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Havells India Ltd
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[indiscernible] I welcome you all to Havells India conference call for 2Q FY '21. We have with us the top management of Havells India, represented by Mr. Anil Rai Gupta, Chairman and Managing Director; Mr. Rajesh Kumar Gupta, who is Director Finance and Group CFO; and Mr. Rajiv Goel, who is Executive Director.Now I hand over the call to the management for further proceedings.
Thank you very much. Good afternoon, everyone. Welcome to the earnings conference call for the quarter ended September 2020. Hope you would have reviewed the results by now.So for my initial remarks, I would say COVID-led disruptions seem to be declining. We are encouraged with the pace and extent of demand recovery. Consumer and residential demand especially is robust. However, industrial and infrastructure sales remain sluggish, though they're also trending towards a gradual recovery.Our initiatives in rural, online and channel engagement have well developed -- delivered. Lloyd recovery is led by AC sales growth. Recent entry into refrigerators would further strengthen the product portfolio.We perceived the recent impetus to Atmanirbhar Bharat with prohibition on AC import as positive for integrated manufacturers like Lloyd.Advertisement spend and CapEx remained low during the quarter, though we expect a gradual recovery to normal levels. The festive season seems to be evolving decently, but COVID development needs to be observed for sustenance. There is a positive sentiment amongst the entire organization for growth, and we continue to build on the momentum.We will now proceed for Q&A.
[Operator Instructions] The first question is from the line of Akhil Tiwari (sic) [ Atul Tiwari ] from Citigroup.
Sir, this is Atul here from Citi. Sir, my first question is on the margin this quarter. So congrats on very strong margins of about 17%, which seems to be driven primarily by raw material-to-sales ratio, which is quite low. So is it sustainable, this 17% kind of margin or 400, 500 basis points higher than what you normally report?
So on the margin front, if you see, we've also reported the contribution margins, which has either remained constant or have improved, especially they're improved in the lighting and ECD segment but also have remained quite stable in the other segments also.So we believe that these margins would hopefully, it remains sustainable, though there is a pressure on the commodity prices, which might take a little bit of lag to pass it on into the market. And hopefully, things should ease out in the coming times also. But our focus usually is on the contribution margin and to keep expenses under control.Now you see in this particular quarter, there were certain expenses which were lower than normal, like the advertising spend, so -- which over a period of time, will come back to normalcy. So I believe the contribution margins have the ability to sustain, and we will continue to build volumes to retain as much as of the overall margins. However, some of it may come off because of the increased expenses.
Okay. But sir, what about raw material-to-sales ratio or the gross margins? Because a lot of this EBITDA margin improvement appears to be driven by that in this quarter. So will that sustain?
So I think we look at the contribution margins. Contribution margins have primarily remained either equal or better than last quarter. So that is where we're striving for, all the cost initiatives, the factories, the productivity improvements are working towards that.
Okay, sir. And sir, my final question is: Any comments regarding the outlook for second half and especially how are things during the festival season?
Well, what we have seen in the last quarter, I mean, the outcome has been positive. When we entered the quarter, we didn't expect that the consumer and residential demand would come back so strongly. So hopefully, this should sustain the -- festival demand, we are -- a couple of our product categories like domestic appliances and lighting cater to, and some part of Lloyd as well. But generally speaking, we look at the overall recovery in the economy. And that, hopefully, is sustainable even after the end of the second quarter.So hopefully, I think we should be looking at better times going forward.
The next question is from the line of Sonali Salgaonkar from Jefferies India.
Sir, congratulations on a great set of numbers. Sir, I have 2 questions. The first related to the key strategies or the initiatives that the company has undertaken during the pandemic, which has helped us with delivering such a strong performance. And secondly, market share gains. So in Q1 conference call, we had talked about market share tailwinds from the unorganized sector. So have we gained market share in any of the categories in this quarter? And do we see sustainable market share gains going forward as well?
