.

[Promeet Ghosh, executive]

Okay. Thanks. Good evening, everyone, and welcome to our Q1 FY '25 earnings call. Firstly, thanks to ICICI Securities for hosting. And as has been said earlier, I'm joined by Kalees, our CFO; Swetha, who's the Chief Business Officer at Butterfly and Natasha, who looks after IR for us.

I'm pleased, as you might imagine, I assume that you have seen our investor deck as well as our press release and our numbers. We have, I'm pleased to say, yet again hit our highest ever quarterly stand-alone revenue at INR 1,959 crores, driven by strong ECD growth of 21% year-on-year. Across our portfolio, the growth has been broad-based. Fans grew at 16%, pumps at 13% and appliances at 24%. Specifically, seasonal products such as our cooling products, fans and air coolers, both recorded robust growth.

Getting into each product category. In fans, we saw, like I said, broad-based growth, including in the TPW category. Our ceiling fans also grew at a healthy clip. This was aided by needless to say, good tailwinds, which arose from the summer season. We also undertook consistent pricing actions to mitigate the commodity price rise that we saw show itself up, particularly during the early part of last quarter, and this has helped us improve gross margins.

In pumps, both residential and agri pumps grew well, leading to a 30% growth overall for the category like I noted earlier. In solar pumps, and you're aware that solar pumps is an area that we've forayed into recently and continue to gain traction in that segment. We executed orders worth about INR 21 crores in the quarter that went by. And in the meanwhile, we have been building up a pretty robust and healthy pipeline of further orders in this segment. Our execution rate has also improved Q-on-Q from about INR 28 crores in H2 to, as I said, INR 21 crores in just the last quarter. We also ran multiple brand awareness programs for our new product launches in the pumps category.

Aided by an increase in summer intensity, we saw a significant step-up in our air coolers, for the last quarter. So -- in fact, our sales for air coolers was the highest it's ever been, and the volume growth in air cooler segment last quarter was 68%. This has helped an overall revenue growth in the large domestic appliances segment of our business of about 25%. Premium saliency of large domestic appliances also improved and was at 25.6%. Moreover, 3 premium models of water heaters were launched to aid the premiumization in that segment. Dare I say that, but for some the supply glitches, our sales of air coolers and a little bit of fans would have been much higher.

In small domestic appliances, we grew 20% year-on-year, backed by a strong growth in mixer grinders. We had the highest ever mixer grinder sales in the month of June with exclusive launches in the e-commerce platforms. Large kitchen appliances business that you -- as you are aware, we are incubating. We garnered a revenue of about INR 14 crores. That business, as you are aware, is continuing to currently make losses at the EBITDA level, which is broadly in line with what we had done in the previous quarter. We also, as a measure of progress, which has been paid in that segment have now 100 EBOs, which are currently carrying our large kitchen appliances products. We've been working on further developing our chimney portfolio, which has been launched additionally on the e-commerce platforms as well. We, needless to say, are seeing long-term potential in this business.

The Lighting revenue was broadly flat, about 2% growth, if I remember.

[Kaleeswaran Arunachalam, executive]

Yes.

[Promeet Ghosh, executive]

And its performance is moving in the right direction. This is a product line which we, as you are aware, restructured about a year ago, and we are beginning to see some of the benefits of that.

While in overall B2C category within the Lighting segment, there was a degrowth. That was in part because we have entirely stopped selling conventional products now which was a part of our portfolio in the same quarter last year. Also, of course, there continues to be pressure, price erosion in the segment. But if we take out the categories which we have stopped selling from previous year, there is a marginal growth also in the B2C segment.

Having said that, what's also interesting to note is that we are witnessing double-digit growth in both battens and ceiling lights. You will remember that particularly ceiling lights, in pursuit of further portfolio diversification as well as premiumization, ceiling lights has been an area that we have are quite keen to increase our share of revenue of.

B2B continues to have robust growth. This has been led by street lighting and industrial segment and several large B2B projects were both secured last quarter as well as executed last quarter. I think you'll be able to see names of several of these orders, which are executed also in the press release. I'm not going to go through them again. And generally speaking, in Lighting, we continue to focus on channel expansion and direct dealer appointments.

We've spoken in the past of one of the cornerstones of Crompton 2.0 being making investments towards growth in the company. Now this is especially visible in the investments that we are making in our brand. A&P spends have increased 30% Y-o-Y and 60% Q-o-Q. We've launched a successful marketing campaign around picture perfect fan, which I hope many of you have seen during the IPL, which has been quite positively received. And they also emphasize the superior aesthetics that many Crompton fans have.

Similarly, we've continued to focus in innovation. This has resulted in the launch of 41 new products during Q1. We also secured 2 -- the filing of 2 innovation patents in cooling technology and kitchen appliances, respectively, last quarter.

Despite an increase in raw material prices during the quarter, our stand-alone material margins improved to 31.3% versus 29.4% a year ago. I'm also happy to share that we delivered a stand-alone EBIT margin of 14.9% excluding A&P spend because as you've seen A&P spends have gone up very materially, particularly given that we were in season. As for comparison's sake, excluding the -- I'm talking to you about A&P spend, EBIT, excluding A&P spend, so that the numbers are comparable. So this quarter, it was 14.9%, which was 1.6% higher Y-o-Y and 30 basis points higher Q-o-Q. So both the numbers have gone up both sequentially as well as year on year.

