Havells India Ltd
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Earnings Call Transcript

Earnings Call Transcript
2019-Q3

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Operator

Ladies and gentlemen, good day, and welcome to the Havells India Limited Q3 FY '19 Earnings Conference Call hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from IDFC Securities. Thank you. And over to you, ma'am.

B
Bhoomika Nair
Security Analyst

Yes. Good evening, everyone. On behalf of IDFC Securities, I would like to welcome you to the Q3 FY '19 Earnings Call of Havells India. The management today is being represented by Mr. Anil Rai Gupta, Chairman and Managing Director; Mr. Rajesh Kumar Gupta, Director of Finance and Group CFO; and Mr. Rajiv Goel, Executive Director. I'll now hand over the call to Mr. Anil Rai Gupta for his initial remarks. Forthwith, we'll open up the floor for Q&A. Over to you, sir.

A
Anil Rai Gupta
Executive Chairman & MD

Thank you, Bhoomika. Dear friends, good afternoon. You must have received the financial results for the quarter. We are quite encouraged with growth across the product verticals and channels. We continue to invest in capability building, increased channel penetration, brand proliferation, augmenting production capacity and building innovative solutions. The next couple of years will be a period of investment and institutional reinforcement to capitalize on emerging opportunities in the country. The margins are muted owing to volatility in commodity prices and fluctuations in foreign currency. However, we expect improvement over the next few quarters as commodity prices seem to be stabilizing and receding. To summarize, we are broadly optimistic on growth and margins going forward. Bhoomika, now we can invite questions from the attendees.

Operator

[Operator Instructions] We have the first question from the line of Venugopal Garre from Bernstein.

V
Venugopal Garre
Senior Analyst

On the -- my first question is just to understand sales for the ECD division. While you have made some comments in the presentation with regards to growth being driven through the water -- through the domestic appliances segment, just wanted to understand, is it more water purifier-led? And has growth also been on account of Water Heaters? That's the first question.

A
Anil Rai Gupta
Executive Chairman & MD

So water purifier is definitely leading to some growth because last year, we had just launched the product. So yes, some of the growth is coming from that. But it still is a very, very strong segment. The major growth has been contributed by domestic appliances and Water Heater.

V
Venugopal Garre
Senior Analyst

Okay. Sir, secondly, if you could also comment on since this was a festive sort of a season if you could comment on how the sell-through has been for the ECD products. Any comments that you would have heard from the channel? And also what has been the driver for the sales for Lloyd in this quarter? Is it more PV-led or even AC business has been a driver?

A
Anil Rai Gupta
Executive Chairman & MD

So on the ECD side, I would say that the festive demand seemed to be all right. But I think much of the growth has also come from internal changes and improvements that we have done over the last couple of years on the product side. So I would not entirely term it to be market demand only. And on the Consumer Durables side, yes, because of the festive season coming in the scene in November, there was -- it was led more by LED panels. And though air conditioners have also had a decent growth in this quarter, however, it's a very small base last year. So I would not really be too optimistic about this thing. It was a decent growth on a smaller base. However, overall Lighting, I can say that while the festive demand in Diwali was quite okay, but generally, not just in ECD and Consumer Durables, there has been a little bit of contraction and consumption over the last couple of months. And when we just did a bit of analysis, it has been found that mainly because of liquidity squeeze in the channel because of the NBFC-led situation. So I think it should be quite temporary over a period of time. Over the very short time, I think things should come back in a good way. The government, they're all taking measures for this liquidity trends to be going away. So hopefully, things should come back to normal very soon.

V
Venugopal Garre
Senior Analyst

Sir, if I may ask a follow-up on this, so about switchgear and cable, you mentioned it's government-led, which has been the case even previous quarter. Now are you seeing a slowdown there, given that normally activity starts closer to the election sort of event?

A
Anil Rai Gupta
Executive Chairman & MD

Yes. So there is election. However, there's also a fourth quarter. So generally, fourth quarter, there is more government-led demand which comes in. So I think things should remain all right for the next couple of quarters.

Operator

[Operator Instructions] The next question is from the line of Inderjeet Singh from Macquarie.

I
Inderjeet Singh Bhatia
Head of Research

Can you explain -- we had a very strong quarter, this one. Can you break the growth between, say, what kind of volume growth you have seen with what kind of market share increases and what kind of price increases you have taken in each segment?

A
Anil Rai Gupta
Executive Chairman & MD

So other than Cables & Wires, I think practically everywhere we can see there is volume-led growth. Because in this particular quarter, in the last couple of quarters, though the raw material prices have gone up, but again we saw sort of a channel stuffing, which had happened because of a low season, especially on the Consumer Durables. So there was not much call for price increases, which will happen now. But however, the commodity prices are also reducing. But I think other than Cables & Wires, there has not been any value -- difference between value growth and volume growth. I think in Cables & Wires...

U
Unknown Executive

[indiscernible]

A
Anil Rai Gupta
Executive Chairman & MD

24%, 25% volume growth. And the rest have been coming from [indiscernible].

I
Inderjeet Singh Bhatia
Head of Research

Okay. Just one more follow-up on that. Have you seen a major market share improvement in other segments because our distribution...

A
Anil Rai Gupta
Executive Chairman & MD

Current quarter, we cannot see major improvements in market share. And neither it is monitored over significantly. I think over the last 1 or 2 years which we see because even market research comes back in some time, we have seen market share gains in many of the product segments.

Operator

The next question is from the line of Ravi Swaminathan from Spark Capital.

R
Ravi Swaminathan
Assistant Vice President

This is in continuation to the previous question. Past 9 months, what would have been the kind of market growth in, say, Switches, Cables and Lighting year-on-year? If you can give a broad sense of that, it would be really helpful for us to understand how Cable's growth was versus the market?

A
Anil Rai Gupta
Executive Chairman & MD

I think, overall, we can say they've grown faster than the market. But this year, the year starting, overall, there was better growth in the economy because last couple of years, things have slowed down with disruption, couple of disruptions, which were always good for the long term. But short-term disruptions are there, whether it be monetization and GST transition. So this year, on a lower base, I think the overall market economy grew until about Diwali time. But definitely, we believe that we have grown faster than the market.