So I think if you talk about broad strategy, I think in any crisis situation, some strategies are immediate and some things are to be pulled forward from the past. So our focus on the channel or deeper entrenchment of the distribution channel has continued to remain as well as intensify during the pandemic time, the COVID time. So our connect to the channel definitely paid off results. Our initiatives in going deeper into Tier 2, Tier 3 towns in the rural markets that helped, the focus on online.And so being an omnipresent channel kind of a company, that really helped during this time. So thus, overall, looking at all good costs, bad costs, good costs, which can go temporarily and come back, bad costs, which can go away permanently. I think a lot of focus was put on improving the cost efficiencies into the organization and obviously, looking at newer growth opportunities for the future. We believe, definitely, we have taken market share gains in all the product categories. And that's, what, something which is very satisfying. And unlike in FMCG industry, it's very difficult to get month-on-month numbers and the market share. Maybe we are not big fans of the market share reports of -- because our industry is not well covered that way from whether you see Switchgears or Cables & Wires from a market share point of view. But what we can find out is how the competition, the organized competition is faring as well as the unorganized competition.Definitely, in the last 6 months, because of supply chain disruptions, because of change of mindset, both in the consumer and the channel, we have seen market share gains, strongly unorganized channel as well. But over the last few weeks or months, we have also seen market share gains in many product categories from the organized manufacturers as well. So I think that is what is more satisfying that this growth is coming not only on the growth in the economy, but also on growth in market share numbers.
Understand. Sir, and how much of your business would be B2B or infrastructure-related right now? And secondly, any quantification in terms of deepening of rural reach right now for us?
Yes. So we estimate that our industry -- again, many of our consumer and residential product categories also go into industries and infra. So -- but we have now started defining into 2 different broad segments, which is both more consumer and residential oriented and the other one is infrastructure and industrial oriented. The products which go into industrial and infrastructure related, they are contributing about 25% of the overall sales. And there we have seen sales even lower than last year. Whereas the consumer and residential, we've seen sales grow at about 15% or so in this particular quarter. So that's very satisfying. And I think going forward, the way we started looking at the last few weeks, the infra and industrial segment has also started coming back. I think, hopefully, things should start normalizing in the next couple of quarters.
Sure, sir. And any quantification of your rural reach, which you think is sustainable?
Well, we -- our rural reach is deeply intensifying, and we've seen almost 140% growth in rural sales in the first -- in this particular quarter. Though the number is small, but now we can say that almost 4% of our consumer and residential sales is coming from the rural areas.
Fair enough. Sir, and my last question: Any views on the real estate demand returning? And any CapEx guidance? That's it from my side.
So yes, as I said, consumer and residential will now start plugging into one. So we are seeing some improvement in the residential demand as well. In fact, within the Cable & Wires, you see our domestic wires business grew around 19% to 20%. So that is an indication of improvement in the residential demand as well. And as far as CapEx is concerned, when we started out the year, we looked at the entire year because the COVID things had happened, we had contracted our CapEx. But now we have revisited our CapEx. And this year, it seems we should be in the range of about INR 330 crores or so for the entire year.
[Operator Instructions] The next question is from the line of Renu Baid from IIFL.
Congratulations for a very strong performance in this quarter. So a, you did mention different aspects of the market and growth. What part of the demand aspect you think could be having some element of pent-up demand, or you think the broad contours of the growth look very much sustainable for us? On the demand side, how does that look in terms of the growth that you secured this quarter?
So Renu, it's difficult to say, even after 4 months or 5 and -- 4.5 months of lockdown opening up, a better pent-up demand would be there. Things would have normalized by now. But we definitely feel that the inventory levels in the trade are lower than last year, than the normal levels. So this does indicate that there might have been some pent-up demand. But overall, we believe that the economy pickup has been better than what you were expecting.
Sure. And second would be, sir, again, you did mention during your comments, growth of 19%, 20% and in the housing wires and other categories. Within some of the large categories, can you throw some insight in terms of the performance? Because overall ECDs grew 18%, others grew. So within them, some figures in terms of the large categories, how did they perform? And overall, should we expect this kind of market share gain to be sustained as the rest of the market comes back to normal towards the second half of the year?
Renu, generally, because we have so many different business units within the segments also. So it's very difficult to get -- or specifically talk about one product segment or the other, but as I said...
Some of the highlights -- or the outlier growth which you think is worth highlighting?
Yes. So as I said, overall, if you see the consumer and residential sector grew in mid teens. So within that, if you see -- lighting as an overall thing has grown by only about 4% to 5%. But if you take out the professional Luminaire business, which is also related to industrial and infra, the consumer lighting business has grown around 15%. The ECB overall has grown around 18%. We believe within that also, if you look at the large product category like fans, we have grown fastest in the market. Not only we have taken share from the unorganized sector, but we believe that we've grown faster than the competition in the organized sector as well. So there is, I would say, large segments, there are large segments in the industrial and infra where we still have to come back to sales levels of last year, but definitely in the residential and consumer, we have seen good traction.