Similarly on the same lines, ECB EBIT margins, again, to make them comparable looking at them, excluding A&P spend. We've delivered 19.8% in Q1 2021 -- 2025, an expansion of 2.3% Y-o-Y. Lighting EBIT margin is up at 11.3%. And excluding A&P spend, an expansion of 20 basis points Q-o-Q. Now as you'll remember, in Lighting, we practically did not spend any money on A&P about a year ago. This year, we've spent close to about INR 6 crores in Lighting A&P. Now that's not resulting in sales this quarter yet, but we do believe this is building for the future.

We remain focused on alternate channels, which have again grown at about 30% year-over-year. Now alternate channels comprise 17% of Crompton sales, which is up from about 16% last year. So on a growing portfolio, they are having an even faster growth as you can tell. We strengthened our e-commerce channel and now are continually delivering INR 100 crore-plus revenue from this for the fourth consecutive quarter, driven, of course, by fans, large and small domestic appliances. In this quarter, e-commerce itself has grown 82% while rural has grown 16% and modern retail has grown 22% all of these on a Y-o-Y basis.

We are keenly watching consumer sentiments and the underlying demand scenario which is showing some early signs of improvement. We have witnessed an intense summer in several regions of the country. which has, of course, helped the sale of our cooling products. Like I said, some of this could have been better, but for some glitches that we -- the higher volumes had on our supply chain.

Weather patterns have been quite unusual and while we created a spike in demand in this season, it's of course difficult to see how this pans out. Remember, that we benefit from not only warmer climate but also cooler climates, having a substantial presence in products like heaters and water heaters, et cetera. So we'll see where the patterns pan out.

You've, of course, have seen raw material prices have trended upwards in Q1. To combat the pressure on gross margins, we've taken price increases practically across categories, being industry-leading in that regard. We are also evaluating whether we should take further price increases, and we will take a decision on them depending on how the overall RM basket evolves. We do want to keep abreast of continuing trends in commodity prices going forward.

You are aware on the balance sheet side that we paid INR 300 crores towards NCDs that we had taken on for the acquisition of Butterfly. We still have INR 300 crores of debt left from that acquisition. Having said that, we continue to generate strong cash in our portfolio and are today a net cash positive company. We are committed to generating not only strong future cash flows, which is an outstanding element of our business model is all of you are aware, but we will use this with -- in line with our clear capital allocation priorities, including sustaining a strong dividend, reducing our debt leverage and investing the right operational priorities in the business to navigate what is a dynamic environment and deliver sustained shareholder returns.

Moving on to Butterfly. Over the last couple of quarters, we have taken several initiatives to strengthen the fundamentals of that business, including actions on price, product laddering, streamlining processes, especially in the online channel, optimizing schemes as well as A&P spends. We have been selective with how we've promoted, pulled back promotions that were not value creating, and we did so while maintaining our market positions. With the transition underway, retail continued its strong growth momentum, and we witnessed a sequential growth in revenue wherein key categories performed well.

Impact to the budget. Under the recently introduced union budget, the announcement of 3 crore additional houses in rural and urban regions is positive for durable products like ours. Similarly, the focus on renewable energy, especially solar with the exemption of duties on key components, the focus that the government has on various solar products, the change in slab rates under the new regime, which will result in tax savings depending on income levels, and overall, INR 11.11 trillion to be spent on infra, augur well for consumer demand in general and our industry in specific.

Sustainability, I'm very pleased to share that Crompton is one of the only 2 Indian companies, which is a constituent of the top 10 MSCI Emerging Markets Small Cap SRI ESG Universal Select Index. That's a very long game, which I almost didn't get past. So I'm going to congratulate myself also for being speak to that long sentence. But yes, this is the MSCI's index -- ESG index, and we are 1 of the only 2 Indian companies in the top 10 of that index.

Sustainability is at heart of what we are trying to do with the company. So I should mention that we have started a wholesale assessment of our product carbon footprint across various categories through Scope 1, 2 and eventually Scope 3. While it still early days in terms of our sustainability initiatives, we remain acutely focused on building sustainability as a key differentiator for this organization going forward.

Conclusion, as you can probably see, we are delighted that Crompton 2.0 strategy, which we unveiled about a year ago now -- about a year and a few months ago, is helping us deliver consistently superior results with the highest ever quarterly stand-alone revenue here again. Double-digit revenue growth for the first consecutive quarter and strong EBIT margins. With this, we are exiting the first quarter of this financial year on strong footing. We continue to expect meaningful progress during the remainder of the year. Thank you for your patience listening.

And with that, we're open to questions.

[Aniruddha Joshi, analyst]

[Operator Instructions] First, we have a question from Mr. Siddhartha Bera.

[Promeet Ghosh, executive]

Siddharth, we can hear you.

[Siddhartha Bera, analyst]

Am I audible now?

[Promeet Ghosh, executive]

Yes, yes, yes.

[Siddhartha Bera, analyst]

Sir, my first question is on the ECD segment, if you can just highlight on the fan side, what has been the volume and price increase which you've taken, [ first ]. And you indicated that you have -- you also have taken a couple of price actions. So how much have taken [indiscernible]. And is it enough to offset commodity cost [ inflation ].

[Promeet Ghosh, executive]

Yes, you want to talk about what the volume changes are?

