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Havells India Ltd
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Ladies and gentlemen, good day, and welcome to Havells India Limited Q1 FY '22 Conference Call, hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Sheth from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.
Thank you, Monica. And I would like to welcome the management of Havells India Limited on the call and would like to thank them for giving us this opportunity. From the Havells management, we have Mr. Anil Rai Gupta, Chairman and Managing Director; Mr. Rajesh Kumar Gupta, Director Finance and Group CFO; Mr. Rajiv Goel, Executive Director; and Mr. Ameet Kumar Gupta, Whole Time Director. I would request Anil Sir to give us some opening remarks, post which we will open the floor for Q&A. Over to you, sir.
Thank you very much, Kunal. Good morning, everyone. Hope you would have reviewed the Q1 results. We are satisfied with the operational performance. As COVID recedes further, we expect the demand environment to stabilize and improve. The structural shift in favor of the organized sector and recovery in projects and in institutional segment bodes well for the demand outlook. We will now proceed for Q&A, Kunal.
[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital.
Congrats on a good set of numbers. My first question is, with respect to the margins in the Switchgear and Cable segment. They have seen year-on-year improvement and even sequential improvement in spite of the fact that [indiscernible] costs have gone up. So if you could explain what is behind the reason for the margins going up. Is it because of price action or is it because of mix improvement? If you can give -- throw some light, it will be great, sir.
I think, Switchgears generally speaking, our margins have remained in this plan. And depending upon a certain quarter or depending upon the demand for this quarter, what we saw as compared to last year same quarter was that the demand for the Switchgears had been better as compared to last year.Last year, if you remember all the projects, we -- contracting and everything was tough. This year because that continues, so we could get a good traction in Switchgear, which actually helps maintain the margins also. And we were able to compensate some sales from the exports also. So that has helped.On the Cables & Wires, I believe this particular quarter, there was a little bit of a better pricing. Because generally speaking, there is -- when these commodities are rising, there you get some advantage of some stocks which are lying at the lower cost and you pass it on to the market. Otherwise, that's the reason for the expansion of the margin. Over the next 1 or 2 quarters, things should come back to normalized levels, which we have been getting in Cables & Wires in the past. But the Switchgears margins have generally remained in this plan between 38% to 40%.
Got it, sir. And with respect to ad spend. So basically, this quarter, it's around 1.7% of sales, whereas the normal run rate used to be 3%, 3.5% of sales. Last year, obviously, first quarter wasn't that much delay -- that much higher in terms of ad spend. So do you see this 1.7% of sales normalizing, say, over the next few quarters in terms of ad spend? If so, we'll go back to the old levels?
It will be increasing because this year, also when we started before the lockdown, certain advertising decisions were taken, which were slowed down as the lockdowns happen. We will now continue to review the markets, how they open up because certain markets still are not fully opened up. So we will continue to review that.And going forward, yes, this will increase. May not be at the same levels fully in the next 1 or 2 quarters because that will take some time to recover fully to the normalized level. But in the last 1 or 2 years, the media is also changing, the digital spends are increasing. So we just have to review in the next few quarters what is the normalized level of advertising.
Got it. And any further price increases that might be on the cards across all the products, switches, Switchgears, Fans, Lighting, that might be taken over the next 6 months?
I think pretty much because the commodities have stabilized now in the last 1 or 2 months. So pretty much most of the actions have been taken. Some of them maybe with a lag effect will effect in this particular quarter. Otherwise, the actions have already been taken.
Got it, sir. And my last question is with respect to cash flows. Cash flows this quarter had been negative. Should we read too much into it? Or I mean, can you give an idea as to why it was negative this quarter?
As you can imagine, the first quarter, the production levels were down. Hence, the procedures were down. And we have always maintained, during the first lockdown as well as in this lockdown as well, that we've never delayed the payments to the vendors. So the trade payables actually contracted in this particular quarter, which, when the production levels come back to normalized levels will -- and plus the inventories were also at a higher level because the summer season buildup for air conditioners and fans was not able to achieve the full sale, which will again normalize in 1 or 2 quarters.
The next question is from the line of Ankur Sharma from HDFC Standard Life Insurance.
A couple of questions. One, just on the overall demand recovery. And clearly, we've seen a very strong bounce back in the last quarter. So just wanted your thoughts. One, how do you see this recovery compared to the first wave? Is it broad-based, is it more B2C? Because last time, I remember, B2B was very late to recover. So just wanted your thoughts.And more importantly, do you think this will also sustain? Because last time also we saw Q2, Q3, Q4, the rapid recovery happening. So would you expect a similar trend?
