Havells India Ltd
NSE:HAVELLS
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Havells India Ltd
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Ladies and gentlemen, good day, and welcome to Havells India Limited Q4 FY '19 Post Results Conference Call hosted by AMBIT Capital Private limited. [Operator Instructions]Please note that this conference is being recorded.I now hand the conference over to Mr. Jay Kakkad from AMBIT Capital. Thank you, and over to you, sir.
Thank you, Aman. Good morning, ladies and gentlemen. On behalf of AMBIT Capital, we welcome you all to the Q1 earnings call of Havells India Limited. We have with us Mr. Ameet Gupta, Whole-Time Director; Mr. Rajesh Gupta, Director Finance and Group CFO; and Mr. Rajiv Goel, Executive Director.Now I hand over the call to the management for their opening comments, post which we can set the floor open for Q&A. Thank you, and over to you, sir.
Thank you, Jay. Thank you, Aman. Good afternoon everyone. The financial results and the related commentary would have been already received by you. And the growth in the quarter 4 has been muted, owing to the lower consumer demand, liquidity crunch, delayed summers and lower infrastructure spend due to impending elections. Havells Electrical Consumer Durables and Lloyd were impacted by delayed summers. Lighting in particular, the professional part of the Lighting was impacted by the deferment in projects awaiting political clarity. The margins are broadly stable. Lloyd could not pass on the entire cost escalation due to high competitive intensity and weak market environment. However, we are optimistic on the year ahead as we hope that the political stability would bring in the requisite investment to drive economy momentum. We are well prepared to capitalize on the emerging opportunities.So now we would open it for the questions and we can take it from there.
[Operator Instructions] The first question is from the line of Renu Baid from IIFL.
Sir, my first question is on the demand pattern. You did read out the key reasons why the volume of -- it was softer. But overall, are you seeing the end market demand being softer or these are more temporary adjustments to demand because of seasonal and certain adjustments in dealer/distributors because of a lot of consumer companies are highlighting cracks in the consumption pattern and trends. So would you perceive these as more of medium-term risk or short-term [indiscernible] in terms of external environment?
Certainly, there has been a suppression of demand from the consumer side since December. It is probably owing to a lot of factors including the NBFC situation in the country as well as the elections happening. And overall, the sentiments were not great from the consumer side, which ultimately also led to some destocking at the dealer and the trade level as well. So it's a double value to that extent that once the consumer demand is lower, so the stock levels in the market has also gone down. And we are seeing a similar kind of a situation in April and May because nothing changed on the ground after that. But we certainly hope that once this whole situation stabilizes, that we should start seeing demand coming back from the coming months.
Even though seasonal pattern which impacted 4Q numbers, are you -- you are not seeing that changing and positively driving growth in the 1Q or is it always...
Yes. So what we mentioned was there are multiple factors. One factor which was there was about the delayed summer, which, of course, has come back strongly in April and May. So that particular piece of it has come back and the demand has come up for the Consumer Durables and Lloyd for that particular thing.
Sure. Second question would be, overall last quarter also we had the headwinds of actually passing on the price increases, cost increase to consumers. And now we are seeing that margins continue to remain weak. So how should we read into the ability to take price hikes even if demand momentum has been soft? So will that mean that going forward next year margin headwinds will continue? Or one should see those 13% margins coming back for the company?
If you see that ex Lloyd, the rest of the segment margins are pretty stable. The only difference from the last year to this year is primarily due to the lower volume in this quarter. So there is some underabsorption of cost to that extent. So they are not hugely different than the previous years. For Lloyd, there has been certainly a challenge of the demand being weak and the huge competitive intensity in the market because of the weak sales happening, and also because there was a lot of changes happening in terms of custom duty going up, dollar going up and our cost were higher than -- probably our increases were a little bit more than the competition. But since we have now set up our own plant, in the coming months, these things should not affect us in the long term.
The next question is from the line of Chirag Shah from CLSA.
First question is on the slightly long-term basis. I mean it's been 2 years since we acquired Lloyd, can you just give us a sense of what has been the success so far in terms of increasing the contribution of non-AC portfolio of the business? And as far the reach and distribution is concerned, what has been the progress so far?