R
Ravi Swaminathan
Assistant Vice President

Okay. And is it because of GST also that you would have observed that [indiscernible] slowly vanishing away? Or is it like you haven't seen that kind of shift?

A
Anil Rai Gupta
Executive Chairman & MD

I don't think I would attribute a lot of growth share towards that.

R
Ravi Swaminathan
Assistant Vice President

Okay, sir. And with respect to segment ECD, what could have been the kind of Fans growth that we would have seen this quarter, sir?

A
Anil Rai Gupta
Executive Chairman & MD

So Fans growth is definitely lower than the consolidated growth because they've grown faster in appliances. But I would -- can say that it is in high-teens.

R
Ravi Swaminathan
Assistant Vice President

High-teens volume growth would have been there. Okay.

A
Anil Rai Gupta
Executive Chairman & MD

That's right.

R
Ravi Swaminathan
Assistant Vice President

And what was the proportion of sales of AC and LED TVs and others in the Lloyds business this quarter?

A
Anil Rai Gupta
Executive Chairman & MD

Overall, we can give it at the end of the year because of this is so seasonal in nature. So I think it's better to look at it over a 12-month period.

R
Ravi Swaminathan
Assistant Vice President

Got it, sir. And my last question, what would be the quantum of price increase that we will be taking in the fourth quarter of this year, on a blended basis, if you can give?

A
Anil Rai Gupta
Executive Chairman & MD

So at this moment, because raw material prices are still volatile, it will be difficult to give any guidance on that.

Operator

The next question is from the line of Shrinidhi Karlekar from HSBC.

S
Shrinidhi Karlekar
Analyst

Sir, I just have 2 questions. Would it be possible to break down that 29% growth we have seen in Havells ex Lloyd business in domestic market and export market? Just wanted to understand if there's a major difference in domestic or export? And another is I want to understand the growth in Cables and Switchgear segment. The consumer-facing business of that, like nongovernment and non-B2B business, how has that grown?

U
Unknown Executive

In Cables & Wires?

S
Shrinidhi Karlekar
Analyst

Cables and -- both businesses, sir. How has been the consumer-facing business or in those 2 segments, like nongovernment, non-B2B business?

A
Anil Rai Gupta
Executive Chairman & MD

So I think I cannot give specific numbers. First of all, your question on the export front, 95% of us here is still domestic. So I don't think even a faster growth on exports on a lower base would not change the needle so much. And secondly, as far as domestic versus...

U
Unknown Executive

In consumer-facing versus B2B.

A
Anil Rai Gupta
Executive Chairman & MD

Consumer-facing versus B2B, I think overall, you can say because of the government push, there were a little bit higher growth in the industrial and government-oriented products. So industrial products, we grew well. Underground cables also, we've grown there. But I think over -- even in the other segments, the growth has been over 20%.

Operator

The next question is from the line of Renu Baid from IIFL.

R
Renu Baid
Vice President

Sir, my first question is on the world pricing scenario in the market. First, both with respect to ECDs and Lloyds portfolio, how are we looking at the market factors to ensure that in the coming season, we should be able to take the price increase which has been required?

A
Anil Rai Gupta
Executive Chairman & MD

In the coming season, sorry, can you repeat the question?

R
Renu Baid
Vice President

What is the outlook on the end market demand, which gives us comfort that the price increase which was impending should be broadly affected in the coming season and the margin recovery which should come through should span across the next 6 months?

A
Anil Rai Gupta
Executive Chairman & MD

So in the coming season, if we look at the Consumer Durables and ECD, ECD is definitely larger part of Fans. And I think there is a little bit of a different scenario between fans and air conditioners. Air conditioners in the last few quarters, the dollar prices have moved up. The custom duty has also moved up. So there is an impending price increase which will happen in air conditioners. Obviously, it's already happening. And also it is also affected by the fact that there was too much salary inventory over the last 9 months. And hence, the price increases were delayed. So this should pan out over the next couple of quarters. It also depends -- a lot depends upon the season, the coming season. So how the demand pans out, it's very difficult for me to say how the demand will pan out. But as far as pricing and margins go, I think we'll have to just play it out in the market for the next couple of quarters. As far as Fans are concerned, as I said, we are reviewing the raw material prices on the stable commodity price increase over the last few months. And hence, those price increases, if required, will be only given to the market. And I think that should take care of both the growth as well as margin, so lesser concern on the Fans side both on the growth and margins front.

R
Renu Baid
Vice President

Sure. My second question is again coming on the Lloyd side, simply we had launched this new range of ACs, Grandè, essentially targeting the premium segment of the market. So what is the strategy now incrementally in Lloyd? Are we looking to meaningfully expand the portfolio in the different pricing category to help improve our margins? And how has been the activities and development so far with respect to the efforts to increase the reach and distribution here?

A
Anil Rai Gupta
Executive Chairman & MD

So I've always mentioned on Lloyd, and it's a general, I would say, commentary that I would give for the benefit of everybody. There is -- we have always maintained that there is a journey which Lloyd will be carrying out over a longer period of time, over, let's say, the medium term, which is to take this brand from a mass brand to a mass premium brand. As I've always said, this will require the company's focus on all the inputs which are required to make a brand, let's say, more, let's say, improve in its image in the consumers' mind, which is branding, which is product innovation, which is depth of distribution and the kind of motivated teams that we have in the marketplace. So all these 4 or 5 things, including channel, are being worked upon. And hence, you see changes already in the marketplace as far as the product ranges are concerned. So if you want to move from mass to mass premium, you need to have more feature-oriented products, whether it is in television, washing machines or air conditioners. And this will take the brand to a mass premium brand, which has to be backed by the right branding, which has to be backed by the right kind of distribution trend. So Lloyd was more for distribution-oriented products, whereas if you want to sell higher feature products, then you need to be present in the model from retail, the digital retailers. So all kinds of channels you have to be present. So all these activities are being worked upon as far as Lloyd is concerned. And it is something which cannot be really commented upon quarter-on-quarter. It is experienced or seen over a period of time as has happened in the case of Havells over a period of time, has moved from a mass brand to a mass premium brand. Over a period of time, this will happen in Lloyd as well.