Well, this year, the sales buildup has been different than last year on many counts. One, last year when things opened up, because the market has been completely closed, there was a pent-up demand, more so from the consumer side. And -- but there was a contraction in demand for the industrial and infrastructure projects.But we -- because of that, also because the projects were slow, the A cities -- A category cities took more time to come back and B and C were compensating that downtrend and plus the rural market.This year, actually, if you see the market has opened up in a very standard manner. In the middle of June, things started opening up. And still there were intermittent lockdowns, even now, there are certain markets where the lockdowns in certain markets are still there. So that's been slow.The second thing is that there is no pent-up demand because the markets are generally open, at least for a few hours in a day or a few days in a week. So they were open. So there is no pent-up demand, especially on the consumer side.Third, there is, I would say, a secular growth in, whether it's A class cities, B cities, rural areas. The kind of jump, which happened in the rural areas is not seen, but it is also compensated by the fact that A category cities have not come down drastically.And fourth, very importantly, the projects in the industrial segment has done well in the last quarter, which should continue. Last year, it came down and it took a long time to actually recover. So I think there are many factors which are very different than last year. But overall, if you see in the last 2 weeks, we are definitely seeing growth over last year.
Perfect. And sir, just going back to your opening remarks where you said something on market share gains will be unorganized. And that's something we've seen over the last 3 to 4 quarters. So our assumption would be that, that continues, right, in terms of the large getting larger and the smaller players actually losing share?
So last year, post the lockdown, again, because of the supply chain disruption, there was a sudden shift in market share from the unorganized sector to the organized sector, which actually sustained during the year. And I would not just attribute the market share gains only from the unorganized sectors to the organized sector. It also happened because of many initiatives and the actions taken by the company, not only last 1 year or 2, the last couple of years, additional channels, whether it is e-commerce, modern format, rural areas, addition of product categories, enhancement of the [ machineries ]. Many actions were taken, which actually have helped us gain market share in the industry overall, per se, not just from the unorganized to the organized.
And just one last question, if I may, on Lloyd. Again, this year, we've seen lockdowns in the peak summer season, right? So if you could talk about the inventory situation, both with the company as also in the channel, maybe at an industry level and also for Lloyd. And by when do you think the situation normalizes? Yes, that's all from my side.
So I would say that the inventory levels are high because end of March, the inventory was built up for the season. And that didn't happen this season. April and May are the biggest months for air conditioners. That still was washed out.So the inventory levels continue to remain high at the end of the quarter. And -- but at least in the trade, the inventory levels are not high because that's also a time when the trade starts destocking the products. So their secondaries have been better than what the primaries have been for the company. So I would say that for the company, the inventory levels are high, which will get normalized within a quarter or two.
The next question is from the line of Rahul Agarwal from InCred Capital.
So a couple of questions, sir. One is on the demand outlook. So could we discuss that more elaborately on the 5 key segments you have? Let's say, Switchgear, Lighting, Cables, Lloyds and ECD. Would you want to highlight, like, which one is doing better than the other? And how do you see that for the full year? That's the first question.
Very general question. I would say, very difficult to answer. I think, I've given you the market trends, which actually give you the demand outlook. And I would not say that it's very different within these segments.
Okay. Got it. On the ECD margin, the second question was on the ECD margins. Did 11.7% for the quarter on the EBIT level. You've highlighted that adverse operating leverage activated. Assuming that a price hike have already been taken, would we see it going back to 40%, 50% for the full year?
Difficult to say for the full year, but in the coming quarters, yes, it will go up. It will take some time because this segment has been impacted by the commodity price increases. And to continue to remain competitive and gain market share, we will take calibrated decisions on the price hikes. And so definitely, because of the operating leverage and not the entire price hike being passed on. So these margins have remained low, which will come back.
Got it. And lastly, on the CapEx. So last quarter, we discussed about INR 500 crores for the year and about INR 1,000 crores planned for next 2 years. Does -- any change in this plan?
Not at the present moment. We'll continue to evaluate as the markets are opening up and looking at the demand scenarios.
The next question is from the line of Charanjit Singh from DSP Mutual Fund.
Congratulations on the great set of numbers. So my first question is on the real estate market because that's one of the key end markets for most of our product categories. So if you can highlight from maybe next 2 to 3 years perspective, how do you perceive this market? Are we seeing, kind of, bottoming out and then pick up in terms of this market, which is more intuitions for different product categories?