So on Lloyd, if you answer -- the portfolio expansion, this is still ongoing. I would claim that AC continues to be the key contributor of the business. You know that the LED TV market itself has several challenges in the last year. But I think our work in terms of getting more products on board, particularly refrigerator hopefully by end of this year or early next year. I think that will be a key addition to our portfolio. So I think that is something which we always knew will not happen in couple of year, that is something -- journey is slightly longer term. But particularly on the distribution side and the fortification of the management both at the central as well as the regional level, there is a significant amount of work that has been done. And that is reflected, you would see, even in our financials which is the investment we have made on the people as well as the brand which is a significant investment. We almost outstand our peers by 2x because usually you're building these things for a long term. We are not looking at a quarter or a short-term approach on the same.And in terms of distribution, I hope if you go around the market you would observe, now we are available in almost all the leading retail chains, you see which is a fairly large part of this kind of -- this industry. So yes, and also I think it improves our brand imagery with the consumer and a consumer which comes at a large retail chain, which is fairly sort of up market. So I think that is the changes which we had anticipated when we acquired, and I would say, in 2 years, if we take the stock, I think the considerable amount of work has been done on the same despite -- you see there has been headwinds which nobody anticipated to have in that industry, particularly in this year. So I think the qualitative improvement in the Lloyd is fairly reassuring. And we do believe and -- but in a couple of years, I think they will come to really fruition and be reflected in the numbers as well.
Sure. Just continuing on that. In terms of just the quality of distribution network, we had some rationalization of the dealer network earlier. Is that exercise over? And incrementally, what is the kind of additions that we are looking at in terms of the distribution network? And where are we on that?
I think, this is an ongoing process. A, we never looked at consolidation, we always looked at addition of the distribution, which is because it was fairly competitive when we acquired this business. So we want to take everybody along. So I don't know whether we are giving the impression that we want to exclude a few streams and want to include, I think, the opportunity which present itself in this industry and where Lloyd was, I think that is sort of humongous. So we are looking both in terms of more deeper penetration, which is achieved by distribution, and also we segment, you see, which industry particularly is fairly dominant which is the -- as we said the large retail chain. So work is happening on both the sides. And I think this something which is an ongoing process. The heartening news is that we have been fairly successful in that, in fact, sometimes even beyond our own internal assumptions and expectations. So the way we have been sort lapped up both by the consumers as well as chains, I think, that's really heartening. And I think the true advantage is that, hopefully, we unfold in next few years.
Sure. And just one last question on the Lighting business margins. We have held up our margins quite well in the last few quarters in spite of the peer group facing a lot of margin pressure in the lighting business. There has been some corrections in the margins in Q4, do you think it is more seasonal or is there some correction that we are seeing in the margins for the Lighting business?
Actually it's not really based in that sense. It has been a little bit of a mix change in this particular quarter. There has been little bit more sales on the solar side rather than the consumer part of the business. So it's a little bit of a readjustment, but I don't think it would continue like this. The margin should improve from here.
[Operator Instructions] Your next question is from Venugopal Garre from Bernstein.
My first question is more -- sorry, I actually missed the opening remarks from you. So I hope I am not repeating some of the things you might have answered. Firstly on NBFC, I just wanted to understand that the sort of destocking or rather restocking from the dealers is more a function of them not wanting to finance themselves too much because of the NBFC issues and probably some liquidity issues out there? Or this was more in response to retail itself -- demanded itself, sorry and this should probably moderate the stocking levels. So is NBFC impacting dealers' financing? Or NBFC is actually impacting the land? It's the first question.
We feel that the NBFC is actually impacting the consumers. The retail and the trade is just basically being a little bit more cautious because the demand is not coming from the consumer side. So they are just being a little bit more rational and controlling their stock levels as well.
And Venu, there would be some impact on SMEs as well, the trading community. But I think in a way, I think, they have been very pragmatic. A, they -- I think you also had to add, particularly in this quarter because there's political uncertainty as well. You would appreciate that a lot of customers, so which is end-user consumer, consumer is not the retail guy, which is also the corporates and the SMEs who were consumers particularly in Q4. So there's a mix of everything, and the NBFC, you see the other challenge is, a, they are not expanding the agreement, but a lot of NBFCs are going back to their customer and asking the money back. You see -- so there is a withdrawal money from the system, which is mainly increasing liquidity for these large banks or PSUs, but that's not helping the overall lubrication in the system. So I think it's a mixture of everything, but yes, I think it is definitely driven largely by the consumer also but when people feel there will be a slowdown, I think you will appreciate this is ultimately advantageous as well. So there's something -- they'll pickup maybe when we see the demand coming back. But NBFC crisis has only worsened the situation in my view. So you cannot take it away from the equation.
I think it makes sense. My second question is, again a bit late to preelection number and how things pan out in certain orders, which actually are linked to government projects. It could be certain other projects, even real estate maybe, which will come in large contracts. So in your segments, it's clear Lighting, I would say, and Cables, is there a way to attribute actually how much would be linked to government-related activity? Or is that direct government opportunity which makes them go through a distribution channel. I think there's no notification on where you might have seen some slowdown, but it could rebound back.