Sure. And sir, 2 follow-up questions on the cost structure. I think we have taken various cost actions. So are we now seeing some of the fixed costs being restored back, be it in terms of employee benefits and other details? At the same time, on the ASP spend, last quarter, you mentioned there could be a structural cutdown in terms of the spend, which you were traditionally doing, of almost 4%, 4.5% level. So should we see those levels now tapering to 2.5%, 3% at the company level? Or they should, in your view, now come back to the previous or pre-COVID levels, sir, where you were spending earlier?
Well, as I said, we've looked at the entire cost structure of the company, and we definitely don't want to curtail any expenditure which is the required infrastructure. In fact, on the employee expenses, we had actually not taken any salary cuts in the first 6 months. So I believe the employee expenses would -- are the sustainable expenses. And -- except something whether it's related to growth and employment, there would be, I mean, an increase. Otherwise, those are sustainable expenses. Some of the costs will come back, like travel costs are still very low. They will come back. Advertising and promotion spend will start increasing in the third and fourth quarter. May not -- it will take time to go up to a normal levels or will never go back. Because, as I said, there are structural changes. But it will gradually step up. So we will not see an immediate rise because brand building for us is more of an investment. It's not something which is related to impulsive buying as in some FMCG categories. So it's more of a brand investment, and I think we'll continue to see how the monies are distributed between digital and non-digital spends.So I think over a period of time, this will come back to normal levels and may not be the same levels as pre-COVID levels.
[Operator Instructions] The next question is from the line of Vishal Biraia from Aviva Insurance.
Sir, in terms of the supplies from China for our small appliances business, how is that shaping up? And what is the market share currency in the small appliances goods, kitchen appliances and others?
Well, from a China point of view, we are not depending upon China because almost 75% of the products, we manufacture in house. Some of products are sourced within India. So our dependence on China for small domestic appliances is extremely low. And -- so that should not be a concern. Our market shares is still low in terms of kitchen appliances, which clearly indicates a huge opportunity for us to grow in this segment. I would say that our market shares would be close to about double digit levels, about 10% to 11%.
Any specific actions that we are taking for growing that market share? And something specific for this other than normal?
Well, there's a constant improvement in the product changes, the features and enhancement of the distribution presence, all across. So there's been a decent growth in this segment because of all these strategies.
Okay. And next question is on the e-commerce proportion for us. Up to this quarter, did we see an increase in e-commerce sales? And how is our profitability in e-commerce versus general trade and modern trade?
Well, we did see a major increase in e-commerce sales. In fact, now it has come to almost about 4%, 4.5% of our consumer and residential demand. So that's quite strong. And I -- going forward with Lloyd now focusing on the e-commerce channel, along with the traditional channel also, that should keep increasing our share in the e-commerce. Consumers have also taken to e-commerce very well. So it's grown almost 100% in this particular quarter in the e-commerce thing. And profitability is not really a concern because we don't play on pricing. Our pricings to various channels are similar, depending upon the cost structure. So we are not too concerned about the profitability in one channel or the other.
Okay. And then just one last question on the refrigerator market -- sorry, on the RAC market. So what led to this stupendous growth in this quarter?
Yes, I think it's mainly a comeback from our, I would say, dismal performance last year because as we had made certain corrective actions in distribution, our product ranges, our brand perception over the last couple of years. So we had lost market share in the last year. I think it will come back from that position, which we always knew that it should happen. And probably, we just need to look at overall growth over the last 2, 3 years rather than growth from last 1 year.
So would we have cut prices to compete and get this volume? Or would we have given higher incentives to the dealers or better working capital terms, something of that sort?
No. In fact, our credit terms are quite well disciplined right now. So in fact, post COVID, our credit days are better. In fact, we've not cut down prices. Our margins are better than last year. So I don't see any reason why we would need to do that.
Okay. And do you think this momentum will continue for RAC's market share growth?
Let's see. As I said, this is also predicated on the fact that we had -- last year, first 6 months were quite slow for us. Let's see how it pans out in the coming time, and especially the season time.