Charanjit, your voice was not very clear, but I assume you're talking about the real estate. So you also track real estate and we do see certain traction in real estate. I think initially, it was largely on the handing over of the either semi-made or the almost finished apartments.But lately, we are seeing some traction, even on the new sort of launches being announced. So again, I think we need to see this market. This market has been in the, sort of, cold storage for quite some time. But we believe and we have also seen the leading real estate players have been very bullish on the new launches and the demand being high for over last decade as well. So I mean we also need to be watchful of that. But as of now, the things look improving on the real estate front, which definitely augurs pretty well for a company like Havells because a lot of our products go into homes.
Okay. Sir, on Cables & Wires front, if you can set into the volume growth and the value growth. In terms of the price hike, what's the kind of quantum of price hike that you have taken and any further price hike that you're expecting in Cables & Wires?
So around 30% to 35% has been because of the price increases you see into the Cable & Wire growth. And definitely there's been a decent volume growth as well. But as you know, the commodity high [indiscernible], particularly in this segment. So I think around 35% of this could be attributed towards the price hikes. And others will be around 10%.
Sorry, sir. Can you repeat that, the 10%?
I mean you talked about the Cable & Wire segment, correct?
Correct, yes.
Okay. In Cable & Wire segment, around 35% of the growth could be attributed to the price increase.
Okay. And sir, just lastly on the Switchgears part. You also priced for the exports as a segment, which would have picked up. So on the exports opportunity, if you can highlight how you see that going forward, not only in Switchgears in any other categories also. That's the last question from my side.
Switchgears continues to be the leading product category for export because you see this market is fairly concentrated and Havells is among the top 10 manufacturer in the world, now in Switchgears. So I think the larger opportunity lies in Switchgears and the next big opportunity we foresee for us will be in air conditioning. But look, it's early days for air conditioners. But yes, we are very, very, sort of, bullish on the export opportunity to go to China plus one as well. And we are seeing good traction happening. But this will become meaningful in a couple of years. But as of now, on the Switchgears side, we are having a good accounts opening, and we'll [ receive ] that much and we can discuss about that.
The next question is from the line of Sonali Salgaonkar from Jefferies India.
Congratulations on a great set of numbers. Sir, my first question is, again, an extension of the earlier question in terms of price hikes. Sir, could you quantify approximately what are the price hikes that we have taken, say, by TD across the product segments?
I think that will be difficult. The only thing we can say is that on the ex Cable & Wire, our price increases have been in the range of around?
10% to 15%.
10% to 15%. And most of the price increases have been taken looking at, as we just mentioned, the calibrated approach, the market competitive scenario and how much has been the commodity increase. So these are a mix of everything. Maybe the older commodity cost may not have been passed on. But you see this is a decision which has taken into account several factors impacting the market and the demand scenario.
15% ex Cables & Wires, what would be your approximate quantum taken in Q1?
I think that will be difficult to talk about. But [ I think you asked ] what has happened in the last is, the commodity cycle begin, that's what we have given. All we can say is that most of the price increase is effected because we see some stabilization in commodity costs as well. So as of now, there are not much anticipated price increase in the offering.
Understand, sir. Sir, my second question is regarding your ultimate channels, e-commerce and rural. Sir, could you help us understand or give an update on the development of sales into both these channels?
So e-commerce continues to do very well. Part of that could be also that our presence has been limited in the past. But as of now, we can claim the strength of the brand, which has been, sort of, demonstrated in the off-line channel for last so many years. I think it's pretty much evident in the online channel as well.One of the leading platform, we already run, #1 of in terms of Fans. So I think we are extremely sort of satisfied and we are very sort of bullish on how this channel will pan out for us because we are doing everything, keeping the harmonization between various channels. This is what we discussed earlier as well. Even rural is tracking pretty well, and we are introducing more and more products into the rural channel. So both these channels, I think, continue to do pretty well with a strong promise of how they will pan out in the near future.
Understand, sir. And how much would the sales from both these channels would have grown in Q1? Because last year, we saw phenomenal growth. Of course, the base was a little lower, but right now with the base catching, what is the kind of steady-state growth that we could envisage from this channel?
Look, these are -- basis are very low. So the [ percentage ] raises will be, sort of, meaningless to discuss. But all I can say is they will become meaningful in terms of the share of the sales in next sort of year or 2. All I can say as of now is they are tracking pretty well, sometimes even exceeding our own expectations.
Understand, sir. Sir, and last question would be on the distribution. Currently, what could be our distribution panning there? And how much of that would be rural versus urban?
We have about 14,500 distributors across India for all product categories. And we have a retailer base of about 185,000 retailers all across the country. This excludes the rural channels, where we have close to about 25,000 outlets registered in the rural channels.
The next question is from the line of [ Siddharth Mehra from Nomura ].