R
Renu Baid
Vice President

Sure. And for my last question, just to sum up with respect to the demand environment, last quarter, remember, you mentioned that you were seeing some positive tailwinds. And towards the end of 3Q, you did mention that the liquidity issues apparently have impacted demand. So as we look ahead for the next 3 to 4 quarters, we have elections. Liquidity should improve mightily in this market. So what will be your reading on the end market demand from the core house industry sector plus the overall market in general from other categories and consumption points also?

A
Anil Rai Gupta
Executive Chairman & MD

Yes, I think the first 6 months of this year reflected that the core fundamentals of demand are strong in India. And this has always what I have mentioned in my past commentaries also. And so I'm very positive about the medium-term outlook for demand in the country, whether it is real estate-driven, whether it's industrial, whether it's government. So we are quite positive about that. However, there will be certain impediments, certain changes might happen on commodity prices or, as I said, the liquidity squeeze has happened. So these are mainly short-term risks, which can happen over a -- in a good story for medium to long term. So I think, overall, we are operating in a very good story. However, I cannot really comment on what can happen in the next couple of quarters. I believe if this is a liquidity-led contraction and consumption. This should get eased very soon.

Operator

The next question is from the line of Charanjit Singh from DSP Mutual Fund.

C
Charanjit Singh

Sir, if I look at the lighting segment, after 2 quarters of very weak numbers, we have shown a very strong growth in the Lighting segment. So any key reasons for this growth? And how do you see it going forward?

A
Anil Rai Gupta
Executive Chairman & MD

So actually, I think in the reported numbers, it is 28%, showing as growth. But actually, the growth is 18%. And this is -- the volume growth is, however, valued more than 18%. This is because some of the B2G projects have been clumped into Lighting because they were mainly -- otherwise generally, we show them in -- as a separate category in others. This time, we have clumped this on Lighting. So this business is affected in the -- because this is primarily Lighting, so it was not right to show it as others. But otherwise, the core Lighting, which has been our trade in industrial and commercial business, that is 18% growth.

Operator

The next question is from Nishit Jalan from Kotak Securities.

N
Nishit Jalan
Research Analyst

Sir, you had talked about that the B2C-facing businesses in Cables & Wires and Switchgears segments have grown at like more than 20%. Just wanted to understand what is driving that growth. Because when we see the housing segment and all, that's not doing very well. And you already have a very high market share at least in the Switchgear segment. So have you seen the market itself showing signs of recovery and there is a high-teens kind of a growth or you have gained further market share even from where you were earlier?

A
Anil Rai Gupta
Executive Chairman & MD

So I think we have been missing the penetration in deeper distribution, whether [indiscernible] are going down or moving down. So that has helped us grow faster than the market. But as I said, we experienced higher demand coming in the first 6 or 8 months of this year. A little bit of a slowness has happened over the last couple of months. But that again should be temporary. But I think we have definitely grown faster than the market.

N
Nishit Jalan
Research Analyst

Okay. Sir, just trying to get more insight into this, if I look at, on a 9-month basis, your core -- basically, your ex Lloyd revenues have grown by about 25%. So is it fair to assume that industry itself would have grown in mid-teens and all and maybe the remaining growth would be driven by your market share gains and annual product launches and faster growth in newer categories, like water heaters, domestic appliances, water purifiers? Or do you think otherwise?

A
Anil Rai Gupta
Executive Chairman & MD

Of course, you're right, the market may have grown by that much, which also you can -- you have to appreciate that last year, the entire industry faced a bad June and July because of the disruption in GST, the transition from one regime to the other. So both June and July and to some extent until August, things have slowed down. So it was a low base. So it's not only was it a low base for us but for the entire industry.

N
Nishit Jalan
Research Analyst

Okay. Sir, the last question from my side, where are we in terms of our new factory that we are setting up in -- for Lloyd? When is it coming in basically?

A
Anil Rai Gupta
Executive Chairman & MD

So we are on track. And I think we should be starting production in the month of April.

Operator

Next, we have a follow-up question from Charanjit Singh from DSP Mutual Fund.

C
Charanjit Singh

Sir, in the ECD segment, if you can give us the number for Water Heaters for the 9 months. And what has been the growth over the 9 months period?

A
Anil Rai Gupta
Executive Chairman & MD

We actually do not give numbers specifically for the BUs.

C
Charanjit Singh

Okay. And sir, if we see the ECD segment, we have seen a significant dip in the margin during this quarter. And like we intend to take certain price hikes and all that. So if you can highlight what kind of price hikes which we are looking at and how are the kind of inventory levels right now in the system?

A
Anil Rai Gupta
Executive Chairman & MD

So inventory level is not a concern, I think. But there is some inventory buildup which has happened because of the upcoming season for the Fans. But overall, Rajiv, would you like to comment?

R
Rajiv Goel
Executive Director

Yes. You see, on the margin side, what we have commented that last year, we were around 27% on an annual basis. Even 9 months, we are tracking the same. So we believe, I think we will be able to maintain the margin. So kind of quarterly, there could be certain dips and there are some commodity cost inflation which we could not pass on. But as a commodity cost itself in ECD, I think we will wait and watch here. But we believe that the margins will go back to their sort of annual average of around 27% in ECD.

C
Charanjit Singh

Okay, sir. Sir, the inventory buildup?

R
Rajiv Goel
Executive Director

No, there is no significant inventory buildup. These are more festival-led growth.

Operator

The next question is from Sonali Salgaonkar from Jefferies.

S
Sonali Salgaonkar
Equity Analyst

Sir, my first question is this 22% growth in Lloyd, that revenue growth in Lloyd that we have seen this quarter. Is it possible to approximately break it down into value versus volume?

R
Rajiv Goel
Executive Director

This is largely value only. But I think, Sonali, what you need to also contextualize, this is very low base in this quarter. So these are some absolute growth, could look at the higher in terms of percentage terms. I only mentioned it be led by the percentage in that case. And Anil mentioned earlier on this call that because of the festive season, there has been a slightly larger growth on the TV, which we had been traditionally very weak on the same.

