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IFB Industries Ltd
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Ladies and gentlemen, good day, and welcome to the IFB Industries Limited Q1 FY '22 Earnings Conference Call hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Mayank Bhandari from Nirmal Bang Equities. Thank you, and over to you, sir.
Thank you, Janice. Nirmal Bang Equities welcomes you all to the Q1 FY '22 results conference call of IFB Industries Limited. The management is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO, Home Appliance Division; Mr. Arup Das, Head of Marketing, Engineering Division; and Mr. Anand Reddy, CEO, Motor Division.I now hand over the call to the management for your opening remarks, post which we can take questions from the participants. Over to you, sir.
Thank you, Mayank. Thank you. Good afternoon to all of you. I welcome you all for IFB Industries investors call for the first quarter FY '22. We have with us Mr. Rajshankar Ray, MD and CEO of Home Appliance Division; Mr. Arup Das, Head of Marketing, Engineering Division; and Mr. Anand Reddy, CEO of Motor Division.I hope all of you and your families are safe and healthy during this trying time. As the pandemic spread, our priority was to ensure health and well-being of our employees, including the need for vaccination and ensure business continuity without disruption of business.During the first quarter ended June '21, the company has reported a total income of INR 556 crores, a growth of 96% over the corresponding quarter of the previous year, which is mainly because last year first quarter was bad because of the lockdown. EBITDA for the quarter was minus INR 30 crores as against minus INR 29 crores in the corresponding quarter of the previous year.Business during the second quarter was impacted due to a second wave of COVID, although revenue improved substantially during the year, but it was below expectation as sales during the period, mid-April to mid-June, was not up to the expectation and low. Revenue during the month was very, very low, month of May. April sales were also low, but sales started picking up from the mid of June. The major portion of AC sales in April and May was washed out due to the pandemic.Due to a complete shutdown last year, certain expenditures were low. The first, during this quarter, the commodity price hike has resulted in material cost increase by INR 14 crores to INR 15 crores. Besides that, in last year, we took graded cut for the employees as well as casual takeout, et cetera, that weren't needed, totaling around INR 14 crores, INR 15 crores.Besides that, since we could not give increment last year, we have given increment this year in line with the competition and others. And also during the first quarter, we have spent some amount of money on selling and admin expenses. As a result, despite the revenue going up substantially, we could not make profit. But going forward, even in the June and July, the sales growth is quite substantial. And we're expecting to get back to the rhythm.With this, I will request you to start the question-and-answer session.
[Operator Instructions] The first question is from the line of Mayank Bhandari from Nirmal Bang.
Sir, I have questions particular to the realization during the quarter. So when I look at the microwave oven business, that registered healthy growth of volumes to 144 per day, but the volume growth that has driven is almost 67%. Sir, how is the realization increasing so much? I mean, how much price hikes have you taken or how much is the product realization changing? That was in particular for microwave oven, but you can highlight for other categories also like how different, how much price hikes you've taken or how much realization has been impacted across the categories?
So this is Rajshankar here. The answer to the part relative to the price increase is that the price increase with respect to last year, which was effected in January of this calendar year would be varying between 4% to, let's say, 6%. In the case of microwave, the increase in value realization that you are seeing is because there has been quite a significant shift to the convection series microwaves, with a reduction in the entry-level microwaves, which is the cheaper solo microwave. So some amount of benefit is coming from that. The impact of the price increase would be roughly between 4% to 6%. If you recall, specifically in the case of the microwaves, we had shared that there were 2 things we're doing there. One is models with better realization based on bigger capacity, et cetera. So that has been continued over the last 1 year. And there has been a mix in terms of the convection microwaves.
Okay. Okay. So overall, you are doing 4% to 6% price increase across the category?
Yes. That's right.
Okay. And regarding particularly in this quarter, we have seen INR 88 crores revenue in Q4 FY '21. And now in 1Q FY '21, it is almost INR 41 crores. And I guess this quarter is impacted by lockdown also. Dishwasher, what is the run rate we could expect going forward? Is it a category where we can get -- we can reach INR 300 crores kind of revenue?
Our assessment is that the immediate potential which we are working on would be roughly about 100,000 dishwashers for the year, which would be about INR 300 crores to INR 350 crores.
Okay. For the full year?
Yes.
Okay. And similarly, expectation in AC business?
Sorry?
Expectation in AC business?
So what we've also shared as a part of the investor report is that our internal target is to reach about 400,000 ACs for this year. But given the fact that there might be a third wave and there may be some disruption in the months ahead, this could also be about 300,000 ACs for the year. But our internal target currently is at 400,000 ACs for the year.
Okay. Still it is 400,000 ACs per year?
Yes. That's right.
Okay. And if I, sir, come to your modular kitchen portion and built-in ovens and chimney and hobs portion. As I can read on the presentation, there is a target of INR 5 crores per month for the modular kitchen. And there is a target of INR 5 crores per month for built-in ovens and chimney and hobs. So basically, we are expecting a category of about INR 120 crores per annum. Is it? So to understand, INR 60 crores per annum overall from modular kitchen?