[Operator Instructions] The next question is from the line of Bhoomika Nair from IDFC Securities.
Congratulations on a great set of numbers. Sir, just wanted to dig a little deeper into the B2B segment, which you highlighted has seen some decline. If you can just kind of explain which segments have seen a sharper decline. And is it a single-digit, double-digit kind of a number? And how are you seeing this kind of scale up across cable segment, switchgears as also B2B lighting?
Yes. So national Switchgears, professional Luminaire and cables comprise our industrial and infra. So overall, we are at about 85% to 86% of last year in industrial and Infra. And -- but this is improving month-on-month. And we've seen a sharper decline in underground cables as against Switchgears and professional Luminaire, which are almost coming back to normal levels in the very recent times. So hopefully, this should also start coming up.
Okay. Okay. Secondly, is in terms of the price hikes that you mentioned that we've taken in the ECD and the lighting segment. What kind of price hikes have we taken? And my last question is on Lloyd. We've entered into the refrigerator space, and we've launched that. So how is that expected to scale up? What kind of market share are we looking at more from a 2-, 3-year perspective? If you can just throw some light on that.
Well, I didn't mention any price hikes in ECD or lighting. So I'm not sure what we're talking about here. But on the refrigerators part, we are very, very new in this. The whole idea, which we've been saying, is that our main gain in Lloyd would be to become a complete portfolio of Consumer Durables, basically offer the entire range to the dealer channel and eventually to the consumers. So with the entry of refrigerators, we are now a complete portfolio in the Consumer Durables, just like in the electrical segment. So we need to see how this develops. We're very hopeful that the demand from this -- for this product also will remain strong and this will contribute to a good set of numbers to Lloyd.
The next question is from the line of Achal Lohade from JM Financial.
Congratulations for the great numbers. My question was specifically with respect to the Fans business. Just wanted to get your perspective in terms of the industry decline. Have you -- like, in your opinion, is the decline is in single-digit, double-digit or is kind of flattish for the quarter? And in terms of the unorganized players, are you seeing the supply distribution getting minimized at their end as well?
So Achal, are you saying, are we seeing a decline in the fan industry?
Yes. Is there any decline in the fan industry for the quarter?
No. I wouldn't be able to say that. I think there would be a growth in the industry. But as I said, it's very difficult to estimate because we do not know the extent of the businesses done by many other companies, including the unorganized sector. But we would estimate that at least there would be a single-digit growth in the fan industry.
Right. And if I look at the employee cost, we see a significant increase Q-o-Q. I understand in the passing remarks, you did say this is a sustainable number. So just wanted to get a clarification on that. Is this a run rate we should look at going forward in terms of the employee cost?
Yes. So as I said, going forward, this is the run rate that we will look at. There will be -- because in the first couple of quarters, there were no increments, now increments are coming in. So there will be -- definitely -- this will be higher than in the past.
The next question is from the line of Manish Agarwall from Edelweiss.
Congratulations for great set of numbers. Sir, just would like to get your views on the current government's -- the AC import ban. How are we looking at that opportunity? And are we at an advantageous position? Obviously, we have our own manufacturing. But from even the competitive landscape position and the pricing perspective, if you could throw some light on that.
I think, first of all, if you look at the broader picture, it's a great incentive for Atmanirbhar Bharat because unfortunately, in this industry still quite a large part of ACs were being imported from China, and that was something which is not really [indiscernible] -- as you know, when we acquired Lloyd, we immediately decided to set up a manufacturing facility and do away with the import from China. And it's not that the Indian industry cannot become competitive against China. So we need to make the right investment. And I think it's good that the government is realizing that AC is becoming more of a necessity for the consumer and more and more manufacturing jobs can be brought about by increasing the manufacturing of air conditioners in India, not only for the growing markets in India because we believe that AC's in inflection point. I think, in the next 5 to 10 years, this industry shall go considerably with better availability of power. But also, it provides a great opportunity for increasing exports.Once you have a competitive manufacturing industry, it's great. Because right now, a lot of the Lloyd customers are dependent on China. And I think depending upon one country might not be the best strategy for many of the buyers. So India can potentially be that kind of a manufacturer for the world. So I think this is a great forward-looking move by the government.