A
Anil Rai Gupta
Executive Chairman & MD

In terms of air conditioners, the values have changed very -- quite considerably over last year because the ratings were different and the average price of air conditioners has gone up considerably this year.

S
Sonali Salgaonkar
Equity Analyst

Sir, what will be the average price increase that we have seen over the past 1 year?

A
Anil Rai Gupta
Executive Chairman & MD

So it is a combination of many things. So it's very difficult to say. We have custom duties with the ratings change. So it would be a combination of many things. I think again, as I said, let's look at overall full year period. In March, maybe we should do that.

S
Sonali Salgaonkar
Equity Analyst

Sure, sir. Sir, to an earlier question regarding the demand in Switchgears and Cables & Wires, you mentioned that the growth was also a factor of you investing in penetration and growing deeper, right? So approximately, can we have a split of rural growth versus urban growth in these 2 segments?

A
Anil Rai Gupta
Executive Chairman & MD

Total growth is still a very, very small number, and especially not at all in this segment. So we are starting our rural penetration through lower-priced products like -- lower SKU-priced products like Lighting. So rural would not have contributed significantly. But we are deeper into semi-urbans and B class and C class down, that is something which is leading the growth.

Operator

The next question is from Achal Lohade from JM Financial.

A
Achal Lohade
Vice President

First, I wanted to understand, you cite in the opening remarks that in the next 2 years, you're looking for more investment opportunities. If I look at the run rate with respect to the unallocable expense, that seems to have been increasing quarter-after-quarter. So how do we look at this unallocable expense going forward? Do you think now we have kind of reached a stability or you think there could be further increase in this run rate?

A
Anil Rai Gupta
Executive Chairman & MD

So there are 2 kind of investments, which we are talking about, one on the capacity expansion. So that will happen over the next couple of years. Because if we're looking at decent growth in the next 3 years, you need to build capacity in the next couple of years, maybe in the existing facility, but we have to invest. The other thing is that I was talking about capability building. That is something which we believe that the next few years, we are definitely looking at decent growth. So we want to build capability. In India, there's not been much investment in capability development and research and innovation, so we are building capabilities there. Even as the company becomes larger, we are investing into people who are not directly coming from industry. So we are building capabilities to look at each business as a separate business. So I think over a period of time, if you ask this question, I don't see that there will be a significant change in the unallocable expenditure. So that will remain for the next 1 or 2 years. Beyond which, we will look at operating leverage in some way.

A
Achal Lohade
Vice President

Got it. And you said about the capacity expansion, so possible to just broadly highlight what could be the utilization at this point in time and what kind of CapEx are we looking at for -- I presume, you're talking about Havells business ex Lloyd for the capacity expansion. So whatever utilization, what's the CapEx?

A
Anil Rai Gupta
Executive Chairman & MD

Yes, pretty much, we are now reaching a level that we are between 70% to 90% in capacity utilization. So in the next meeting we'll be coming out with that capital expenditure plan for the next year.

A
Achal Lohade
Vice President

Got it. And just the second question with respect to the working capital. So if we look at, in the second quarter, we had paid down the creditors. So our creditor days have declined. Wanted to understand your perspective as to how do we look at it going forward. Do you see this is normalized now? Is there a further reduction in creditor days? What is a sustainable working capital day should we look at?

R
Rajiv Goel
Executive Director

The criteria which we prepared in this quarter was more opportunistic and also led by volatility in the ForEx.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

30-odd days.

R
Rajiv Goel
Executive Director

So I think we normally have been in 30-odd days. If you remember last year, it was 29, or we have [indiscernible] 31, 34. And I think we're really pretty much around 29 to 30 days. I think it will normalize over the next few quarters. But we had a one-off event of the prepayment of creditors.

Operator

The next question is from Atul Tiwari from Citigroup.

A
Atul Tiwari
Vice President and Analyst

Sir, my question is on the pricing environment again. So in second quarter also, we saw a bit of the pressure on the overall margin. And at the time also, you commented that going ahead, you will take some price hikes which should normalize it, which doesn't seem to have happened in a big way in the third quarter despite third quarter being a festive quarter. So I mean, is it your well-thought-of strategy that you will stagger the price hikes over a longer period of time? Or is it a case that the market conditions will probably be a little tough for the price hike to be taken in the third quarter? So I mean, any more color on that will be helpful.

A
Anil Rai Gupta
Executive Chairman & MD

Yes, I think these raw material prices had been volatile. And so we had to look at the competition also, how they were faring in the market. So yes, we have taken a little bit more time. And we're still reviewing the situation as we have discussed. We will continue to review the situation. And in an appropriate time and the kind of [indiscernible] that is required, there only we'll be taking price hikes. But as Rajiv has mentioned just now, that we are definitely looking at an overall basis to come back to similar contribution margin levels.

A
Atul Tiwari
Vice President and Analyst

Okay. And sir, my second question is on the outlook and the guidance for the revenue growth number. So until about couple of years ago, you used to give a guidance for the next year's revenue growth. And then things became a little slow and a little volatile. But now it appears that things are picking up quite sharply for you, very strong revenue growth in the first 9 months. And even your commentary suggests a very healthy environment. So I mean, would you consider giving some kind of revenue growth guidance for next 1 or 2 years?

A
Anil Rai Gupta
Executive Chairman & MD

Healthy environment is for the medium term. That's why we never give a guidance because it's very difficult to predict the short term.

Operator

The next question is from Kartik Mehta from IDFC Mutual Fund.

K
Kartik Mehta

Sir, on the Lloyd's front, particularly on the air-conditioning side, I wanted to ask, you seem to have mentioning that the base was quite favorable. But if I'm not wrong, last year in the December, because of the energy launch and all, there was a very good sales growth in the air-conditioning front in the month of December. So for the AC, the base was not that much favorable. So if you can just throw light on what the AC growth for the Lloyd division for the current quarter?

R
Rajiv Goel
Executive Director

Yes. AC was largely flat. I think that's what we mentioned, that this is largely driven by the period where was the festive season. And I think you were aware last year, the festive season was in the earlier quarter, at least the sell-in. So I think this is what we clarified, that this is largely [indiscernible]. Particularly, also the base is very small, so certain number can swing, when you see the percentage growth, whether this side or the other side.