So clearly there has been a slowdown, and we can feel that because especially the industrial part of the business has been more impacted in the last quarter. But we actually don't deal with government agencies directly and it is always through the trade. So we don't really know the exact breakup of how much of it would have been because of that. But certainly the government sector was a major consumer for some of the industrial segments, and it was impacted quite strongly in the last quarter.
The next question is from the line of Sonali Salgaonkar from Jefferies India.
Sir, my first question is regarding Lloyd. So post the commissioning of our plant for local manufacturing in Lloyd, what are the kind of margin benefits that you expect to accrue over the coming years? And currently, what would be the in-house production as a percentage in Lloyd?
Sonali, right now, the plant is just about commissioned, and we are in the process of doing SKD assemblies and it's not a full backward integrated right now. It would happen in the next couple of months, but by that time, the season would be over for air conditioners. So the real benefit of the -- having the plant, would actually start accruing from the next year only, not this year. So it's a little bit early right now to completely judge how much benefit would be there because since the time we decided on setting of the plant there has been a lot of moving parts as far as costing is concerned in air conditioner market because there have been complete change of the efficiency ratings by the government. There has been change in the custom duties. There is a lot of components which are still imported and those -- there have been an increase in the dollar rate. So it's a combination of many things. So once we stabilize and we really know what is the final cost of our -- when everything is ready, we would know the things better. So that is the current situation. What was the second question? It was something else...
Sir, currently, what is the proportion of in-house production in Lloyd?
So right now, everything was sourced. But once this factory would be up and running, we would assume that in the first year, we will probably be having around 60% to 65% of the sales in-house -- production in-house.
Sure. Sir, and secondly, in your opening comments you mentioned that summer has come back strongly in April and May. Are there any price hikes you have taken in ACs or probably planning to take in the coming months?
There has been a delay in increases -- increasing pricing in air conditioners for some time. And we have been able to pass on a little bit of an increase, but it's still, like I said, the industry is right now quite tough, and people are all having a lot of inventory piled up from the previous times So it is taking its own time in being able to realize the proper price on the market.
Sure sir. And lastly, CapEx guidance, if any?
So next year, CapEx plan is around INR 600 crores. Most of it is on expanding capacity of -- capacities of other existing businesses, which is almost in every segment, but mainly in the Wires and Cables, also into Switchgears, and some remaining investment in the Lloyd plant.
The next question is from the line of Aditya Bhartia from Investec.
Sir, my first question is on Lighting revenue growth. So this quarter we have seen fairly strong growth from EESL and government sector, and if we remove that component, it appears that the B2C segment hasn't really done all that well. What is that on account of? And do you think that the overall growth in Lighting sector over the next couple of years could moderate a bit?
So I would say here, the Lighting also includes a lot of these professional lighting which is 50% of the business. And if you recall our comments at the commencement is that, that business has obviously the recent built up because of the political clarity. And a lot of these orders come back exactly from the government to a government departments. So I think so -- maybe you should not just go on the quarterly performance. We do hope that you see the -- in the year ahead, that it should also be a good decent growth in this. So I don't think Q4 should be taken and extrapolated going forward.
Understood, sir. And sir, the next question is on margins in Cables & Wires business which appear to have risen for almost all companies in the last few years and within that, if you look at this particular quarter, pretty much every company appears to have reported really strong margins. So what exactly has contributed to that? And how do you see these margins panning out?
They're still the lowest in our product category. for that matter. So I think some degree of price distribution in every country, every company, and we should believe that actually we deserve better remuneration for what we are doing. So nothing in particular, I would assume.
And for us, the margins have been pretty steady.
Yes. And it's not that we have grown exponentially in margins. We have been increasing margins over the last few years. So hopefully that should continue. It's a big part of our business. We want them to be more profitable.
Understood, sir. And sir, my last question on Lloyd. How are you seeing TV business given that we have seen some of the lower-cost Chinese companies coming and disrupting pricing over there? Do you think margins for the business may inch down at least in the TV category going forward?
I think TV, that's the first part of in this. I think, we don't want to be in this business. It is not easy to be part of this business. So that I can say. So yes, I think fortunately or unfortunately, it's still not a very large part of our portfolio. But yes, I think -- I would say, it's in a transition stage. Let's see how it goes. But I think we'll try to collect our apple, but it's not easy being -- to be a TV guy these days.
So we certainly believe that the brands would always continue. The Chinese have made an impact. But because of that Chinese influx, there has been a reaction from most of the leading brands where the margins are a bit tougher. But as far as the market shares and all our concerns, we are very sure that the big brands would continue to do volumes.
The next question is from the line of Shrinidhi Karlekar from HSBC.