[Kaleeswaran Arunachalam, executive]

Overall, from a Q1 perspective, the price increase that we have taken in fans is about 1.5 percentage and that has been taken around mid-May. And in terms of future price increases and whether it offsets the commodity costs, et cetera, as you would know, there are 3 levers that we work upon to ensure that our margin model is sustainable.

There is a cost program that is well established now under Unnati. We're trying to see what levers are available, including value-add, value engineering, technical and commercial lever to see how do we optimize our cost across all the areas that we work upon. Second, premiumization is a critical focus area for us across the product categories that we operate at [ be it ] fans, lights, et cetera, which can help us in yielding better mix and better margins.

And even after that, if we believe that as to be -- margin models is not in line with the unit economics that we want to deliver, we would go for price increases. And you have seen this as a pattern, this is not the first time that we've done a price increase, this was the fourth quarter consecutively where we have taken price increases.

Now as -- and as far as price increases for future is concerned, it's an outcome of many factors. We need to see how the commodity basket moves. We have seen increase in copper prices, in aluminum and ABS while copper, we have seen a little bit of cooling down in the recent past, but we do expect the trends in the future to move northwards. So that would decide plus there are regulatory headwinds that will always be in this business, we'll determine how much of price increase that we need to do as we move forward.

Now within fans as a category is concerned, there has been very, very strong volume growth, mix and price is limited. It's largely a volume-led growth that we are seeing for Q1.

[Siddhartha Bera, analyst]

But just to clarify, since in the last couple of quarters, we may have taken nearly 4% to 5% cumulative price increases till date. So does it mean that our volume growth will be closer to 15%. So that is what I was looking at on a Y-o-Y basis.

[Kaleeswaran Arunachalam, executive]

Yes. Around that, in terms of what we have delivered on a Y-o-Y basis on fans.

[Siddhartha Bera, analyst]

Got it. And sir, in terms of margins, with this price hike, which we have taken and in terms of the outlook. Do you think with probably the advertisement expenses normalizing in the rest of the year, we do have tailwinds for further expansion from current levels?

[Kaleeswaran Arunachalam, executive]

Siddharth, as you would know, we don't provide forward guidance on what our margin model is going to be. I would like to only reiterate our going strategy with Crompton 2.0, where we clearly said that we have oriented the organization towards a growth-focused business. And that means that we have to invest behind brand, people and innovation which we will continue to do.

So even if you look at Q1 compared to last year Q1, marketing spends have gone up by 20 bps higher in percentage terms and significantly, up almost close to 30% on a year-on-year basis. Now -- and there would also be differentiated consumer-oriented innovation that we want to bring it onto market, which will also help us to gain market share and grow sustainability as we look forward.

So overall, our ambition continues to grow in double digit for the portfolio as a whole and expand our profits better than the revenue growth.

[Siddhartha Bera, analyst]

Got it, sir. Sir, the last question is on the solar pump side. So we did INR 21 crores in the quarter. What will be our order book, which we [indiscernible] over the remaining part of the year?

[Kaleeswaran Arunachalam, executive]

We don't disclose the order book, Siddharth, but that is a healthy pipeline that is being built.

[Promeet Ghosh, executive]

[Operator Instructions].

[Aniruddha Joshi, analyst]

Next, we have a question from Aditya Bhartia.

[Kaleeswaran Arunachalam, executive]

Aditya, we can't hear you, you're on mute.

[Aditya Bhartia, analyst]

Can you hear me now?

[Kaleeswaran Arunachalam, executive]

Yes, we can.

[Aditya Bhartia, analyst]

Apologies, couldn't unmute myself. Sir, my question is on new product launches, wherein as part of Crompton 2.0 strategy, you've spoken about introducing to a new -- 2 or 3 new product categories. So just want to understand how we're thinking around that and when you speak about 2, 3 new product categories, are these completely independent product categories into a business that we -- into a product category that we are not into? Or is it an extension of existing categories like doing solar pumps in addition to the conventional pumps that we were doing? So just on that front.

[Promeet Ghosh, executive]

Maybe I'll answer that question, Kalees. The categories that we would enter would, needless to say, have adjacencies with what we are currently in. So we would look to leverage the various strengths that the organization has whether in some cases, the brand; in other cases, the go-to-market; and three, the innovation capability that we have. So it is likely that they are areas that we have a right to win in, not likely, it is definitely an area in which we have -- we believe, our right to win. We are unlikely to enter category simply for the sake of entering those categories, right?

As we've said -- as I've said in the past, our objective in new category entries has and continues to be, to be a significant player in that category over a discernible period of time. We have entered, as you are aware, I mean, you could -- just have to look at what we've done in the recent past to tell you how we are thinking about it. We've entered geysers and air coolers, and we have obviously a leadership position amongst one of the few -- top 3 players in those categories. We have also now in the kitchen appliances business, become a significant player in that category as well. So yes, it's -- that should give you a sense of how we will choose the categories that we enter into.

[Aditya Bhartia, analyst]

Sure, sir, that's helpful. And is that something that you are thinking from a near-term perspective? Or is it about first extracting growth from existing categories and then thinking of it from a slightly longer term, maybe a 3-year, 4-year perspective?

[Promeet Ghosh, executive]

Tough to say, to give a timeline of that. Needless to say, there's a bunch of things that keep happening in the evaluations and strategies that keep getting looked at.

[Kaleeswaran Arunachalam, executive]

In fact, all we would say is these are -- certain things are close to critical business strategies, and you guys would know that first as we move forward closer to hitting them ground, and at this point of time, we will talk about what have we done in Q1 and how we're looking at it.