No. It is, if you add modular kitchen and the kitchen appliances, then both put together, our immediate target is to make these 2 together into INR 120 crores per annum target per year.
INR 120 crores per annum target?
Yes. So the INR 5 crores plus INR 5 crores basically.
Okay, INR 5 crores plus INR 5 crores. Okay. And sir, as highlighted in last quarter that the competition did not take price hike and because of which we have lost market share. So any particular data point you have in terms of around market share, how much we have lost last quarter? In this quarter, how much we have recouped the market share? And maybe next 2 quarters, what is the expectation in terms of increasing the market share?
So the thought, our understanding is that in this quarter, we have recovered share, a substantial portion of whatever we lost in February and March. But we are waiting for some more data points which will come maybe by the first week of September. As we had shared earlier, based on actions that we are taking in sales, we hope to recover whatever shares we lost in quarter 4 of last year by the end of Q2 and by Q3 of this year.
Okay. Okay. By the end of Q3?
Yes.
And sir, if I may ask you, like in the industry, white goods industry, probably in the washing machine category, which brand would be losing share? Any industry insights you can provide on that?
Which brand would be losing share?
Yes. I mean, are there brands which, is there any particular brand which is losing market share or installs particularly? I just want to understand the industry trend.
So if you see fully automatic washing machines, which is front loads and top loads, then it is essentially 4 brands that are the bulk of the market, which is LG, Samsung, Whirlpool and IFB. And there is also a Bosch and Siemens together. So if you look at the share between these 5, they, I mean, if you look at the last, let's say, 1.5 years, 2 years, it's more or less constant. Specific to IFB, we did lose share in the month of February, March and early April as we had shared in the previous call. That got distributed amongst the other players. And our agenda is to get back that loss basically. Does that answer your question?
Yes. I mean, partly, but I mean, basically in terms of industry, what is happening, is there any player losing share or what are you seeing?
There is no impact from any new player if that is what you're wanting to understand.
Yes. New players like Voltas, Beko and all.
No. There is no significant impact from any new entrant.
Okay. And lastly, sir, are there more price hikes expected in this particular month because some of the players are indicating that. And from our channel checks, we can understand that there are more price hikes coming in the white goods category. Is it true that we are taking more price hikes in this quarter or are these before they pressure your results?
No. So there is a price hike that should be expected. So specific to IFB, as we have also shared in the presentation, we have had material cost unrecovered amount in Q1, which needs to be recovered. And different players will have different portions of unrecovered material cost. This is an issue. I think we are just trying to work out when that price hike should become effective. So if the market stabilize, then over the next few months you will see another round of price increases.
Okay. Okay. Okay. And last question, sir, what is the CapEx we should expect particularly in the engineering, motor division going forward?
In motor area, indicated INR 34 crores is the CapEx.
INR 34 crores this year?
Yes.
And from that, what is the asset turnover we should expect?
Anand, please.
This is Anand here. We are expecting a turnover of around INR 120 crores to INR 140 crores out of that INR 34 crores investment.
[Operator Instructions] The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.
So just from a medium-term perspective, if you could talk about EBITDA margins in the home appliances division? And when do we see margins on a normalized -- what kind of normalized levels of margins can we see in this business?
See, normally, we do not give any guidance on our margin. The first quarter was not a normal period, but we expect to come back to the normal margin level from the next, this quarter, #2. And our target is to reach double digit. But depending upon the situation due to COVID because if third wave comes, then it would be different. But as of now, with the current situation, although there are issues on commodity price hikes, like Mr. Ray explained that price hikes that happened, we could not recover from the, pass on to the customer. So other than that, we are hopeful of coming back to the normal margin level from the second, third quarter.
And sir, when you talk about double-digit EBITDA margin, can you just help me understand what will drive this in the sense, which category? Because I understand certain of your investments would have not been fully utilized. So just from a category perspective, where do you see or what kind of revenues are needed to get to that kind of level of double digit margin?
So yes, Rajshankar here. There are 3 actions. And if you look at the quarter 3 performance of appliances, that is the sort of consistent level that we need to target. And there are 3 key actions for that. The first is that we have been affected in quarter 4 and quarter 1 now by a very rapid increase in the commodity prices, which completely we have not been able to pass into the market. So I'm treating this as a sort of a 1 quarter or a 2 quarter problem because ultimately, this will go into the market. But in the immediate term, this material cost increase is a problem on the margin side. So this is the first action.The second action is that the investment that we made for air conditioners, and we went into the market right in the middle of the part of last year, this is March '20. So March '20 and now August '21, and this complete period has been affected by lockdowns, et cetera. We have not been able to get the volumes in line with what we need from the capacity that we've installed. So between August now and March of this fiscal year, this is the second issue that needs to be fixed, which is the volumes in the air conditioner segment. This is the second one.And the third point, which is your specific question on what sort of revenue levels give you the kind of healthy margin that you require. So if you take our last year quarter 3 revenues and you look at our margin profile on the quarter 3, then that sort of revenue and with the first 2 actions completed, we'll see the sustainable margin profile that we see regarding this business.