So you've touched upon the current inventory. I guess one confirmation on that. Would it be fair to say that the current inventory for your Fans and the AC segment at the start of the new financial year is relatively lower than what it was in period last year?
It should be, Shrinidhi. It will be -- it is proper to really have a sort of strong estimate on that. but I think it should be lower.
Okay. And sir, my second question is, like you're spending about 7% on the Lloyd on advertisement and promotion. Do you see yourself spending similar amount in terms of percentage for next couple of years? Or do you see it increasing or decreasing?
We certainly hope the revenue growth would take care of some of the percentages.
Again, like -- as a percentage of revenue, would it be similar? Or it may go up or go down?
So what I'm expecting is that the revenue should go up and automatically, the percentage to revenue should come down accordingly.
The next question is from Pranav Tendulkar from Rare Enterprises.
Sir, can you just elaborate what is the percentage of replacement given in each of the verticals or each of the segment that you share other than the AC segment? That is first question. Second is the -- what is the sustainable margin in this segment? And is there a big difference between consumer and wholesome. So for example, in Cables, what would be the available amount versus the -- if you say in retail digital and that's it.
Pranav, I think you have asked a very simple, but a long question to be answered. So what I suggest you -- our colleague, Manish will be in touch with you and then he can elaborate with you on the same because we should update you every segment detail, that will be very difficult on this call.
The next question is from the line of Ashish [indiscernible] from [indiscernible].
Sir, my question is on the Cables & Wires business. So we are seeing strong demand which is pretty much visible from last many years, and also we are seeing improvement in margin. What do you think the sustenance of this kind of growth and margin is in the next 2 to 3 years?
I think we should only be -- you see, this government believes in building up infrastructure which this country chronically needs. Then I would assume that there's a whole lot of potential in this segment. Now how we perform ultimately will depend upon our own strengths and all but I think on a macro basis, we believe this holds tremendous opportunity.
But how do see new players coming? And we see all FMG companies getting into this business, how do you see competition going ahead in this business, especially on the Wire side?
Wires side, the competition has always been there. If we have few more players or few less players, frankly it doesn't matter in this business. I think the macro opportunity to mind should be larger issue, but the macro opportunity, I am sure, we can accommodate.
So you see maybe that 15%, 20% kind of top line growth, revenue growth will continue for...
Actually, no. We don't go for the guidance, you're aware of that. So what we are saying that, again, I would reiterate that the opportunity in this is fairly compelling, and we believe that we can do justice with our brand distribution network, manufacturing excellence to continue to grow in this segment.
Next question is from the line of Vinod Bansal from Franklin Templeton.
A couple of questions. One on the ECD business, Fans primarily, when it could have been weak. Could you give us some color on what you think would have been the industry growth in the quarter gone by? That's one. And some broad estimate of what your Fans growth would be within the ECD segment?
So Vinod, the Fan industry has been fairly muted. Now it's anybody's guess, but we've been doing it low single digit upon the industry. As far as we are concerned, we don't give individual breakup of Fans, but it's pretty much in line with the overall ECD growth.
Okay. All right. And the Lloyd's business, I think you spoke about the channel inventory, I missed that part. Can you just again elaborate how would inventory be from the December quarter to the March quarter, both Europe inventory and distributor inventory -- channel inventory? A rough estimate, how much you would have normalized quarter gone by? And how much more for it to come down to your usual business levels?
So the channel inventory must be lower. I think the question was, what should be lower than the last year. So we answered it, yes. I think, we believe there have been channel destocking. As far as we are concerned, you see we built up the inventory, but because of delayed summer, we, obviously carried more inventory than we planned for 31st March, which is to -- both for fans as well as ACs. We believe by 30th June, both of them should get normalized.
Would you -- can you give you some -- like it's 15 days higher or 30 days higher of sales inventories, what you are carrying more than what you would've normally wanted?
Not 30, 15 days like that. But definitely, we carried more inventory as I said because we never anticipate the summer to be delayed and the season to be delayed that much. So we have not yet quantified by how many days because that is own complication, what sales you take and things like that. We do believe that we carried more inventory on 31st March and we do believe that the strategy is get back to our normal inventory level because though the summer has been delayed, but I think the -- after it is delayed, I think this offtake has been fairly decent.
And the channel is not overstocked compared to what they are normally are at this point -- at the end of last quarter?
The channel is -- so I think the entire brunt has been taken by the company and the channels.
Okay. Okay. And just last thing, if you could just speak a bit about the distribution base. Are there official numbers on that. When you acquired the brand, what was the typical distribution base like and how it has changed in the last few? Which is have you been operating it both in the traditional distribution channel as well as the modern retail? If some numbers are there it'd be helpful.