[Aniruddha Joshi, analyst]

Next in line we have a question from Mr. Praveen Sahay.

[Praveen Sahay, analyst]

My question is related to the small domestic appliances. In the last couple of quarters, even the last year, if I look at -- you had grown very healthy, like 39%, again, in this quarter of 20% of growth. So can you give some more color on that from where the growth is coming?

Is it a product portfolio expansion or the channel mix, which is more playing out for you? Would be helpful if you can give some more color on that from where the growth is coming in.

[Promeet Ghosh, executive]

Broadly, the growth is coming from a mix of one, increasing market share, firstly. We are still relatively small in this business compared to the size and strengths of Crompton. So it's coming from there.

It is pretty broad-based. I mean, there are probably 2 areas that we are in: Mixers and garment care, and both of them are growing quite decently for us. It's also relatively broad-based across regions, no, not -- I mean there are differences in the rate of growth in between the regions, but relatively broad-based. We've also seen in this category, we've had relatively low salience of e-commerce, and this is a segment in which e-commerce for the broader market is, of course, much higher than we have in SDA. And that's, again, addressing that is also translating into pretty good growth for us.

So it's, I'd say, a pretty broad source of -- we have -- in so far as mixers is concerned, we have come out with newer products. We have actually come up with higher-wattage mixers, which is healthy, relatively -- a little, currently because it's a new product introduction, but we do believe that, that will continue to drive growth.

[Praveen Sahay, analyst]

And also premiumization is a part of that?

[Promeet Ghosh, executive]

Yes. So in this business, premiumization, as you can tell, will come from the higher-wattage mixes which is what I told you just now, it also comes from a higher grade of -- in the irons. It comes from gravitating towards steam irons from regular dry irons. So that is also continuing a pace. In fact, our steam iron portfolio, we strengthened last quarter.

[Aniruddha Joshi, analyst]

Next, we have a question from Hardik Rawat.

[Hardik Rawat, analyst]

Yes, am I audible?

[Promeet Ghosh, executive]

Yes, Hardik. Go ahead.

[Hardik Rawat, analyst]

This is Hardik Rawat from IIFL Securities. I had one question which was with regards to Butterfly Gandhi -- Butterfly Gandhimathi. So we were expecting in a turnaround in its performance only in the second quarter of the current fiscal, but it seems like it has turned around earlier than our expectations and guidance. So wanted to understand what has driven this firstly? And secondly, what would be our ad spends for Butterfly Gandhimathi in the current quarter vis-a-vis the previous quarter, same year -- same quarter, previous year?

[Kaleeswaran Arunachalam, executive]

Hardik, we continue to believe that Butterfly is a work in progress in terms of the strategy that we called out on what we need to deliver. If you look back at what did we call out for Butterfly as a business, we said H1 would be a decline considering that we are working on price parity, channel optimization and getting more importantly, the fundamentals right at business.

Swetha and team was first working to get that corrected. And as we get that completed, we would start seeing business growing from H2 onwards. But at the same point of time, we also said we are coming off our worst, which is Q4, where we delivered a loss of INR 27 crores for quarter -- for the quarter of -- last quarter of last year.

Now in Q1, sequentially, we have improved revenue and ensuring that some of the right fundamentals being established in price cadence has started to deliver a positive EBITDA for us. That is where we are. But the work is ongoing, and our near-term focus is to get the fundamentals fixed and start growing the business from H2 onwards.

[Promeet Ghosh, executive]

Also, if you recall, what we told you last quarter is that in the last quarter, there were some one-offs. So I think we were quite transparent with you, telling you that there were some one-offs as we work to refresh the business model. So obviously, some of those also, needless to say, are not there in these numbers. But it's work in progress, and we -- there is a good trajectory that Swetha and her team are taking that business.

[Hardik Rawat, analyst]

Absolutely. So going forward, can we expect that the business is largely broken-even and the transition in the business strategy is now behind us, and it should now get back on the growth path going forward?

[Promeet Ghosh, executive]

Our transition is a work in progress -- so that is something that we are continuing to work hard on, particularly Swetha is working very hard on. So...

[Hardik Rawat, analyst]

Yes. And if you could give the ad spend numbers, please?

[Kaleeswaran Arunachalam, executive]

I don't have a precise number. Maybe I can ask -- ad spend for Butterfly, we have incurred close to about 4.5% -- 4% in this quarter compared to about 2.5%, 3% in the previous quarter.

[Promeet Ghosh, executive]

That -- stuff like this is not going to come from simply cutting growth drivers.

[Aniruddha Joshi, analyst]

Next, we have a question from Natasha Jain.

[Natasha Jain, analyst]

Am I audible?

[Kaleeswaran Arunachalam, executive]

Yes.

[Promeet Ghosh, executive]

Yes, please.

[Natasha Jain, analyst]

My name is Natasha, I'm from Nirmal Bang. Sir, my first question is on Butterfly. Now when I see your annual report for FY '24, I see that your capitalization in terms of R&D has increased very sharply from INR 4.4 million to INR 32.4 million. Now vis-a-vis even the recurring expense has decreased by -- so first, if you can tell me what kind of cost is getting capitalized? Because optically, that might make our EBITDA margins look higher in Butterfly.

And on a similar note, I want to understand why are we reading pre-A&P spend margins? I mean, is not A&P part of OpEx. So what is the rationale to call this out separately?