K
Kartik Mehta

Right. And how is the total inventory, including the company inventory in that system, even channel inventory, 2.5 months together for the AC?

R
Rajiv Goel
Executive Director

For the air conditioner?

K
Kartik Mehta

Yes.

R
Rajiv Goel
Executive Director

Very difficult to say. But there is one thing where we correct that there is still a channel inventory. Because I think we still need to see a good season. And I'm sure, you – we are at crisscross of the industry and its players. So I think we are all waiting for the seasonality to kick in and a good season. So I think this can only be answered maybe in the next few months.

K
Kartik Mehta

Okay. Sir, and the second question is on the Lighting front. While you have not probably felt the pinch of the somewhat price inflation in the Lighting, but a few of your competitors have felt that. And while they are saying that now the pricing environment has started improving, so have you ever seen, first of all, like an environment for you which was not that difficult, but system-wide, the environment is improving on the Lighting front from the pricing point of view?

A
Anil Rai Gupta
Executive Chairman & MD

I don't see any major shift. I don't know what you're referring to. But I don't see any major shift, especially on the LED segment. The only way we are able to maintain margins is through innovative products and deeper penetration. So that's what we are continuously working on. I don't see any change which will happen in the last 1 or 2 quarters.

K
Kartik Mehta

Okay. And on the Cables & Wires front, since we have seen the raw material prices and copper prices going down, do we foresee any sort of inventory-related losses in the coming quarter?

A
Anil Rai Gupta
Executive Chairman & MD

Oh, I think we don't have much inventory buildup in the system, so we don't foresee that.

Operator

The next question is from the line of Nitin Arora from Axis Mutual Fund.

N
Nitin Arora
Equity Research Analyst

So first of all, my first question is on the Lloyd. There has been an increase of INR 400 crores on the capital employed of Lloyd and INR 100 crores roughly in the sales. So I just wanted to understand how this thing happened.

A
Anil Rai Gupta
Executive Chairman & MD

No, this is largely, as we said, the crisis have been prepared, unlike last year. And there's also the CapEx, you see part of the CapEx which we have already spent this year. This is a factory which you are aware is coming up and will be operational by April. Yes, so it's both working capital and the CapEx.

N
Nitin Arora
Equity Research Analyst

Okay. Interesting. My second question, as you highlighted in Lloyd, that it's largely a value growth which happened in this quarter. And we also saw in December you taking price hike in the off-season, correct me if I'm wrong, in some of your SKUs in ACs. Is it, sir, possible to quantify? Cable, you've already quantified. Because some of -- I'm not talking about particularly your distributor and dealers. They don't talk too much strong in terms of volume growth in the Switchgear, let's say, or let's say, in the Lighting or an ECD. So I just wanted to understand that because usually, the commodities costs are up only in the last 9 to 12 months, and your margins didn't deteriorate at that time even though commodity has started cooling off in the last 2 months and margins only went down. So I just wanted to understand that it is primarily a value growth that has come? Or is it largely a volume growth because the volume growth could be as high as 30%, it looks like.

A
Anil Rai Gupta
Executive Chairman & MD

You're talking Lloyd or you're talking Havells?

N
Nitin Arora
Equity Research Analyst

No, I'm talking about the core business now. Havells.

A
Anil Rai Gupta
Executive Chairman & MD

No, I think there have been -- if you look at the other 9 months, there have been increasing commodity prices, which has been partially passed on. So I think there is a volume growth and a value growth. But I think in Switchgears, it's difficult to point you how much is there for the price and how much is volume. I think with Switchgears, it really will be volume growth, volume growth. So I think even in ECD, ECD maybe fans a little bit of value versus volume growth. But primarily, I will say the value growth -- the difference between volume growth and value growth will not be more than 3% to 4%.

N
Nitin Arora
Equity Research Analyst

Will not be more than 3% to 4%? All right.

A
Anil Rai Gupta
Executive Chairman & MD

Other than Cables & Wires. Other than Cables & Wires.

N
Nitin Arora
Equity Research Analyst

All right. And then largely, as I understand, the revenue growth has been on the very higher side. Despite the operational profitability has been always [indiscernible], as you very well explained about the margin in that particular thing. Do you still see margins to normalize? Is it possible to quantify what is the normalized margin you're looking now? Because the base of the business is not growing very fast. So I just wanted to understand what kind of a -- because employee costs also sequentially has started increasing for you. So is it just because passing a price hike gives me operational advantage here because despite growing 30%, the margin is still not increasing? So just wanted to understand that, what is the normalized margins you were looking at in the medium term, as you're very confident of a healthy environment in the medium term?

A
Anil Rai Gupta
Executive Chairman & MD

I'll give you ex Lloyd. Lloyd, we are not right now disclosing. But ex Lloyd, [indiscernible] last few years have been 14.5% of EBITDA. We believe in the next year sort of -- next few quarters, we should strive to get there.

Operator

The next question is from the line of Chockalingam Narayanan from BNP Mutual Fund.

C
Chockalingam Narayanan
Head of Research

I just wanted to understand this INR 102 crores corporate investment in the balance sheet. What does it pertain to?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

It pertains to deposit to the IDFC Limited.

Operator

The next question is from the line of Abhineet Anand from SBICAP Securities.

A
Abhineet Anand
Analyst

I understand the present seasonality is small and cyclical. But for the 9 months, can you quantify in Lloyd what could be the issue of ACs, TVs in terms of value?

A
Anil Rai Gupta
Executive Chairman & MD

Can we give it at the end of the year? That will be better, at the end of the financial year.

A
Abhineet Anand
Analyst

Okay. And secondly, within Cables, if you can give a split of B2B and B2C for value for 9 months of EBITDA.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Almost 50-50.

A
Abhineet Anand
Analyst

And that remains the same almost like last year, right? Or is there any change in that ratio?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Sorry, can you repeat the question?

A
Abhineet Anand
Analyst

I think you said that it's 50-50.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Yes.

A
Abhineet Anand
Analyst

So for the last few years, has that number inched up towards retail side? Or has it been largely constant?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

So I think it used to be around 45% customer and 55% B2B, but now it's moving towards 50-50.