So we answered that, that our modern retail, which overall has improved. So to give you an idea, we used to -- 7%, 8% sale used to accrue from modern trade, now it is almost 20%. Other than modern take rate of Lloyd. You're talking Lloyd?
Yes. Yes. Absolutely.
So as I said, we are fairly encouraged by the response we have got from this segment because normally, this segment in a way "[indiscernible]" also. And -- but I think it is the -- it is maybe the patronage of Havells, I think the long-term stability, now they're seeing the brand and the fact that we are improving the imagery and of investments we are making the brand both in advertisement and now setting up the -- which is sort of modern state-of-the-art plant in India. I think as we say, fairly long-term visibility to these sort of are our change in [ MCN ] that's why I think they are really now looking forward to Havells into their counter. And we have been fairly materialistically sort of received by them.
Okay. Do you have some numbers in terms of how many chains you've reached today compared to when you acquired?
75% of the chain -- retail chains is what we have reached.
The next question is from the line of Bhavin Vithlani from SBI Mutual Funds.
So I have 2 questions. One, on Lloyd. Sir, how should we consider the sustainable margins over a longer term? So we've seen a drop from 8% to 5%. So what in your view are sustainable margins for Lloyd?
So I guess the 5% looks to be a diversion. Hopefully in a couple of years and going forward. As we said, the industry has -- well we see the leaders are at 10% plus. And that's the journey we want to take. And I think we should start reflecting in a few years. As we get into our own manufacturing and all this should aid the margins. But it will be a journey. This is not something which is going to happen in a couple of quarters.
Okay. That's helpful. Second is, you also spoke about introduction of refrigerators. Some more color on that will be helpful. Even on that segment, are you...
So as I said, somebody asked me the question that are you broadening the portfolio. As I said, that is something definitely under active consideration and -- but it is something in the next sort of 12 months or so you should hear more from us.
Okay. My last question is on the working capital. So we saw increase in the working capital primarily due a reduction in the creditor days. And in your notes, you mentioned it's similar to FY' 18. So is this a more sustainable number? Or how should we look at a working capital cycle?
Yes. I think this is pretty much -- this arrangement is in line with our average as well if you look at the -- and don't go just by the -- but overall days has been on 24, 25 days, and I think we have ended this year also at 28. So sometimes you see the quarterly number distort the average and the trend line.
Okay. So 28, 30, is this like a more sustainable number versus [indiscernible].
Yes. Let's say, between 22 to 24, 25 days, a few days here and there.
The next question is from the line of Atul Tiwari from Citigroup.
My question has been answered.
The next question if from the line of Achal Lohade from JM Financial.
My first question was, if I look at the unallocable or the employee cost, we've seen a significant amount of increase in last couple of years. So is it fair to say that now the -- broadly the cost part is done and we should start seeing the operating leverage? Or you think there is some more room for the operating cost to go up before we see a meaningful operating leverage benefit?
I think, Ameet also commented in between that hopefully the growth in the revenue should take care of this. When you see these numbers, you should appreciate that there is a lot of new businesses we keep adding every year. So for instance, last year, we added Water Purifier. So the cost of that -- because we don't do segmental separately, they get absorbed in the overall numbers and because of the base effect, they shouldn't be also add to the segment growth. So if you take out these and calculate, we see the growth will be around 17%, 18%, and we're seeing the -- and which is something like, you see increments and some new additions which is -- keep happening to the existing business. So we believe that definitely there should be more leverage coming out of these investments and hopefully as we keep now believing that the way this government has got a political stability and the way I think they're going to invest. I think we are very well prepared to take advantage of the growth which could sort of [indiscernible] from now. So hopefully when we talk in next few quarters, this question maybe get self-answered.
Great. Second question was, can you help us with the volume growth for the fourth quarter for Cables & Wires?
Pretty much similar to that because there has not been much value. We see the copper has been stable. So this is -- you could argue, it's pretty much the volume growth.
And what about the full year, sir?
Full year what?
Volume growth for Cables & Wires?
That I think -- we'll come back, we don't have that right now.
The next question is from the line of Pulkit Patni from Goldman Sachs.
Sir, just one question from my side related to the previous participant who spoke about operating leverage. Now our employee cost clearly has gone up in the last one year and that's obviously because of the investments that we have made. On a sustainable basis now, are we reasonably well benefited across the country in terms of our distribution and our people and how should we expect this employee cost to move forward from here for the next, say, 1 or 2 years?
Look, Pulkit, as I said, this is also accruing because of the new businesses, we keep adding, new business lines and also the new regions we keep expanding into. So in some sense, you see it's an ongoing process. However, we believe the pace of the growth definitely should recede from now. And as I said, maybe then the revenue growth also kicks in, I think these growth number, and will be much lower. So -- but yes, I think we will not stop investing in the talent acquisition. We believe that is what is required to set the kind of infrastructure we have now created both in terms of the brands and sort of the manufacturing excellence. So I think the investment in talent acquisition will continue there but the pace of growth should subside from now on.