[Kaleeswaran Arunachalam, executive]

Okay. Natasha, I'll start with the...

[Promeet Ghosh, executive]

Let me answer the question -- the second question first, here. Our EBIT margins are our EBIT margin, right? That is very -- they are very much a part of operating expenses. We have called out in the past that this is an area that we are going to focus on to strengthen the brand. And the only reason that I read out the numbers to you is so that you have a comparable number with the previous quarter. That's it.

[Kaleeswaran Arunachalam, executive]

Yes, because...

[Promeet Ghosh, executive]

By all means, look at whichever numbers you prefer to, it's simply for the sake of there being a comparability that I read those out. That is what...

[Natasha Jain, analyst]

My point of asking this was, sir, are we by any chance also capitalizing some part of this expenses as well?

[Promeet Ghosh, executive]

No, not at all. None whatsoever.

[Kaleeswaran Arunachalam, executive]

No, not at all. I think maybe probably you have not gone through the Crompton 2.0 strategy that we called out. One of the initiatives that we very specifically called out as part of the Crompton 2.0 strategy is investing behind brand. And when we talk about this, it means that we go aggressive in ensuring that the brand gets its right due both in terms of its positioning and visibility across the categories that we operate.

So that means that on a quarterly basis, you spend significant sum of money as part of your overall business strategy. So as you look at it, even in last quarter, we have spent almost 4.5 percentage of our revenue as advertisement spends, incurred as an expenditure. After absorbing that on a year-on-year basis, the EBIT margin has significantly improved in Crompton business and even on stand-alone. Yes?

Yes, now coming into the other question of capitalization. These are product development expenditure that you incur towards new products that will develop in businesses. This is a practice that is there across, wherever when a new product is being developed and you have a commercial value of that gets identified, you do it as a capital expenditure.

Now, in Butterfly for last year, the transition happened from the promoters to Crompton, and we are standardizing our accounting policies. So this accounting entry happened in Q4 of last year rather than spreading out throughout the year. That's why you see a bump-up in Q4. As you look at Q1 onwards, this will be in every quarter, you will do whatever is the right accounting towards the product development that you do for new product categories.

[Promeet Ghosh, executive]

And capitalization, by the way, depends on the quantum of spend in that quarter. What you are doing simply, so is the fact that the capitalization is higher doesn't -- is not necessarily related to any other matter. But what we are ensuring is that the accounting practices at Butterfly are identical to those of Crompton. Needless to say that's one of the things that we have to do.

[Kaleeswaran Arunachalam, executive]

Yes, and just to help you out a little bit more on this. You may refer to Indian Accounting Standard 38, it talks about product development capitalization and how do we need to go about it.

[Natasha Jain, analyst]

Understood, sir. Sir, that's helpful. Just one more short question. Sir, can you tell us what is the discount as a percentage of your gross sales? Can you give that number?

[Kaleeswaran Arunachalam, executive]

Sorry, we don't provide the gross-to-net split. I think the way you need to look at our business is having delivered a gross to -- a net revenue growth over the previous year because that is intrinsic to our business, it includes our business margins also. So it's a competitive data, not to be disclosed in public domain.

The way you have to compare is, how has our net sales performed, have we improved on our EBIT margins, have we generated cash significantly and that will ensure that your P&L balance sheet comes in a place where you know what's the unit economics for the business.

[Promeet Ghosh, executive]

And our gross to net as an indicator, hasn't changed, particularly over the last several quarters.

[Kaleeswaran Arunachalam, executive]

In other words, Natasha, just probably maybe the question that you want to know and understand is we are not in the business of discounting products to get sales. It's an important point for you to look back. When we are talking about investing behind brand, it is our ability to generate organic demand and that is the only way you can see sequentially how the EBIT margin has improved, is on the back of strong pricing action that has been taken for fourth quarter in a consecutive manner.

The brand strength of Crompton is very, very strong. It is an 85-year-old brand. We need to ensure that it is nurtured well, and it has got a strong unit economics to get backed by. So it is not that you do a tactical stuff of doing a price cut in 1 quarter and then see what would yield in next quarter. Those are not sustainable business models that you will be able to continue.

[Aniruddha Joshi, analyst]

[Operator Instructions] Next, we have a question from Mr. [ Rishabh Gang. ]

[Unknown Analyst]

Am I audible?

[Promeet Ghosh, executive]

Yes.

[Unknown Analyst]

Yes, I'm Rishabh Gang from [ Sacheti ] Family Office. So I want to understand on the fans and pumps front, what are our in-house capacities? And what is the usual split of products sold between those in-house manufactured and those outsourced? And any idea on what are the gross margins for them?

[Kaleeswaran Arunachalam, executive]

We don't give those data specifically, Rishabh, at a gross margin level for in-house business and outsourced. Our EBIT margins at ECD is disclosed, that will tell you how we have been moving over a period of time. Roughly, we are equally split for the in-house and outsourcing for fans as a business.

[Unknown Analyst]

Okay, and how is the pricing for those manufactured by others decided in terms of like pass-on of commodity price changes? Like how is pricing decided?

[Kaleeswaran Arunachalam, executive]

So yes. So you have a standard commodity index that helps us to see what is the commodity index that you need to pass on. For every product that we manufacture in-house and outsourced, we know what's the amount of commodity costs involved into it, what are the kind of material costs involved and what's the conversion charge. And then you have a profit margin decided on that and then you do it. So there are certain things that goes by an index and standard and certain things that goes by the design requirements that we have on the product.