Okay. And sir, basically from, like, maybe the next season, for summers, like, next quarter onwards, the supply would start to the channel. So how do you see us positioning there from these pricing and the competitive position? Because as you also mentioned, it's a large, 1/4 of the ACs used to be imported. So this disruption do you see as garnering very high market share?
I think it provides an opportunity. But again, as I said, we should not look at this for the next 5, 6 months. I think the government intentions are very clear that they want to promote Indian manufacturing. So yes, right now, they have prohibited imports for gas-charged air conditioners. But it is a real indication that they don't want 1/3 of the production or 1/4 of the production to be imported from China. So it is the right time manufacturers, syndicated manufacturers, like Lloyd and other manufacturers, should invest more in manufacturing in India rather than depending upon imports.So going forward -- we made this investment at the right time. We should definitely look at maximizing our capacity utilization in this plant. And hopefully, going forward, look at more capacities in the coming times. So -- but again, as I said, it might be too short-term oriented to see growth in next season.
Okay. Okay. Sir, just last question on this that, sir, our margins in Lloyd, sir, our plant is fully functioned now. So maybe from a 1- to 2-year perspective, any guidance that you would like to provide? I mean how the margins will pan out?
Yes. I think margins would definitely improve with more and more production coming from in-house. Right now, still certain parts where the plant was fully coming to operations, then suddenly the COVID happened. So -- and then we missed the season impact as well. So going forward, the next season we'll really see the major impact of fully operational plant. So we should be seeing increment in margins in the coming times.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Congratulations for great set of results. Just one question. Over the last couple of years, we have seen considerable expansion in our addressable market. So it will be useful if you could just help us in terms of the management-level increases that we would have seen? And it'd be useful if you could just give some -- the new entrants where they are managing the newer businesses?
I'm sorry, can you clarify the question? I couldn't really get it.
Okay. So we have seen increase in our addressable market into refrigerators and a couple of other areas. So if you could just highlight the newer management-level entry into the company. And in terms of background also, that will be helpful because we are expanding our addressable market exponentially.
So I would, again, say that it's not really related to 1 or 2 product categories that we've entered into, whether it's refrigerators or water purifiers or something that is in addition to our existing channel. But overall, over the last 5 or 6 years, there's been a considerable expansion in management bandwidth at Havells. And we're getting talent from different kinds of industries, not necessarily only from the electrical industry. We're getting a lot of people from SMCG background, telecom background. We're bringing different sets of capabilities, even in manufacturing, we're getting a lot of people from the auto comp side as well, auto businesses as well.So the great thing is about -- I can proudly say that it's -- we are amongst the top few companies and a great place to work with great assimilation of culture and different kinds of people in the organization, with lots of new learnings on both sides and some amount of new unlearnings on both sides also. I think we've been able to assimilate a huge amount of management bandwidth in the last 5 or 6 years. And that has augured very well in terms of expanding into new categories as well as expanding into new channels.
Sure. One more question, if I may. So when I look at the R&D spend on the innovation for Havells, and it's twice that of the industry. But when I compare with some of the global peers, which could be a relevant comparison, I mean, some of the global peers could be in the region of about 3-odd percent. So if you could just highlight slightly on a longer-term perspective, where you, one, look at the R&D spends? And if you could also include the areas on which we are focusing on our R&D initiatives?
The R&D creation is not really spending, it's more of a journey, right? So you need to create infrastructure, you need to create the right kind of people in the organization to do real R&D. One is developing products. But to do real R&D, it is a journey, which we have started the first phase, I would say, about 20 years back when we wanted to become self-reliant and not be dependent upon European technologies. That we had started. But over the last 4 or 5 years, there's been considerable increase in investment in terms of getting manpower and to develop newer technologies like IoT, smart home, electronics into electromechanical products. So there is a considerable investment which has gone into these areas. We have a fully developed R&D center, both one in Northern India, but also in Bangalore, which focuses on newer-edge technologies, like smart homes and IoTs -- IoT and all. And so I think going forward, as I said, rather than looking at the percentage of sales, but look at it as a journey that building capabilities within the organization, you can [indiscernible] the margin. This is an Indian company, which is not dependent upon any technology from outside, whether it is high level of Switchgears which is being sold, not only in India, but in many developed parts of the world. We are manufacturing miniature circuit breakers, products which are extremely sensitive, which are being sold in the brand name of Hyundai in many more parts of the world.So this is to the testament of what kind of technology development we have done without being dependent on any outside technology. A lot of people ask us this question whether we'll be early to compete in air conditioner manufacturing in India without any technology backup. Everything is developed in-house, whether it's washing machines, air conditioners, water purifiers. So it does -- it's, again, as I said, you can do R&D at a lower cost as compared to the global peers, but there will be a cost associated with that always. And this will keep building up. As and when our capabilities keep building up, this investment, I would say, not an expense, will keep building up.