Sir, my first question again is on the ECD and Lloyd segment. If you can just talk about a few product introductions you are working in, which could help us in the growth in these segments. And on the margins as well on the Lloyd side, how do you think we should look at maybe next year in terms of the improvement from this year?
So on the ECD side, there are continuous product introductions which are happening. Despite the fact that the Fans was a truncated quarter there was a very good new models, which was launched on the air purification side as well as on the aesthetic side, Technological and aesthetic new product innovations have happened.Even in air conditioners, even in Lloyd, there have been a huge revamp of the washing machine range, refrigerator range continues to enhance. So there has been a continuous innovation process in both these product categories. Going forward, I believe this -- actually the new product innovations will definitely help increase the sales. And as far as Lloyd margins are concerned, last couple of years have actually been a bit of a dampener because the sales in the seasonal time were affected. So I think next year -- from next year, we should definitely see good traction of margins in Lloyd as well.
So I mean, to be specific, so in Lloyd, we had introduced this entire range of washing machines and refrigerators. So I mean, by when can we see meaningful pickup in some of these segments? And I think on the margin side, I mean, should we expect a close to double-digit margins, we should aim for in Lloyd in the next 1, 2 years?
You asked this question about meaningful contribution. It will take at least 2 or 3 years for them to start making a meaningful contribution. Look, Lloyd will continue to be our growth engine. And so the main focus there will be to gain market share, gain entry into each segment. And yes, of course, because of the volume, the margins will improve. It's difficult to say how much margin will it be, but it will improve from the present range.
The next question is from the line of Naval from Emkay Global Financial Services.
Congratulations on good set of numbers. My question is on revenue distribution, the way you elaborated on Tier 2, Tier 3 towns and how urban is picking up. Any sense you can provide on how geographical mix was in the last quarter? Not the exact numbers, but if at all, qualitative trend, which geography would have outpaced the growth number and how trends are happening in the current month as well? Because you also stated the way there are localized lockdowns in South, so that are still impacting overall recovery.
There has been a variation in the, let's say, the extent of pickup in sales. The South and East have been weak in the first quarter. And North has definitely been much stronger, West been signed. But South and East are quite slow. Actually, a little East, the biggest market for us, West Bengal, took us a long time to open up. So that will start improving. And the East has started improving in the second quarter, but South is still a bit weak at the present.
And anything specific on Lloyd because of the strong heat wave in North? So how traction would have been, say, last 20, 30 days because of this? Or this would have accelerated channel inventory liquidation, far more exceeding your expectation? Was that also the trend in Lloyd?
Yes. In the North, actually, you're right, the channel's inventory reduction was beyond our expectations because the lockdown actually opened much later as compared to last year, this year. So the North saw a good pickup in sales for air conditioners because of the heat wave. But now because of the monsoon coming, things have started normalizing back again. So the first quarter saw that benefit. So the losses that happened in the East and South were compensated somewhat.
The next question is from the line of Aditya Bhartia from Investec.
Sir, if you could just share some insights on how 3 months of the quarter have panned out. May, I guess, would have been very weak. But how strong was exactly the growth that we saw in June?
Yes. I mean this is quite general. Till the 15th of April, things were quite normal. And then suddenly, the lockdown happened with COVID. The [indiscernible] COVID started around 15th of April. And continued til the middle of May, when things started opening up in a very cautious manner. I think June was a month where things were much better as compared to April and May.
Sure. And then where you have seen a reduction in number of employees? I mean FY '21 was the second consecutive year where we saw a reduction in total number of employees. So which are the areas or verticals wherein we are seeing employee reduction? And why exactly is it panning out?
There is no reduction. I don't know where are you getting this impression from. If it is driven from the value, these are because there are a lot of variables which are also included in the value. So I think this impression is not, sort of, correctly placed. There is no reduction in the number of people. In fact, we have added a number of people.
So I was just taking the data from the annual report, wherein it is -- the manpower number that you have mentioned, that appears to be going down, which is why the question.
Very last time, numbers are the same. Maybe you can take it off-line with Manish. But I must correct it because you're asking it on this call. Let me state it very clearly, there is no reduction in the number of people in any discipline. With all the numbers are going to increase because we are fairly sanguine about the growth which is now going to happen in this country. And I think we're very well positioned to take advantage of that.
The next question is from the line of Balaji from ROE.
Congratulations on the good set of numbers, sir. My question is relating to ECD.
Mr. Balaji, this is the conference operator. There's a slight disturbance coming from your line, sir.
Okay. Is this better now?
The disturbance is still there.
Hello, is this better now?
There's disturbance, sir.
Now.
Now it's better. Sir, you may go ahead.