[Unknown Analyst]

How frequently does the third party actually changes the prices? I want to understand...

[Kaleeswaran Arunachalam, executive]

I think, it's too intricate data for us to share on our call, on operating data, Rishabh.

[Unknown Analyst]

Absolutely fine. Just one question here. What is your capacity expansion planning? Do we plan to increase the share of in-house manufacturing? And when we do an in-house thing, what are the return ratios and payback?

[Promeet Ghosh, executive]

Okay, Rishabh, basically -- and again, what you would have seen as a part of Crompton 2.0 is we are rolling out a strategic sourcing plan for our various businesses, right? And the idea, as I've said before, is for us not to simply focus on what is in-house and out-house. But to ensure that as we -- as the business evolves, we have control of important parts of the value chain, which will -- needless to say, given someone who is investing heavily in technology, that's a critical portion of how we're going to evolve as a company.

So generally speaking, our business is one in which the asset turnover ratio is high. So the payback for investments in in-house manufacturing tends to be quite quick.

[Unknown Analyst]

Tend to be quite?

[Promeet Ghosh, executive]

Quick.

[Unknown Analyst]

Fine. Any -- no expansion plans at the moment, right?

[Promeet Ghosh, executive]

None that we are in a position to disclose yet.

[Aniruddha Joshi, analyst]

Next, we have a question from [ Dhruv Jain ].

[Unknown Analyst]

Am I audible?

[Promeet Ghosh, executive]

Yes.

[Unknown Analyst]

Sir, I had a question on one of the data points that you've put out in the presentation. So I think you've mentioned that revenue contribution of alternate channels is about 17%, right?

A, I wanted to know what is the margin split or any directional color that you would want to provide us to, say, in the next 2 years, what is the contribution from alternate channel that you're looking at? And I mean, specifically, what's the broader mix then you will be sort of trying to try? Any color would be helpful.

[Promeet Ghosh, executive]

The alternate channels as a share of overall business will continue to grow over the next -- in 3 years. And that is, as I've said before, in the presentations, it's not that we are targeting a particular share for alternate channels to have, but we do want to have a balanced go-to-market.

In our business, it is extremely important to have a balanced go-to-market in order to be able to sustain the kind of profitability that we have and aspire for. Each one of these channels has an impact on the other, and having an [indiscernible] heavy alternate channel is not conducive to business just as not having an adequate exposure to alternate channels is also not that desirable.

So as you can see, some of our alternate channels are growing very fast, and I expect that they will continue to grow quite fast, faster than GT, which is close to about 80% of our portfolio just now. So while we will see more of this, it's not like we're targeting now.

[Unknown Analyst]

I had one question on the competitive intensity. So 2 years back, we had seen that there was a lot of competitive intensity across product categories. So if you could just broadly speak about how are you looking at it at this point of time across certain categories, has it reduced? Any thoughts there?

[Promeet Ghosh, executive]

Actually the competitive intensity in our business never abates. So you have to do what you have to do in the context of competitive intensity. We are -- we have the fortune of having moats, which work to our advantage despite the fact that each one of our businesses is intensely competitive, right? So if we are doing well, it's not because competition has gone down, I wish it did but it's not.

[Aniruddha Joshi, analyst]

Next, we have a question from Mr. Achal Lohade.

[Achalkumar Lohade, analyst]

Am I audible?

[Promeet Ghosh, executive]

Yes, please.

[Achalkumar Lohade, analyst]

Congratulations for a good set of numbers. Just wanted to understand -- sorry, I missed the initial part. Did you mention the fans growth was 16%, 17% something?

[Kaleeswaran Arunachalam, executive]

That's right.

[Achalkumar Lohade, analyst]

Okay. And would you be able to kind of give some estimate as to how the industry has grown? Is it very similar? Is it much lower than this?

[Promeet Ghosh, executive]

Achal, we don't have an industry number -- a credible industry number, we have some estimates, but we don't have a credible industry number. My guess is that the industry has grown slower than this and then we have grown -- gained market share would be our guess.

[Achalkumar Lohade, analyst]

Right. And I remember a few years ago, we used to talk about our market share number. Would you be able to talk about that number? Do you have the like-for-like number of the market share?

[Promeet Ghosh, executive]

Again, I can't give you a precise number. A broad estimate -- it's never a good idea but our broad estimate is that we are between 28%, 29% market share in the business.

[Achalkumar Lohade, analyst]

Which used to be around 25%...

[Kaleeswaran Arunachalam, executive]

Yes. So also -- from a point to point, we have gained market share. This is also in fans, led by a focus on premiumization and which is also helping us to gain market share. And as you would know that the portfolio growth of fans is different between the mass and the premium category. So our focus there is also helping us to gain share.

[Achalkumar Lohade, analyst]

Got it. And just one small question, if I may, with respect to the margins. Now if I look at first quarter margin, it's at 15%. I'm talking about Crompton stand-alone ECD margins or even consolidated segment margins for ECD. How do we look at the margins? Would -- given it's a fans-heavy quarter, and following quarters will be a bit more heavy on the water heaters, et cetera, would the margin profile be better or similar or slightly lower than what it was in 1Q?