The next question is from the line of Chirag Shah from CLSA.
So over the last couple of years, you've done a lot of hard work to provide the market share and margins in Lloyd. Can you just spend some time on the progress that we have seen on Lloyd on the distribution front, the steps that we have taken from the margins and overall growth visibility on how we see now Lloyd shape up in the next 2 or 3 years?
Well, I've talked about it in the past conference calls also. But unfortunately, we didn't have the results to back that up. Obviously, your efforts, you put in, and the results come later. So hopefully, the results have started coming in now. The distribution enhancement, so just to give you a few examples that we were dependent when we acquired the company, we were dependent upon key a few distributors only all across the country. We were not present in the online channel, we were not present into regional retailers, we were not present in the modern format retail.So today, we are omnipresent company in terms of [indiscernible]. So complete distribution channel has been revamped over the last couple of years. The brand perception, which was -- it was considered more like a cheap product, a good-quality product but a cheap product, has also been changed with many new additions of product features, high levels of product quality as well as service. And lastly, on the manufacturing front, with control on supply chain, now we have a better hand on the cost of the product as well. So going forward, on the channel side, on the brand side, on the product cost saves side, we have a great hand on -- or I would say, control on.So going forward, we definitely see that there will be expansion, both in market share, distribution reach as well as margins for Lloyd.
Sure. Just a couple of follow-up on that. So if I had to now look at a 3-year view, is it a good time to now look at how the product mix would look at in the next 2 or 3 years, given that now we are also getting into newer category? And also to your point around the perception of the brand, given the fact that now we have a world-class manufacturing facility in place and we have also added a lot of new features, how are we communicating that -- communicating the same to the distribution channel? And how well accepted is our product quality with the distribution channel in your view?
Well, it's been a tremendous, I would say, 180-degree change in perception in terms of the channel. And you'll be surprised to hear that our factory came up in November last year -- or October last year. And during that time to till about November -- February, almost 3,000 channel partners had visited the facility. So they are very, very capable, and we have been able to communicate it well. And those are the people who can communicate the attributes to their customers as well. So there's a great communication exercise happening in terms of the channel. And so I don't see that as a concern at all.
Sure. And is it a good time now to start thinking about how the product mix will look like the next 2, 3 years, given that we are now also getting into newer categories?
In terms of the proportion of sales for different product categories?
Yes. Yes. ACs...
Yes. Listen, this would not be the right time to comment upon that.
The next question is from the line of Pulkit Patni from Goldman Sachs.
Just one question. Could you give a sense of what our CapEx guidance for the next couple of years would be? And any particular segment where that CapEx is going to go in, particularly given that there is a thrust of manufacturing in India, if you could talk about that?
Yes. So right now, we believe that this year, we'll be looking at about INR 300 crores to INR 350 crores, around INR 330 crores is the CapEx plan as of now. Next year, not entering into new plants because we are expanding capacities in our existing facilities also, which number could anywhere be between INR 250 crores to INR 300 crores. But there could be possibilities. We are reviewing of a new manufacturing facility for any product category. And that we'll continue to review depending upon how the market situation improves. So right now, we're looking at INR 330 crores right now. And maybe closer to the end of the year, we'll be able to formulate for the next year.
Sure. Just to clarify, we've done INR 80 crore in the first half and INR 330 million for the full year is what we are targeting?
As of now, yes.
[Operator Instructions] The next question is from the line of Naval Seth from Emkay Global.
I have 2 questions. First, if you can share some insights on your O2O model. How much traction we have got? How many distributors we have already reached out? Some sense over there? And second, on -- you have elaborated well on the cost structure, where all things have kind of been structured and where things can come back. If you can highlight some large cost items or where savings are structural in nature, if not the quantum, but the cost heads where it is structural in nature?