Okay. Congrats on the great set of numbers, sir. My question is relating to contributions in ECD. When we are comparing it with FY '20, last to last year pre pandemic, we see that there's a drop by 700 basis points. Is that because of delayed price action? Or any other reason because of commodity price increase? Or is there a mix change because you said that Fans has seen a stressed quarter?
So I think what you're comparing is the Fans season quarter, which is Q1 of FY '20. That obviously is a quarter where the Fans sales are the highest and hence, it helped bump up the contribution. And so I would say that it's not really a good comparison. And yes, of course, because the commodity prices have increased, some corrective pricing actions have been taken, there is always a delay. I think going forward in the next 2 or 3 quarters, you will have to see how the situation comes. It's not a great comparison to do a full quarter, and that too the highest season quarter, with this quantitative quarter.
So as a follow-up to that, I'm just doing a comparison because the revenues are comparable. FY '20 revenues were around INR 562 crores. And this year, ECD revenues are INR 576 crores. So was that truncation in plans?
There is growth in many categories. For example, water heater, appliances. Fans, obviously, where the manufacturing is high and the season is highest in April and May, which was [ lost ]. So it's not -- again, I'm saying it's not a great comparison to do a full quarter comparison with this particular quantitative quarter.
Understood. Understood, sir. Understood. And any -- so the Lloyd -- another question, again on Lloyd's contribution. You did mention that the contributions will be going up 2 to 3 quarters down the line. In the longer run, with newer product mix coming in, what -- the refrigeration and washing machine, any sort of expectation on what it can go up to?
We don't want to give a number, but yes, there will be improving -- improvements.
The next question is from the line of Nitin Arora from Axis Mutual Fund.
I'm sorry I joined the call a little late, and I'm sorry if you have to repeat if this question has been asked. Sir, this is the second quarter where the cash flow is negative. Just wanted your guidance, how one should look at it? And if you can throw some light on how the secondary sales in the channel has been?
So I think the cash flow in this quarter is largely attributed, as you mentioned, the 2 products, particularly ACs and Fans, we are capping high inventory, which could not get liquidated as anticipated because of the, particularly Lloyd, the peak season got impacted by COVID.And second, maybe sort of technical, but since there was a truncated quarter, the purchases were low, but only if you kept paying the regular [ right ] of payment. So what happened the [indiscernible] goes down, which I think we'll see will just recover over a few quarters. So I don't think that should be cause of much worry.As well as secondary, I think secondary sales continue to track well. And we have said this earlier also, since the demonetization, we have seen the channel inventory continues to be tracking pretty much the secondary sales because I think there has been a repeated -- whether it was demand and GST, then COVID. I think there is a bit of a, sort of, turbulence in the dealer channel where they want to keep the inventory, which is not too high compared to what they see in the secondary trend. So secondary sales are pretty resilient, and we believe this should improve, as we said, the COVID recedes. Hopefully, there is much more reopening of the market.
So if I remove -- if you look at the inventory, excluding Cable & Wire, the inventory is at an optimal level, not too high, not too low. Is that the right way to incur it?
We will not see Cable & Wire. Our inventory is high because of the seasonal products like ACs and Fans.
ACs and Fans -- the inventory, right, not Cable & Wire that [indiscernible].
No, no, sir. My question is, if I exclude the Cable & Wire business, the rest of the inventory in the channel, is that the optimum level? Is that the way to look at it?
Yes, yes. Yes, that's right.
And sir, any comments of yours towards the market share gain from the unorganized sector? Is it still happening? Or do you think unorganized now is stable coming back how -- because that was a good share of gain you witnessed last year and I think it will continue. Just some comments on that.
As you said, you joined late, we did mention this in the beginning. But mainly for the repetition. I think we have mentioned that there has been overall gains for Havells. And we are the combination of effort over years, which is, these are not, sort of, 1 quarter or 1 year effort. There were efforts into new channels, seeding, sort of, new product categories, looking at a new customer category.So I think these are what has helped to gain the market share, which we believe is overall -- there could be something attributed to organized as well. However, the pie of organized seems to be growing because there is a continuous shift from unorganized to organized. One cannot track this on a quarter-to-quarter basis, but we believe the trend which started, you see because of COVID, continues to remain. So this is the only way we can, sort of, as of now explain the same.
But there are...
Sorry to interrupt, Mr. Arora, I request you to rejoin the queue.