Operator

The next question is from [ Vishal Chaudhary] from [ Financial Advisors ] .

U
Unknown Analyst

Sir, I just want to know what are your new launches -- new product launches.

A
Anil Rai Gupta
Executive Chairman & MD

Excuse me, you're inaudible.

U
Unknown Analyst

Sir, I want to know what are your new product launches going forward.

A
Anil Rai Gupta
Executive Chairman & MD

I think this is an ongoing process, so there's nothing specific we have in mind. We have just launched last year a water purifier. But these product launches keep happening in every BU and SBU. So I mean, it's difficult to point to anything specific. As we launch, we will inform the Stock Exchange about it.

U
Unknown Analyst

Okay, sir. And can I know your market share in the economy segment?

A
Anil Rai Gupta
Executive Chairman & MD

Rajesh?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

No. Again, we would not like to give because there's a lot of competition in the value market share, volume market share. And somehow, we are looking at our growth rather than the market shares in India. We are not present in the economy segment. We are only present in the premium segment, whether we take the entire base or whether we take x economy. So we are focused on not giving market share numbers.

U
Unknown Analyst

Okay, sir. Sir, can you -- this is the just last question, sir. Can you also guide me on the ad expenses for FY '20?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

3%, 3.5%, which is the normal level we are maintaining for the last few years. 3.5% of the revenue.

Operator

[Operator Instructions] The next question is from Vinod Bansal from Franklin Templeton.

V
Vinod Bansal

A couple of questions. First, on Lloyd. If you could just tell us about your touch points, how much it has grown this quarter and this year, business?

A
Anil Rai Gupta
Executive Chairman & MD

This is also because we are expanding channels, not only in the distribution side, which is going -- again, we put into different segments. And there is some churn happening on the [ sub-BU ] side as well. Also, we are expanding on the modern format, retail and the [indiscernible]. It's a continuous number which is happening. I don't think we have comparative numbers at this point.

V
Vinod Bansal

Sure. I asked this because when you acquired, we used to talk about, about 10,000-odd touch points when we talked of the brand. Would it be substantially ahead, about 11,000, 11,500? Or it was the same number?

A
Anil Rai Gupta
Executive Chairman & MD

I think the reality is that the 10,000 numbers are more of the touch points which have happened in the past. But you need to get really deep down to the inspection of this [ family ]. So really, in today's terms, we may be -- actually where we are expecting, probably -- maybe at a number of around between 7,000 and 8,000.

V
Vinod Bansal

Fair enough. Fair enough. And do we have some targets in mind as to how many more retail touch points we wish to go to in the next couple of years?

A
Anil Rai Gupta
Executive Chairman & MD

No, it's a continuous increase which will happen. We don't normally go by this kind of a target number, but it is a continuous increase.

Operator

The next question is from Naveen Trivedi from HDFC Securities.

N
Naveen Trivedi
Research Analyst

Sir, my question is on the RAC side. If you can give us -- how has been the RAC industry growth within the quarter? And also if you can elaborate, are you also seeing -- witnessing any competitive pressure on your EBIT margin profile? Although like third quarter is not a very important quarter from the -- at least, your point of view, but going ahead, are you also seeing any pressure on EBIT margin?

A
Anil Rai Gupta
Executive Chairman & MD

Yes. But as we've already said, this year has been not a very good season for the RAC industry. And there has been inventory buildup in the channel. It definitely put competitive pressure on the pricing.

N
Naveen Trivedi
Research Analyst

And any growth trends that you have witnessed? If not for you, at least from the industry side, how have been the trends for the quarter?

A
Anil Rai Gupta
Executive Chairman & MD

They're developing. Not a very great year for the air conditioning.

N
Naveen Trivedi
Research Analyst

Sir, my last question is on your ECD business. So last 5 consecutive quarters, we have seen more than 30% growth. So there's been lots of initiatives which you are taking along with the improvement which you are seeing in the demand side. If you can just give us some understanding about how much of this growth is driven by your distribution expansion or maybe new product launches which you're doing, so that gives an idea about how we should see this segment to have a sustainable growth going ahead.

A
Anil Rai Gupta
Executive Chairman & MD

So the only new product launch which has happened is only water purifier, which is still a very small percentage of the entire share. So the rest is all coming through a combination of product, let's say, refurbishment. In a sense, refurbishment means constant churning and innovation of the model and deeper penetration of the existing channel. So we've also said in the past that we were, let's say, under-optimized -- optimally using our -- or we are working on our domestic appliances, which has now started kicking in. Last year, water heaters was a low base because there was less growth in last year. So we had a low base where the growth is coming. Fans continue to do well through our premium strategy. So overall, I think it's a combination of many factors. I cannot attribute a certain percentage to each.

Operator

The next question is from Pulkit Patni from Goldman Sachs.

P
Pulkit Patni
Equity Analyst

As I look through your cash flow statement, your PBT for the first 9 months is close to about INR 847 crores. And the operating cash flow, which is before your CapEx, is about INR 115 crores. Now I can understand this particular quarter given that there was a lot of channel inventory into the channel. But how should we look at our working capital going forward? Because this conversion ratio is much lower than what we are typically used to seeing in your case.

A
Anil Rai Gupta
Executive Chairman & MD

So again, you rightly said that this was a particular quarter where the inventory buildup happened, and working capital [indiscernible] and this is what we paid because of a special situation. I think things will get normal by March and by end of the year.

P
Pulkit Patni
Equity Analyst

By end of March quarter, you mean?

A
Anil Rai Gupta
Executive Chairman & MD

End of March or end of June. Because some of the -- some inventories start getting depleted by end of March, but the season continues up till end of June.

Operator

The next question is from Jay Kakkad from AMBIT Capital.

J
Jay Kakkad
Research Analyst

Sir, I just wanted to understand on the Lighting side. Currently, there's a lot of replacement demand when there's LED -- when people are committing towards LED. But after a point -- sorry, there's a lot of new demand when LED is getting -- when LED is coming. After a point, replacement demand will start kicking in. So how are we becoming ready for the replacement demand in the Lighting segment?