Okay. Sorry, your first question was -- O2O. Okay. Yes, O2O model is developing, and we almost have about 1,100 distributors on the platform. The sales buildup is still very slow because we need to get the consumers attracted from the -- they are still on the large marketplaces. We also need better attraction tools for the consumers to come on the havells.com site. But it will develop over a period of time, but we are quite excited about this opportunity where online consumers can get physical delivery from the physical stores in the neighborhood. So that's one. As far as structural costs are concerned, as I said, these are somewhat -- these costs related to, let's say, more of virtual meetings with the channel partners as against physical meetings, larger office spaces being converted to smaller office spaces. Those are the kind of structural cost-haul. A mix of physical travel with e-travel. Those are the kind of changes which are happening, which could subtly change the cost structure. But not to a great extent. Ultimately, employment is the largest part of the expense part. And that hopefully will continue to drive productivity there.
Okay. So continuation to this, basically, the question was to -- how to build margin going forward given the fact that you have reported strong numbers. Is it fair to assume that your margins going forward will be better than what we have reported in past years, which is 14-odd percent in F '16 was one of the best years? So is it fair to assume? Or it is -- some insights there, if you can share.
See, margin, frankly, margin is a combination of the sales growth, the contribution margins and the expenses. So it will be difficult for me to comment whether it will be 14% or 12% or 16%. We are focusing on expanding market share. We are focusing on increasing sales, right? We are focusing on improving efficiencies in the markets for -- in the product categories for better contribution margins. And we will continue to keep costs under a tight control, whatever right costs have to be done. So -- and we are in mix of many, many product categories. So please don't hold me -- on to me, making your work easier of making your analyst report by taking a number from me. You also work hard on it.
The next question is from the line of Bharat Shah from ASK Investment Managers.
Anil, would you say while pandemic is a rude interruption for everybody, lives and businesses. But in a way when you think about it, probably, this may be a blessing in disguise for Havells in kind of reimagining our business model or structure, distribution, diversity, product portfolio and all of that. So in a way, whether this adversity that should be a long-term benefit for Havells? Would you think that? Or what is your thought?
I think Bharat bhai, when you see markets which have always grown, sometimes [Foreign Language]. I think such rude disruptions, though at a very high cost to the world, are sudden -- sometimes a good wake-up call for people like us that you need to make -- you think that your companies are very resilient, but you need to even go deeper and to ensure that your companies are really institutions which become strong whether it's a good time or a bad time, remain strong.So I think this first couple of months when the pandemic happened, then we saw factories being closed each and every shop remaining, no sales. I think it was something which was never expected in the last 100 years or probably in the next 100 years. So it gives a rude shock to everyone to see where your efficiencies lie. And I think only this kind of a shock could have woken us up or anybody else in a growing economy like India.So yes, I would say that it has improved us, and we need to maintain or continue with these gains that we have -- I keep referring to good costs, bad costs, certain bad costs, which have been taken out, should not come back. Good costs need to come back. Efficiency, focus on productivity, focus on competitiveness, focus on -- so many things which actually make a company strong and institution for a long time. But I agree with you that this kind of a shock has woken up the industry.
And Havells, apart from the industry?
No. Of course, we really have worked hard in looking deep inside each and every aspect. I think last 6 months have been quite hyperactive for all our team members. And I tell you the way teams have also responded also talks about the culture of the organization, [indiscernible] contribute to. I don't consider that it's a reflection only of the leadership, but also how each and every employee comes forward and acts in a very different way. In a time where the entire supply chain was disrupted, how even warehouse manager or a warehouse worker was trying to ensure that the products reach to the customers in time. I think this reflects very well. And so I would say that Havells has done a tremendous job in the last 6 months of serving the customers.
The next question is from the line of Charan Singh from DSP Mutual Fund.
First of all, congratulations on a great of numbers in a very tough environment. My question is, sir, more on the core business. When we see no core business, despite real estate being weak, there have been some positives in terms of the growth. But if you have to take a little next 2 to 3 years' view on the consumer electricals business, various categories, be it Switchgear, or be it Wires & Cables, so how do you see the market growth panning out? We have seen some benefits coming even for organized players [indiscernible] for smaller organized players, but unorganized players getting out of the market, our channel getting deeper. So -- but from a 2 to 3 years' growth perspective in the core business, how do you see that?