I'll come back in the queue.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Congratulations for a good set of numbers. So I have 2 questions. First is, if you could guide us on what is the expected capital expenditure for the current year and if you could also highlight what it could be for the next couple of years and the categories in which we are investing towards capital expenditure.Second is if you could comment, we would -- we are expecting to see new energy ratings for Fans as well as air conditioners from early 2022. So your comment on how is Havells positioned towards that? And will this also aid in terms of market share gains due to Havells superior investment in research and innovation?
So on the CapEx side, we did mention we had earlier guided INR 500 crore for the year and INR 1,000 crores in 2 years. As we said, we'll continue to evaluate it. There could be something shift because first quarter due to COVID, there have been some reduction because the market -- the factories could not be opened for all these kind of construction activities and all. But as of now, we are not changing our guidance are the same. I think we'll continue to evaluate that.On your second question on the BE and all, in fact, we were already ready. The government obviously delayed the notification, for right reasons. But we were already ready in terms of our Fans. And AC, the position is also there. So as of now, I think as the government [ notifies ] we are fairly well prepared with a new range. You see fully compliant with the new BE norms. So we do not face much issues on that.And as you're aware, we see our CRI or R&D efforts are pretty, sort of, future focused. We have a large team as well. So we continue to evaluate how the new BE norms will affect, not only the company, but also the customer orientation towards that. So in terms of a specific question, the answer is we are already ready with the range we are complying with the new BE norms.
Sure. And just a follow-up on this. Do you expect these to be delayed further as they were last year because you've got a strong [indiscernible].
As of now, there is no indication like that. We do not feel there will be any meaningful shift, if any, by the government of the same now.
The next question is from the line of Achal Lohade from JM Financial.
Can you hear me, sir?
Yes.
Am I audible? Okay. Sir, congratulations for the great set of numbers. My question is if we're looking at normalization in commodities and growth picking up, how do we look at the margins, what we have delivered in the [indiscernible] or do we think that this is, kind of, a sustainable number? I know there is an element of seasonality here. But from an annual number perspective, is it fair to say that these numbers or these margins are sustainable?
I believe that if you don't see it the entire annual, but on an annualized basis, yes, the margins should start coming back in most of the product categories. So in Cables & Wires, it's on the higher side and ECDs on the lower side. I think we should be coming back to normalized levels soon.
Understood. And my second question is, is there any thoughts on the inorganic opportunity side? Are we looking at any opportunities? Or given the, kind of, product profile we already have, we may not be really keen on bringing opportunities?
No. Look, first of all, we have a strong organic traction in our product categories. You are aware, after the acquisition of Lloyd, the kind of runway we have in terms of product categories we can, it is fairly sizable. So we have mentioned before also, we do not feel the need of inorganic acquisitions to support our growth. We are -- there, we see strong traction in organically as well. However, again, you see there are opportunities, you see which fit into our portfolio at the right pricing, which again is a very difficult thing in India.So I think that something will always remain open. So -- but let me just clarify once again that this is not something which we need to fulfill our ambition of the coming years, sort of a much larger player in the industry. We will remain open, that's fine. But we feel very satisfied with the, kind of, opportunity we see organically in the entire portfolio we have at Havells.
The next question is from the line of Mayan Pandari from Nirmal Bank.
Sir, my first question is on Lloyd. So we have grown about 60% Y-o-Y. Any idea how much industry growth has been?
Well, I think we have not much idea because [ those results will come ] but we believe, I think we have pretty much, sort of, maintained and grown our sort of market share in this. But look, the last year base was very different maybe for others as well. So difficult to look at one quarter and then decide how others have done. I mean let's suppose we've got the whole year performance, and then the picture would have much better.
Sir, how has been the growth in the July month specifically given there is extended, summer in northern part of the country. How would you -- any comments on that?
July, I think it'd be difficult to comment, and we'd like to stick to Q1 performances only.
Okay. Okay. And sir, in the Q1, as you highlighted that the contribution from industrial has been -- has increased. So how much would have been the contribution from the industrial side of the business?
Overall, on the Havells side, we see that almost about 27% of the business is from industrial.
27%?
Yes, Industrial and Intra.
Okay. And lastly, sir, we have seen a dip in our other expense. Other expense as a percentage of sales is pretty low when we look at the last 8 or 9 quarters. So is that the savings which we have realized in the pandemic year is now, kind of, resulting in better margin for us?
I think in some sense, this could not be compared with last, sort of, 3 quarters because we -- as we said the quarter has been, sort of, truncated. A lot of areas there have been, sort of, local lockdowns as well. So maybe I think let's view them over the next 2 quarters, and then we can see the trend. So I don't think these are, sort of, really, comparisons we can draw on this quarter because it really, sort of, lopsided in some way or the other.
The next question is from the line of Aniruddha Joshi from ICICI Securities.