[Promeet Ghosh, executive]

Broadly speaking, our margins tend to be in a similar range. Not identical, but broadly speaking, they tend to be in a similar range.

[Aniruddha Joshi, analyst]

Next, we have a question from Mr. Sanjay Chawla.

[Sanjay Chawla, analyst]

Am I audible, please?

[Promeet Ghosh, executive]

Yes, please.

[Kaleeswaran Arunachalam, executive]

Yes.

[Sanjay Chawla, analyst]

Sanjay from Renaissance Investment. My question is you talked about achieving double-digit revenue growth. Can you talk a little bit about the growth construct or a breakdown, if you will, in terms of penetration growth, premiumization, price hikes for our existing key categories and also the contribution that you expect from new products and categories in an overall sense?

[Kaleeswaran Arunachalam, executive]

So overall, from a portfolio perspective, while I won't be able to give you specific numbers. Broadly, the way we are seeing is -- let's start with ECD, fans, we are the market leader. And as you know, we sold about 2 core fans last year, making us the single largest player and a global platform. On that scale, we still believe there is significant headroom for us to drive growth on premiumizing the portfolio.

Now this is something that you would know that the business used to hover around 17%, 18% premiumization of the portfolio. We have moved close to 24%, 25%. And the idea is that potentially in about, say, 3, 4 years, can we take this up to 40%. That's the strategy that we're looking out in terms of plans to deliver growth led through premiumization.

There is also premiumization aided by faster replacement cycle that is coming in which should help. Coupled with the fact that even in the mass premium category, we do see geographical opportunities available in certain parts of India, considering our market share differentiation between strong markets and markets where we can improve.

In pumps, as we stated earlier, residential, we continue to be the #1 player. But within residential, we do see, considering our presence when the replacement cycle comes in, considering the water scarcity, people move towards submersible, there is an opportunity to significantly improve on submersible portfolio in the longer run.

Having said that, the area of focus is agri pumps, where we don't have a representative share similar to what we have in residential. So the idea is how do we improve our agricultural portfolio, both with new products and penetration. You have seen consistent agri pumps growing in the last 2 to 3 quarters and gaining share also.

Similarly, we have started entering into solar. We are building a pipeline towards it. We have now 2, 3 quarters of execution excellence as proof of concept so that we can take up the orders and execute it. So that continues to also open up further doors to gross pumps as a portfolio.

Appliances, as you know, we are today the #1 player in geysers. We are a top-3 player, geysers as a portfolio. Geysers in e-commerce, I meant as #1. We are trying to look at both channel penetration, trade is a great opportunity for us, while we do very well in e-commerce. Similarly, air coolers, the last 2 years has been phenomenal, led by the last 2 quarters, Q1 and Q4, where we have sold close to 200,000 coolers on a quarterly basis.

So that gives us a great pathway and considering that we have an affordable, sustainable cooling solutions between fan and air cooler. We think that portfolio is augmented well to grow for the future.

Kitchen, we think, is one of our potential fast growth track strategy for the future. Subsequent to the acquisition of Butterfly today, we are the #2 player in India on kitchen. We talked about earlier in the call on what are we doing to transform Butterfly. That's moving in the right direction, and we should start seeing results coming out in late part of H2 onwards.

Our Crompton kitchen portfolio compressing of SDA and large kitchen, SDA is already growing at a very fast clip of 20 percentage plus over many quarters now. Idea is how to be sustain and expand that. Large kitchen is a startup, the step one is try to make that INR 100 crore business and then try to make money and scale up from there onwards.

The last, but not the least, the Lighting portfolio. Our stated agenda for Lighting was in Q4, we wanted to stop the decline in Lighting growth. Glad to state that we did that. And in Q1 onwards, we have to grow the business and we have started the growth trajectory.

Our B2B business with the new vertical that we have created for enterprise has helped us to aggressively participate in tenders and that is growing in the right direction. Our B2C business augmented by our focus on ceiling and battens, these 2 businesses already growing in double digit as we speak.

So the course corrections that we have to do on the Lighting business is almost done. Now we should be able to take the opportunity to grow the business from here onwards. Largely price erosion is one thing that we need to play, which is a category headwind that is continuing for many quarters. Subject to that, we are moving in the right direction on Lighting business.

So overall, idea is how do we grow the portfolio in double digit. And as when we enter into new categories, in the longer run can that add about 200, 300 bps to the overall growth strategy and how do we get operating leverage to claim, to expand the EBITDA margin is what we are looking at in long term.

[Sanjay Chawla, analyst]

And just on the -- in terms of the fans segment, did you indicate the room for market share gain due to distribution growth?

[Kaleeswaran Arunachalam, executive]

In certain markets, yes, not on overall market. There are markets where we are very strong and there are markets where we believe there's opportunity to improve and gain share.

[Promeet Ghosh, executive]

Look, as you've seen market share gains happens over -- so we've kind of hit a ceiling there. We have to keep working at it. We have to keep working at it.

[Aniruddha Joshi, analyst]

Next, we have a question from Harshit Kapadia.

[Harshit Kapadia, analyst]

Are you able to hear me? Sorry.

[Promeet Ghosh, executive]

Yes.

[Harshit Kapadia, analyst]

This is Harshit Kapadia, I'm calling from Elara Securities. Just 2 questions from my side. One is you had appointed [ Vector ] Consulting a year back. So if you can throw some light on how they have improved your performance? Any tangible data that you can support with -- that would be helpful.