The next question is from the line of Bhoomika Nair from IDFC.
So just wanted to understand the Switchgear segment a little better. This year, we've seen a decent double-digit growth driven by a little bit of low base, focus on AWA and exports. Now if you can just comment how sustainable it this given that real estate [indiscernible], and also the quarterly margins were a little bit weak in this quarter. So if you can just comment on that?
So we certainly believe that Switchgear growth should continue. The -- I mean it's not really been a great year in terms of real estate and all and still we have been able to deliver these numbers. And with the stability coming in, I'm sure the country would need a lot of infrastructure and real estate going forward. So I mean in the medium to long term, we are very bullish about the Switchgear business, that's been a major revenue as well as a profit for the company. And we believe it should continue in the same line.
Second, the margins which were a little weak in this coming quarter, sir?
That I believe is primarily due to the underabsorption of some costs in this particular quarter?
Okay. Okay. And just my second question was on the -- more from a short-term perspective on demand. You mentioned that there was some addition in DC-related slowdown in demand in 4Q. So would that kind of actually continue into 1Q especially for segments like Switchgears, Lighting, et cetera?
It is certainly continuing as of now. The situation has not dramatically changed from the last quarter.
The next question is from the line of Arnab Mitra from Crédit Suisse.
First question was on the ECD growth slowdown that we've seen. So now in the last 3, 4 quarters, we've seen ECD growth be significantly higher than your Fans growth. So obviously the other categories were contributing substantially. Now this quarter, it seems it's more or less similar. So is it because of end consumer demand? Or is it because of some categories which were ramping up but now have reached some scale and from here on, the growth will not be at the pace that it was in the last 3, 4 quarters?
No. It's not, nothing like that. It's just that -- like we've said, the season was a little bit delayed in an overall sense. So most of the categories had the same -- the whole thing about the consumer demand and everything has impacted across the segment. It's not really limited to one particular business or the other. So it's -- the trend would continue. And the newer businesses would be growing faster than the existing big ones.
Okay. Second question was on CapEx. So you, I think, guided for about INR 600 crores next year. This looks fairly high considering you've just done the Lloyd CapEx. So is a lot of this -- is there a big step jump in the amount of capacity you are adding together next year, given that this number seems high compared to the past years?
Yes. You are right. First of all, some of this INR 600 crores is Lloyd left over in this particular plant itself. But other than that, we are expanding capacity in most of the businesses we are in, which is Switchgear as well as Cable & Wire and in Fans. So all these segments, there would be a substantial increase in the capacity in the next year and the following year after that.
So some of this could spill into FY '21, the INR 600 crores that you mentioned?
No, the -- you see the -- whatever we are going to spend, a benefit of that would certainly be after a year or so. So the project -- the spillover might not happen, but the project execution and the commencement of the production and all would take its own time.
The next question is from the line of Abhineet Anand from SBICAP Securities.
New growth for Lloyd in FY '19?
Sorry, Mr. Anand, we had lost you in the initial part. Can you repeat the question again, please?
It's okay. For Lloyd, I just wanted to understand what has been the volume growth for the year?
Pretty much, you see there's a flattish growth in Lloyd.
And for the full year, if you can breakup the revenue of Lloyd into the various products that it sells?
It is largely as I said, 80% of this is AC. So I think you should just consider AC a growth as the overall growth for Lloyd.
The next question is from the line of Sachin Pal from MC Research.
[indiscernible]
There's a lot of disturbance in the background. May I request you speak a bit loud please?
Hello, is it better now?
Yes.
Yes. So the question is basically related to your equity -- to your balance sheets. There in [indiscernible] the intangibles around INR 1,500 crores which came in as a part of the Lloyd acquisition. And the amortization that we have done across for the year is around INR 15 crores, INR 16 crores. So just wanted to understand on the amortization policy going forward on this front?
So as for the [indiscernible], you see the rule requires that you have to do the impairment testing on the -- except for the noncompete.
This is a noncompete which is a [indiscernible]
Extension network and distribution.
Yes. Yes. And distribution network and the noncompete [indiscernible], which has been done, which you also see the chart. The goodwill and the distribution and other part is basically tested for the impairment. So that -- in their growing impairment, there is no charge to the P&L. So this is as far as [indiscernible] requirement.
The next question is from the line of Shrinidhi Karlekar from HSBC.
Sir, I just wanted to hear your thoughts on the -- how has -- how good has been the customer response for your Water Purifier business? How large it has become? And how much of the addressable market you have reached in terms of distribution?