Sir, one question on the distribution. So we have around 1 lakh, 55,000 retail outlets. Can you indicate what would be the universe or how much is the scope to expand the penetration further? Also, in rural areas, we have just 25,000 outlets. So how much can be the penetration expansion scope in that? And we have started the initiative rural, Vistar. So again, what are the initiatives that we are doing in that? Yes, that is 1 question. And second question is, obviously, in commodity-linked categories like Cables & Wires, we have taken a steep price hike of almost 30%, 35%. But let's say, if the input prices decline, will the company be, again, reducing the selling prices or it will stick to the current selling prices? I mean, how it will be playing in that scenario? Yes, that's it from my side.
I'll take your second question first. Normally, Cables & Wires, the prices in the market follow the raw material trends. So whether it is an increase or reduction within a short period of time, it is passed on to the consumer. That has always been the case. And yes, you are right that if it comes down, that will also be passed on to the consumer.On your first question, on the -- sales is still very large. I would say with the electrification are going into a smaller town or villages, there is a huge scope to expand with network, retail network. And even within the rural segment, right now, we have identified 3,000 towns where the population is below 50,000 where we are now, in a short period of time, we'll be covering that. But to cover the entire retail network, that will also take time and adding more and more new product categories within the rural segment. So I would say that within the rural areas also, we would be still at a very low base at the present moment because it's just a 2 or 3 years old journey for us.
Okay. That's helpful, sir. Sir, just last question from my side. In case of Lloyd, what are the 3 key important things that we will be working on to expand the market share? I guess we already have a large product portfolio in place now. I guess, distribution wise also, we would have already been reaching out to the distribution of most of the outlets that the market leader would be reaching.And in terms of pricing also, would we be relatively more competitive compared to the pricing of the M&C products or even the market-leading products? So what are the 3 important things that you see will lead to better market share gains for Lloyd?
So according to you, we've already exhausted all our options in the expansion of the Lloyd?
No, sorry. No, no, so I mean that is not absolutely not the thing.
So it's always a journey, whether it's Havells or Lloyd. Maybe 5 years ago, you would have asked me, I would have said the same thing. Product innovation, branding, distribution reach, that is a continuous process in Havells and 10 years ago as well as now. Lloyd, I think, gives us far more opportunity to keep investing on branding, product innovation as well as distribution enhancement. So that will continue as a process. I think whether it is FMCG companies or our kind of companies -- that's -- those are the 3 or 4 main key points that needs to be looked at, at all points of time.
The next question is from the line of Renu Baid from IIFL.
Congratulations for the good results in 1Q. Sir, I have 3 questions. First, if you look on the demand side, last year second half, we had a good pent-up demand in addition to the base market. So when we look at the current year, given that you mentioned that you're only seeing -- you're not seeing any pent-up further, how do we target volume growth for the year in this scenario without pent-up? So any change in business mix strategy that should be there in place to ensure that we deliver growth, or volume growth could be a challenge in your view?
Okay. Renu, I feel that I've always maintained even last year that the pent-up demand could never have been for the entire year. The pent-up demand is always for a short period of time when markets open up and there have been delayed purchases because of the lockdown. The pent-up demand actually played out.The rest of the year was not really a pent-up demand, but increased demand from the consumers because of change in, I would say, consumer behavior. And I would argue that this year, though there is no pent-up demand, but the growth in the sector, which is, let's say, without COVID, that growth will continue, and that's where the growth will come. The volume growth plus, of course, the pricing growth will come. So we are quite confident that the growth will continue despite the pent-up demand not being there.
Sure. And broadly, given the fact that commodities have also started to taper off, we have taken adequate price increase. Do you believe that the gross margin headwinds are broadly behind now? And how should we look at Lloyd specifically because volumes [ had ] a moderate post season. What would be the strategy there to improve the margins both in a balancing ASP as well as relative pricing in the market?
So yes, the volatility has abated and that's helpful. But there will always be pressure on the margin. There is pressure on the margin because the commodities are at an all-time high. And hence, we are always balancing between the ASP in the market as well as market shares and the margin. Look, we have always been a growth in margin oriented organization. So we always have maintained balance between our growth in market share as well as margins. And I think that trait has -- will continue in the coming times also. We will have one look on the market share and the other look on the margin. We believe that the margins will improve from here, but it will be under pressure. It will be under pressure in the sense that it will require far more effort to achieve those margins.
Sure. And so my last question is on the CapEx side.
I request you to rejoin the queue for follow-up questions.
That's okay. She already mentioned that she has 3 questions.