And secondly, on your fans portfolio, if you can share data on how much is your premium fan in this quarter as well as the BLDC as a percentage of fans?

[Kaleeswaran Arunachalam, executive]

On the first one, it is still work in progress. It's too early to comment on what is the progress and where we have moved. As and when we make significant in roads, we'll come back to you guys to see how is it moving.

Second, I think what we disclosed is saliency of our premiums, which includes BLDC also. We are moving towards about 25 percentage of our portfolio being premium from about 17, 18 percentage a few quarters back.

While we don't give specific numbers, BLDC is a growth category for future. We do believe we are the #2 player in BLDC right now. Our endeavor is to reach #1 player in that category also in the long run.

[Harshit Kapadia, analyst]

And would you be able to share your market share in BLDC fans?

[Kaleeswaran Arunachalam, executive]

It's not disclosed, yes.

[Aniruddha Joshi, analyst]

Next, you have a question from [ Rahul Agarwal. ]

[Unknown Analyst]

Am I audible?

[Kaleeswaran Arunachalam, executive]

Yes.

[Unknown Analyst]

This is Rahul Agarwal from [ Ikigai ] Investments. Sir, just to filter out whatever Kalees just said on how do you see different segments. Just wanted to know like top 3 priorities in your mind going into next 3 years, there's a lot of work you've done over the last 3 years to get where you are on Crompton stand-alone. I wanted to know like where would you spend your maximum time on? Like bang on the buck for a stand-alone business, really. Next -- top 3 priorities for you in your mind. It could be product, it could be channel, it could be cost, could be anything. Just wanted to know your mindset. That's the first question.

[Kaleeswaran Arunachalam, executive]

See, I think one of the things that we wanted to shape this organization to move towards this consumer orientation. While there were many things that we talked about, we are good at margin, we are good at market share, we are good at everything. Finally, our product needs to win with the consumer. So that brings in a priority on how do we bring in meaningful innovation that can help us to differentiate ourselves with the consumers. That will be one. Therefore, linked to that is how do we get our act right on new product development and how we ensure that the entire commercialization of that goes through.

Second is portfolio after portfolio in all the categories that we are present, we do see premiumization as a great opportunity. And we want to ensure that we are able to capture that as a strength. Not many brands in this country can straddle between selling a fan that is INR 1,500 to a fan that is INR 15,000 and do kitchen equipment that costs about INR 45,000 under the same brand. When we have the ability to do that, it is important that we focus on that and see how do we maximize the entire premiumization strategy.

The third would be the go-to-market to support. I think as you have seen in the earlier part of the call, the channels are evolving. We see the go-to-market on general trade is moving in a particular direction and the alternate channels are starting to capture a meaningful share of business.

So how do we equip ourselves to deal with this and continue to ensure that we fortify our business to capture those opportunities? These would be the 3. The foundation of this would be a great supply chain, which will help us to deliver the demand that is generated and continue to nurture and augment both our brand and people.

[Unknown Analyst]

So essentially, it's the same of what you have done over the last 3 years, right? Just incrementally building on the same thing. Is that correct?

[Kaleeswaran Arunachalam, executive]

Yes. I think as you have seen for the last many decades, this business has got a few levers to 2. It is just that we need to continue to do that with great amount of execution excellence. Otherwise, we will only be trying to do something which will not have a meaningful impact on business in the sake of innovating.

[Unknown Analyst]

Got it. And lastly, on the cash usage, I just wanted to know like there's a INR 300 crore debt balance. One is, obviously, there is a timeline there. So if you could help with that in terms of repayment? And second is after that, whatever cash generation happens, your dividend payouts are anywhere like 50% on an average. What are your thoughts in terms of investing in the business and re-investing in the business? Any thoughts?

[Kaleeswaran Arunachalam, executive]

As you would know, at the time of Butterfly acquisition, the debt that was taken was about INR 2,000 crores plus. As we stand today in about less than 2 years, we have dropped that down to INR 300 crores outstanding debt. That shows the ability for the business to generate a very high amount of cash. The current outstanding debt is about INR 300 crores, and that is expected to be paid in next year, July.

Our dividend payment has been consistent and has been reasonably improving over a period of time, and we'll continue to focus on that. Now insofar as cash towards investing behind the business is concerned, we typically look at 2 areas: One is meaningful new product development which will ensure that we are able to invest behind that and get in -- our innovation pipeline going.

Second is on manufacturing and supply chain capabilities that we need to develop. There will be minor sums of money required for digital, et cetera, but largely, these 2 would be the areas. And we will have all the options available in front of us to evaluate the use of cash and from an optimal level of cash holding.

At the same point of time, it's not that we are looking at any M&As to grow the business if that's the other question that you have. We think the organic business currently on the portfolio has got enough headroom to grow in the long run.

[Aniruddha Joshi, analyst]

That was the last question for today. From ICICI Securities, we thank entire management team of Crompton Consumer for participating in this call. And over to you, sir, for the closing comments for today.

[Promeet Ghosh, executive]

Thanks. Thank you, everyone, for joining this call and actively participating in it. Thank you also, Swetha, for joining this from Chennai. Swetha has recently hurt her arm. I suspect it's from having wrestled with one of the competitors, what she claims, otherwise. Thank you for the -- ICICI, for hosting this conference, guys. And if you have any questions, please feel free to reach out to us.

[Kaleeswaran Arunachalam, executive]

Thank you, guys.