So the response on the market has been really encouraging. As the -- we have launched a product which was having better features than most of the competition and was at a premium. So people realize that the value of the product, and we got a great response from the consumer. But as far as the numbers and all are concerned, we are still -- a very early business for us. So to be a reasonable-sized player in this market would take its own time. So the initial placements have been done and the initial pickup from the market is very good.
Okay. So would you be able to -- just like a qualitative comment in terms of just -- in terms of distribution, how many cities have we penetrated already? Some quantify or a qualitative color on the -- like the reach you have already achieved that would be of great help.
Shri, we'll come back to you on this. We don't have a ready number right now.
The next question is from the line of Naval Seth from Emkay Global.
Sir, my question is on rural distribution expansion. In the past, we have stated that the large part of the growth is coming from Tier 2, Tier 3 towns. So -- and we have been aggressively expanding rural distribution. So what is the progress there? Where we have reached as per our target? And secondly, will we be launching or adding new product lines under Rio brand because as the rural expansion would require, products will be -- which will be at lower price as compared to Havells main brand?
So the rural plan for the company is continuing as per the -- whatever we had worked on. But it is a slow and steady process because to reach in deep into the interiors of the country takes its time. And we have been building up the -- a massive team across the country to penetrate into this segment.As far as the overall number is concerned, it's still a very small portion of our business. So it's still in a build up stage in that sense. As far as the products are concerned, we have already made a decent portfolio within the Rio brand of a certain broad category, which we feel in the first stage would be the right portfolio to go to the market. To expand further on that, would be only after we reach a certain success level with this portfolio.
And sir, in the rural or across your distribution, would we be looking to change any terms and condition on channel financing, limit on channel financing going forward? Any thoughts there.
So rural business is working on our cash-and-carry model, where basically we are supplying to a distributor who is paying us cash, and then he is placing it with the retailers within the rural areas. So there is no credit in this business.
And anything on channel financing on the overall business? Are we looking at tweak any terms, condition or that's the main status quo, how it was in FY '19?
It would continue as it is. It is been [indiscernible]. There's no change.
The next question is from the line of Abhijit Sinha from Pi Square Investments.
Could you just through some light on the Standard business as well? Along with the Hyundai Electric, has that already started because of the factor you were planning to do in the first quarter of this year?
Sorry, one was Standard. I did not get the second part of the...
On the Hyundai, the MCB one.
Yes. Can you repeat the question, please?
Sir, first, I was asking about the Standard business, the Standard brand. And the second question is regarding the Hyundai [indiscernible] that we have...
Hyundai. Okay. So Standard continues on a similar kind of a growth as overall company. And it's becoming a substantial brand in itself. We would be doing -- we have done -- so in all the segments which are -- we are present in, it's doing a decent growth and placement of the products slightly lower than Havells. So we are addressing a different segment to that extent. As far the...
Yes, sir. So I think that you guys were looking at a INR 500 crore revenue coming in from there. So now is there any change? Do you think in FY '20, you'd be able to get around some higher numbers there?
No. I think our number should be similar to that already. As far as the Hyundai is concerned, the tariff is on. We are already supplying some Switchgear products to Hyundai, and we are expanding the product portfolio which would be going to them. They are actually looking at India as a diversification of risk from China, sourcing they were doing. So they have come through Havells, and we are expanding the portfolio which we are working with them. Also, they are helping us in some of the technology for some of the strategic products for the Indian market.
And for FY '20, do we again see a -- 3.5% of our sales was spent on advertising? Or this - the new brand ambassadors at Lloyd, you think that [indiscernible] price [indiscernible]?
So you see, Havells and Lloyd are independent. Lloyd, you might have seen the numbers, they're already around 7%, and Havells is around 3.5%, 4%. I think those numbers will not change meaningfully in the coming year.
Okay. Sure. And sir, has there been a further penetration with the premium Fans business?
Yes. I think that's -- again, that's a continuous endeavor. And I think we believe that segment just continue to grow. Even though it's a niche, I think that is certainly growing much faster than the industry.
The next question is from the line of Darshan Mehta from UBS Securities.
Yes. My question was regarding Lloyd. So while a large portion would be room ACs and colored TVs, can you tell us that do we also sell a small proportion of washing machine or something? A very small portion or something?
Correct. We do. We do sell. And I think we see a good opportunity in that segment going forward as well. But what we are saying is that overwhelmingly it is still an AC brand. And over a period of time, you would definitely see the broadening of the product ranging offers by Lloyd.
The next question is from the line of Nitin Shakdher from Green Capital.
My question pertains to the Lloyd's business and the new factory capacity addition. Can you highlight an approximate estimate of the product SKUs for the financial year? How much would the factory produce?