Yes. I think this industry has seen a bit of a slowdown in the past few years. But again, we need to go back to whether those are temporary losses. But if you look at India as a whole, if you're catering to all kinds of -- the entire Bharat -- or not just India, but Bharat, taking to all kinds of customers, I don't see that there is a possibility of a lower growth in any product category. So we believe that the product categories that we are in, definitely has great potential for growth in the next 3 to 5 years. Not only in India, but I think as Bharat bhai had asked this question about what kind of -- what has changed in the last 6 months? Also, I think it has opened our eyes to the kind of opportunity which lies ahead outside of India as well. So there could be many, many opportunities in the global markets to expand exports as well. So I think FMCG industry is definitely in a strong position to have a decent growth in the coming years.
Okay. And sir, just a second question from my side on Lloyd. So we had gone through a very disruptive year last financial year, but things got stabilized in terms of our channel, in terms of now ready with a very strong manufacturing base where even policy measures are kind of favoring where Lloyd is standing at this point of time. Sir, in terms of scaling up of the market share from here on, stability of the channel for Lloyd, if you can just highlight some aspects on that? And for the new product introductions, so refrigerators, what's the kind of ramp-up which we are seeing now going forward in the coming years? Yes. That's all from my side.
I think I replied this answer -- question also in the sense that the stage is now set. We had not a great last year because of many adjustments that we were making. Today, we have the product change, we have the distribution channel, we have the right positioning for the product category. So Lloyd is -- and also complete product portfolio with, as I said, additional [indiscernible]. So I think we need to really look at the coming time, and it's a huge industry. We are playing in a huge industry. It's more than INR 60,000 crores industry. And I think a huge opportunity for Lloyd to grow in the coming years.
We take the last question from the line of Tejas Sheth from Nippon India Asset Management.
I have 2 questions. One, on the working capital side. I think there's a lot of channel efficiency, which has been seen in post COVID towards receivable management as well as inventory management, and leading to a higher cash conversion. How much of that you see sustainable going ahead? Is the channel going to be in this efficient mode down the quarter as well?
Well, to a great extent, many of our channel partners are in channel financing. So for us, it really doesn't make too much of a difference. But we've also seen that there has been efficiency improvement -- number of days improvement from the channel to the banks. So that is a positive sign. I think it is a -- it's also a reflection of the fact that people have also cleaned up -- the dealers and distributors have also cleaned up their houses, they've put that in order, high levels of stocking has reduced. Because of that, they've been able to collect monies that are -- and pay to the company in a faster way. I think some of that will be sustainable because, as I was referring to Mr. Bharat Shah also earlier, that like Havells has looked at any inefficiencies within the company, industry has looked at, similarly channel partners, dealers have also [indiscernible] their efficiencies into the system, and it doesn't make sense to have very high levels of inventories or high levels of debtors in their system. So we believe that some of these gains will be sustainable.
Okay. Second question on Lloyd. Are there any pockets of growth you're seeing on the regional basis in India for you in terms of market share as well as in terms of modern trade versus traditional trade? Which trade are we doing very well here versus the other?
I think this -- for us, it's not really that much of a difference. But overall, as the markets opened up, like, for example, Maharashtra, Pune, they opened up much later as compared to other parts of the country, eastern part of India, Calcutta opened up much later. So we see variations there. So that is for the entire industry and not necessarily for Lloyd. So going forward, I think, when the markets come back to normal, most of the -- all the markets should grow in the same -- in the manner of market share strength for the brand.
No, I meant portfolio acquisition, the Lloyd brand was very strong Eastern India as well as the in Gujarat market as well as very strong in traditional trade versus modern trade. If you can tell me how that composition has played out post the changing of the whole structure?
No, I think the stronger areas have sustained very well. Like, for example, Gujarat, Andra, Maharashtra, where Lloyd, unlike Havells, was very weak in the eastern region, and that's come up very well after the acquisition and the changes. But the major change has come in the proportion of the presence of modern-format retail and regional retailers as compared to pure distribution. So that -- as I said, that almost 95% of sales used to come from distribution, which is now down to about 65%, and the rest is coming from the other channel.
That was the last question. I would now like to hand the conference over to the management for closing comments.
Thanks, everybody, to attend the call, and we look forward to keep [indiscernible]. Thank you.