A
Anil Rai Gupta
Executive Chairman & MD

Right now, there is a lot of replacement demand in the next coming few years because of old technology getting replaced gradually. So I don't see that we have really tapped the entire potential. There's a lot of things that could happen. And over a period of time, I think innovative products, innovative solutions will sell. Solutions, I think -- these are the things that we're working on to continue to maintain the momentum of growth. So I think both -- the replacement demand is still yet to continue.

J
Jay Kakkad
Research Analyst

Okay. Because why I was asking this question is because when the first buying happens, the buying is very different from when the replacement happens. So I was just wondering if there is a focus on availability of...

A
Anil Rai Gupta
Executive Chairman & MD

In fact, we are much better placed to cater to the replacement demand because our solution reach is much better than many others. Hence, I think we should be okay not only for the solution, but if a solution is selling, the first-time demand that you're talking about, this will continue to remain in India. This building and new build will not go away in a very short period of time.

Operator

The next question is from [ Lakshminarayanan ] from Catamaran.

U
Unknown Analyst

I have a couple of questions. The first question is your plans for refrigerator. How far are we from launching refrigerator in the Lloyd's brand? The second question is pertaining to the distribution reach which you addressed sometime back in terms of x number of retail outlets. My question is that what is the potential in terms of distribution reach enhancement? Because there may be some states where you don't have presence, right? And then finally, I see that almost 1/5 of incremental TV sales are coming from online and that the ratio is almost like 15% for the industry, I guess, for air conditioners, et cetera. What is our plan on online distribution for Lloyd's?

A
Anil Rai Gupta
Executive Chairman & MD

So as far as the first question on refrigerators go, I think right now we're doing a feasibility study on buying versus putting up a manufacturing plant. Whether entering into this product category through sourcing can be a good alternative. Though we have a lot of demand coming from the channel, we need to review it properly. So this is a study which is going on. Hopefully, if that is feasible, then probably in the next 12 months, we should have refrigerators in our brand. But if it turns out to be more of a manufacturing difficulty, then we'll have to wait for some more time. As far as the penetration goes, I think, definitely, there is a huge potential to grow this number, maybe from 7,000, 8,000 to 12,000, 13,000 in the coming years. It doesn't happen very quickly, but there is a huge potential for the distribution to grow.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

And Anil, what's the third question?

A
Anil Rai Gupta
Executive Chairman & MD

What is your third question? Sorry, we didn't hear.

U
Unknown Analyst

Regarding your online sales of televisions and air conditioners. I believe that it's almost touched 20% of incremental sales at an industry level. And how are you thinking about...

A
Anil Rai Gupta
Executive Chairman & MD

There are some brands which are more online-oriented. So brands which are both offline and online, I don't think that number percentage is relevant. So hence, the number is much smaller in our case. Most of it is offline.

U
Unknown Analyst

And you said for us, most of it is offline.

A
Anil Rai Gupta
Executive Chairman & MD

Yes.

Operator

The next question is from Ravi Swaminathan from Spark Capital.

R
Ravi Swaminathan
Assistant Vice President

Sir, I just wanted to know what would be the number of touch points for your core business? I mean, this year vis-Ă -vis last year at the same time. Is there in terms of distributor or the touch points, how has it increased?

A
Anil Rai Gupta
Executive Chairman & MD

So we now cater to almost 7,000, 7,500 direct touch points. And indirect touch points, while we have more than 100,000 in our [ tenders ], I would say where we get real inspection is almost about 60,000.

R
Ravi Swaminathan
Assistant Vice President

60,000. And how this number would have been last year? Any idea?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

We are expanding almost by 10% to 15% every year.

R
Ravi Swaminathan
Assistant Vice President

10% to 15% every year, okay. And how the performance of Standard brand has been for what would be -- as of now or quarter-to-quarter?

A
Anil Rai Gupta
Executive Chairman & MD

Standard brand has been doing well both on the traditional segment, like [indiscernible] and fryers and fans and water heaters. Water heaters have just started. And the segment has also started doing well. This year we should be doing almost INR 500 crores from the brand.

Operator

The next question is from Harshit Kapadia from Elara Capital.

H
Harshit Kapadia
Senior Associate

Sir, you are saying that there is a pickup in infrastructure electrification, and you are seeing a high growth in Cables, Wires and Switchgear segment. Can you also expect, let's say, over the next few years, you could be adding maybe products to more of your brands to enhance your rural coverage, or let's say, Class B or Class C towns? Or is that something that you're working on?

A
Anil Rai Gupta
Executive Chairman & MD

Yes, the focus is to get into the rural sectors, Class B and Class C towns. But I don't see that we would need to enhance the product range for that. Basically, the idea is to take these products into these areas.

H
Harshit Kapadia
Senior Associate

But would you be cross-selling those products at this, let's say -- products available on the Havells brand only, which was not available, let's say, on the Rio brand because that's a lower priced kind of brand? Will you be doing that to make sure that you cater to those markets?

A
Anil Rai Gupta
Executive Chairman & MD

See, it is not a brand-oriented strategy. It's more of a reach-oriented strategy. So if a certain product which fits into the Rio brand, will go into the Rio. But if in the rural channel, a Havells product can go to a Havells product label. Even now today we have -- we have not launched Lighting into the Rio brand, but it is going as a Havells brand, as you will find. So it is more product-oriented than channel-oriented.

H
Harshit Kapadia
Senior Associate

Okay, okay. And my next question is on the Rio segment. We have already had a tie-up between [indiscernible] exporting the [indiscernible] contractors. Are we seeing a good jump in that number in Q3? That is also one of the reasons why we have seen a high growth in the Rio segment?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Partly, yes. So it's not Rio started. I think that we will come there the first quarter next year.

A
Anil Rai Gupta
Executive Chairman & MD

And we do bid work.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

And that is contributing a significant amount.

Operator

The next question is from Niket Shah from Motilal Oswal Securities.

N
Niket Shah
Vice President of Research

I just wanted to know 2 things. How is the cost structure kind of shaping up as far as next year AC season is concerned? Because I think if I remember what you have in the slide, you did mention that there has been some prepayment which has happened. So will you get benefit of that and scale put together for next year AC season effect?