No. That is still being -- as we mentioned earlier on this call, it has effectively just started the SKD. The full-fledged production will start maybe in couple of months. So I think those decisions on the SKUs and all would actually be part of the operational plan which will only get finalized maybe in the next sort of 4 to 6 months. So I think this is premature to comment upon the same.
So effectively, you're saying that any benefits of the production of the factory will not accrue this financial year?
Yes. Hopefully in the last quarter, yes, because the season starts somewhere January onwards. So in the last quarter. But I said the SKU and exact numbers and all, those will be something which maybe get finalized by September, October.
Okay. And my follow-up question is, can you highlight any feedback from the trade in terms of EMI consumption? What do you anticipate the consumers to do in terms of, are they slowing down? Is it going to pick up this year? Is it going to stay static specifically when it comes to high-end products, let's say, like the Lloyd split ACs. What's the feedback from the trade on EMI consumption?
You see -- you are talking consumer finance?
Correct.
Yes. I think that is only going to grow. There's only one way. It's only going to grow. And in fact, I don't think it is not limited only to the large ticket appliances or things like that. Consumer is just getting used to leverage. So he will take leverage from wherever it is available.
Okay. So do you think there's a healthy trend to move down towards lower-value items also rather than higher-value items?
Both. Yes, I think it'll move in every direction. I don't know what is healthy or unhealthy, but the fact is that the leverage is going to be the defining factor for any consumer business.
The next question is from the line of Ankit Babel from Subhkam Ventures.
A couple of questions. Sir, for the company as a whole, you have reported EBITDA margins of 11.9% this year. What could we expect in FY '20, sir?
Yes. We hope to improve only. We can't guide you a particular number, but we do hope that these numbers should be better when we talk next.
Okay. And sir, second is, in your ECD segment, the base is very high for the first 3 quarters of this year. So on that base, would it be possible for you to witness, at least, a double-digit growth?
That will be our endeavor. Now whether we end up doing this or not, that's a challenge we have taken up on ourselves.
And sir, lastly, just correct me, did I hear it correctly that in your initial remarks you mentioned that things have not still picked up in the month of April and May?
Yes. What we said is that there's nothing significantly a change on the ground because there's a [indiscernible] uncertainty had just came few days back and we -- action on the ground is still to be undertaken. So any macro improvements should happen from now on. Except for weather, it is products like fans and AC. Yes, I think, that one part of that sort of equation seems to have resolved but there are multiple issues still plaguing the economy.
Okay. And sir lastly, since you're doing a INR 600 crores CapEx, so initially, could there be pressure on your margins because there would be a lot of overheads which would be coming in and the benefit of revenue will only come in the years thereafter. So in that initial period, could there be pressure on your margins because of higher cost? Because there's some big investments you are doing.
I don't think so. You see even at this year, we have done close to INR 500 crore plus of CapEx. So I don't think it will really impact the margins in that sense. So if there is a good demand, I think the margins should only improve. They won't be impacted because of the additional CapEx.
The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.
Sir, my question is you adhere to improve your operating margins next year. Could there be more a function of gross level expansion through a price hike? Or it'll be more off operating leverage through higher fees? Our most [indiscernible] investment. And second question is that since you mentioned that ECD margins are impacted due to product mix. So if you can throw some light on that?
So on the first, I think, it'll be a mix of both. There can't be just one strategy. So there should be improvement in the gross margin [indiscernible] higher revenue should also bring the operating leverage. So that's how we looked at the overall business. On the mix, we said it should normally be -- because of the delayed season, you see Fan growth has been muted. Normally Fan is a higher margin than the new product categories we have. So that is the reason we said the product mix has been sort of slightly adverse than it has been in the past and that's why you see the lower margin.
Okay. Perfect. And just one follow-up question. So asking about mid-term margin expansion from gross margin, was that for the last 6 to 9 months, we have not been [indiscernible] as a list, we have not been able to pass on the higher inflation. So what is the status or what is the confidence that it will be possible in the near term or medium?
Look, what we said, this is our endeavor. And I think confidence and other things will be sort of -- ultimately, we're a pragmatic people. But that will depend upon how the business pans out, how the economy is, how do we see the sort of macro demand pick up and all. But the strategy you asked us what will be -- it will be driven by both which is, definitely we are not looking at just increasing the revenue without -- by sacrificing the margins and vice versa. So our endeavor will be to do both, how much we are successful, it will depend upon various factors which will only pan out as the year unfolds.
Ladies and gentlemen, that would be the last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.
Yes, thank you, everybody. We do hope that the things will only get better from here. And look forward to engaging with you next time. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of AMBIT Capital, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.