Yes. So just last thing on the -- especially for Lloyd expansion in the South, one of the largest player has called off the South expansion plan. So do you think that the proposition of having another facility in the South makes sense given that PLI also is not focusing on finished products for components here. So are we looking for a second facility for Lloyd?
We are evaluating right now. I think if the PLI would have been on the finished products, maybe that could have fastened our entry into setting up a manufacturing facility itself. But now we will be taking it as and when the requirement of those market shares or volumes when Lloyd requires it. So it will not be a decision based on PLI, but it will be based on the fact that how fast we can grow into those markets.
The next question is from the line of Ashish Jain from Macquarie.
Sir, my question pertains to cash flow. So fiscal '21 was the first year where our operating cash flows were much lower than our profitability and you -- then a profit in the same...
Can you repeat?
Sir, fiscal '21, the operating cash flows were much lower than our profits because of working capital increase and all. And we have seen the same trend in Q1 also. So do you think by end of this year, it will normalize and you'll go back to a scenario where our operating cash flows are much better than a profit channel?
Yes. I think you rightly mentioned that the last year when the trend continued, because I think the disruption continued in Q1 as well. So yes, we are fairly, sort of, confident that these things will improve over the next 3 quarters. And look, structurally, we continue to be a net operating cash flow company. Nothing has changed structurally in the business.So quarter-to-quarter, things can vary. But I think if you say the trend wise, we continue to be the same company we were earlier and I think we're only improving upon the same. So I think you will see this [indiscernible] reflecting in the number in the next few quarters.
Sir, my second question was on margins. So one of the comments that you made in the press release was that operating margins were impacted in a couple of segments because of lower sales and all. So what is the trajectory we are seeing for those specific segments like Lighting and Consumer Durables? Have margins, kind of, normalized now based upon the commodity and the demand momentum that we are seeing today?
So look, under absorption of overhead was one part of the reasons why they were lower. As we said, there are, sort of, competitive pressure as well. There are strategy about balancing the market share gains and [indiscernible]. So part of that over -- under the option like they will get stabilized once we have, sort of, the full quarter and hopefully, there are no lockdowns going to happen in the future. Part of the -- actually will be -- strategy will be compensated through the higher growth into the business. These are things which are fairly variable. So I think that needs to be seen only when the quarter plays out. But yes, I think that part where the under absorption has been, hopefully now with the full quarter, that will get addressed.
The next question is from the line of Rahul Soni from Smiths Limited.
Sir, my question is on the refrigerator and the washing machine, the new product you have launched in the Lloyd plans. So what kind of investment do you have done regarding these products? And what is your current capacities? And in going forward, will you be manufacturing these in-house? Or there is -- you will also outsource the manufacturing? That's it.
See, as of now, we are using the ODN approach, where the designs are proprietary. They are developed in-house through our research, consumer research. And whether we do in-house, definitely will be evaluated as we grow in the volumes. But yes, if you look at the way we work is that we always prefer to do in-house manufacturing. But I think that question is some time away.
[indiscernible] questions.
And washing machine, part of the washing machine factory we already brought in-house, so that we have done. But still the large part of refrigerators and washing machine which will continue to outsource, that can then -- we keep evaluating. And at the appropriate time, we will keep building them in-house.
Okay. And what's your current capacity, sir?
Capacity, since we are not doing much in-house, I think that has not much capacity. We have an ODM approach. So these are not in-house capacity. So capacity of the vendor who was dedicated on our behalf.
The last question is from the line of Chintan Sheth from Sameeksha Capital.
Am I audible?
Yes, sir.
Sir, I have only one question. If you can provide an estimated revenue loss for the quarter because of the second wave, of what we [ predicted ] when we started the quarter, and that would be helpful.
No, that is difficult to estimate because this time the lockdown has been sort of bits and pieces, sometime in North, some time in East. So I think let's move forward on this. I think there's no time looking at the past now.
Yes. But I was just trying to understand because it was a very sudden lockdown issue came up at the middle of the quarter. We will have very less time to [indiscernible] cost as well. So we're trying to gauge if we have ended up the revenue, the way we have anticipated at the start of the quarter. That things would have -- how things would have looked from that angle. Not the particular number, any revenue shortfall in terms of percentage would also help.
No, look, revenue definitely lower than what we anticipated. But I think it will be pure conjecture if you try to put a number on that. And obviously, expenses, unlike last time would not have been that much reduced, except for the variable ones, like [indiscernible] or travel and all. So as I said, I think we would rather stay away from this and let's focus on Q2, Q3, Q4 and way forward.
As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you very much for joining the call, and look forward to a great year in the coming times. Stay safe and stay healthy. Thank you.
Thank you. On behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.