A
Anil Rai Gupta
Executive Chairman & MD

I think the prepayment was largely led by the foreign currency movement, so there's not a very significant sort of upside from there. And I think hopefully, the cost will remain stable if the dollar remains stable. And now that the currency started going well and the commodity cost price for ECD, so hopefully, the price will remain. The costs will pretty much stabilized in the AC industry, which this year has been fairly volatile.

N
Niket Shah
Vice President of Research

Yes. But last year, you would still see some improvement given the fact that assuming currency remains at the same level. I mean, you would...

A
Anil Rai Gupta
Executive Chairman & MD

Yes, but the custom duty has been increased. So the last figure simultaneously increased only in the sort of second half. So I think a lot of factors will play. And I think one would have to really see all the available factors because this is a development label of our product.

Operator

The next question is from Shrinidhi Karlekar from HSBC.

S
Shrinidhi Karlekar
Analyst

Sir, in the Lighting segment, you said volume growth is higher than the 18% you reported in terms of revenue. Would it be possible to broadly say how much was the volume was higher? And secondly, sir, by when do you really expect that the value growth should eventually move closer to the volume growth and eventually pass -- like grow faster than the volume growth?

A
Anil Rai Gupta
Executive Chairman & MD

Yes, volume growth in Lighting has been significantly higher. It should be anywhere between 25% to 30% number.

S
Shrinidhi Karlekar
Analyst

Okay. And by when do you really expect that the value growth should start to increase, like the volume growth? Like, I mean, when can we expect the utilization in LED kind of pass -- or I think it was passed?

A
Anil Rai Gupta
Executive Chairman & MD

If it's stabilizing in the next few quarters, I think it should be...

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Volume growth and value growth are not related.

A
Anil Rai Gupta
Executive Chairman & MD

But that may not mean that the volume growth will be 30% and the value growth [indiscernible]. So I think don't try to extrapolate.

S
Shrinidhi Karlekar
Analyst

Yes. I just wanted to understand the volume and the improvement in value.

A
Anil Rai Gupta
Executive Chairman & MD

Shrinidhi, just to clarify the 30%. When we say only for the consumer side of the business because this is where normally the numbers are coming, which is almost 50%. On the B2B side, actually, these numbers will not get impacted much, so it's already sort of the 30% is already 50% of the business.

S
Shrinidhi Karlekar
Analyst

I understand. And sir, last one, if I may. So we have seen in this last few examples of household electrification. If you go by government, there are almost 2.5 crores of households which are newly electrified. Have you really seen this kind as a consumer or the demand from these households will eventually be material from a Havells' point of view and kind of reflecting demand from these household starts?

A
Anil Rai Gupta
Executive Chairman & MD

Anybody building a home or refurbing is a potential customer for Havells. And I think it is obligated on us to reach these customers where they are rather than expect them to come to us. And that's why the entire focus is on the semi-urban and rural, which we have sort of initiated and we continue to sort of double-down on the same. So anybody building a home or refurbing, as I said, is a potential customer.

Operator

Due to time constraints, we'll be able to take one last question. The last question is from Vinod Bansal from Franklin Templeton.

V
Vinod Bansal

I'm just following up on Lloyd. Q-on-Q, from second quarter to third quarter, it's almost INR 100 crores jump in sales. I understand you said there's a festive season and therefore, TV sales have picked up. Outside that, there would still be some growth because TV is a very small part of the business right now. Is it to say that the channel has picked up more stock or it's purely pricing and little -- almost 0 volume growth on the ACs?

A
Anil Rai Gupta
Executive Chairman & MD

Well, I think AC value has changed a lot. But again, if you talk about the price because the tables have changed. The cost have gone up, the custom duty as well as the currency. So there's even some more value growth. I think -- there may be slight volume growth but nothing to really speak about. So I think, yes, there has been some growth in the AC, but maybe good to argue that this is largely value-driven than volume. I mean, we continue to be in a challenging time for AC and the industry as a whole.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Just to finish on this, the channel inventory would not have increased end of December as compared to end of September.

V
Vinod Bansal

Correct. Which is why I was trying to understand better. Let me first clarify, there is no volume decline at least from 2Q to 3Q in terms of the number of AC units you sold in 2Q versus the units you sold in 3Q?

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

No.

A
Anil Rai Gupta
Executive Chairman & MD

No.

V
Vinod Bansal

Okay. So if the channel had a lot of inventory built up by the end of the second quarter because of the weaker season earlier in the year, there was little reason for them to replace the inventory. So I'm just wondering there should have been a decline in your volume sales if channel had to clear out the inventory. So I'm just trying to understand that part of it. Why would channel replace it so soon when they are looking at a weak season?

A
Anil Rai Gupta
Executive Chairman & MD

Vinod, [indiscernible] because in certain cases, in December, pick up from certain markets starts increasing because they have to build up certain inventory for the month of January and February season -- upcoming season after [indiscernible] and then February and January [ products ]. So it's a combination of many things.

V
Vinod Bansal

Right. And just the last question, how would you characterize the inventory in the system, your all closed channel end of December versus, say, end of September -- and end of June, rather a little bit earlier because that was really the best part of the year.

A
Anil Rai Gupta
Executive Chairman & MD

In ACs?

V
Vinod Bansal

In ACs, yes.

A
Anil Rai Gupta
Executive Chairman & MD

So our inventory will be higher because we build up for the season. And channel inventory will be lower because, at the end of June, there must have been high inventory in the channel at that point of time.

V
Vinod Bansal

But still nowhere closer to what you would want it to be at this particular time of the year?

A
Anil Rai Gupta
Executive Chairman & MD

Right.

Operator

Thank you very much. We'll take that as the last question. I would now like to hand the conference back to Ms. Bhoomika Nair from closing comments.

B
Bhoomika Nair
Security Analyst

On behalf of IDFC, sir, we'd like to thank you for giving us an opportunity to host the call. Thank you very much for taking time out.

A
Anil Rai Gupta
Executive Chairman & MD

Thank you, Bhoomika.

R
Rajesh Kumar Gupta
Director of Finance, Group CFO & Executive Whole

Thank you.

Operator

Thank you very much. On behalf of IDFC Securities Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.