Got it. No, this is very helpful. Sir, just one more thing. There are certain categories like this modular kitchen, built-in oven, chimney, hobs. I was just asking, today, are they breaking even? Are you breaking even in these categories or what kind of scale is required to make company level margins or the normalized quarter 3 margin?
So the gross margin profile on these categories is very high. In fact, they are among the highest gross margin categories we have. Now they don't really have fixed cost. What is there is in terms of running cost. So we are not losing money, but the key thing about these categories is the potential going forward. So if you look at kitchen appliances and the fact that every kitchen requires a chimney, becoming more conscious about having a chimney in the kitchen. If you look at modular kitchen and the fact that 99% is all cost center, one segment today, these are investments for the future. So we're not losing money. They have high gross margin profiles, and they are good bets for the future. Does that answer your question?
Yes. So can I take it as that, as of now on the EBITDA level, these 2 business segments are not EBITDA negative? Is that a correct understanding?
If you were to apportion basically company overhead on them, then they might be negative. So let's say in quarter 1, if at a company level we are negative, then these segments are also negative. But if you look at them at gross margin level, they are much healthier then like I said.
Got it. Got it. And sir, just...
Have I been able to answer your question?
Yes, yes, yes. No, no, no, I understood, I understood from your comment. Got it. Got it. And lastly, just would you like to consolidate the categories on which you are focused or you would like to add more categories because...
Of course, we don't see any addition of any category in this fiscal year. And the only other category on which the company is currently under evaluation is the air conditioning strategy I have shared earlier. But for the revenue potential that we need to realize, the current categories that we are in are good now.
Got it. And sir, one question on the AC side. You talked about OEM sales also, right? Is this a stopgap arrangement for full utilization of that plant? And would eventually we see within the plant the mix of ACs going more towards IFB as you gain scale in the market?
So our intention is to do both brand and OEM. So OEM is not a short-term play. Yes, definitely, the OEM segment helps the plant overhead absorption. And we have also shared earlier that it will help us to utilize the plant's full capacity faster. Going forward, I would expect that the brand sales will, of course, rise much more than OEM, but OEM will remain a significant portion of our plant production.
Got it.
We are in this for the long haul, it's not a short-term thing.
The point is that eventually, as you know, it is not that AC sales will stagnate. The market is growing. Obviously, last 2 years have had COVID as a result of which the true potential of the industry could not be realized. And I'm assuming in the midterm when COVID is not an issue, wouldn't you want to shift or think about focusing more on your own brand, with your own manufacturing rather than having a balance? Or else then you'll have to set up new capacity, right? So that was the only limiting point which I had in my mind.
Yes. So if we look at the existing capacity we have and the incremental initiatives required to increase it, so that you work on material substitution, import substitution, et cetera, over the next 2, 3-year horizon, meeting capacity is not an issue. Beyond that, we will evaluate the CapEx required for either category and then decide. I mean, from a business relationship point of view, if you're opening up OEM relationships, we don't see these as short term. That's the only limiting point that I see.
Got it. And sir, at what scale do you break even in this plant? At 300,000, would you be breaking even on this plant?
Yes. It will be more than breakeven.
[Operator Instructions] The next question is from the line of Sreekanth D, Individual Investor.
I think one of the key aspects I understand from the business is on the operating leverage. Even if the sales get disturbed a bit, I think we are not able to make a lot of profit. And I think the circumstances for the last 2 years have not been kind to us or the industry as well. So on the same point, are we thinking, okay, we have ACs over the very near term and kitchen categories, modular kitchen and kitchen appliances over the long term. But in the next 1 to 2 years, are we thinking about any new product introduction which will help us leverage our channel so that our operating leverage is better utilized? Any thoughts around that?
So the answer to this would be in 2 parts, what we need to do on the revenue and profitability side. What we have today is good enough in terms of short term and medium term as well. Going forward, in terms of the operating leverage or channel leverage, so there is this category of built-in oven, which would sit very comfortably with the network, et cetera, that we have established. This is something that is still under evaluation within the company. So if you look at, let's say, the next 3 to 4-year horizon, then this will be there. This will be the basket.
Okay. That's helpful.
[Operator Instructions] The next question is from the line of Karan Sharma from Kredent Capital.
I just wondered, what is your EBITDA margin excluding AC and engineering division because despite our product price is higher, but then also our margin is lower as compared to the peer companies. And what is your strategy to gain market share in AC division?
So Mr. Chatterjee, would you like to answer the first part, then I can answer the part B.
The point is the engineering margins are higher than the appliances. Again, it is dependent on revenue, but the engineering, the EBITDA margins are higher than these things. They are always in the double-digit margin. And appliance is dependent on few things, which Mr. Ray will now explain.
So your question was on the market share on the AC side. And our market share on the ACs requires us to complete placements of the product that we have across all the channel that is available to IFB. I'm happy with that. That is still not complete. It has been affected by the shutdowns. That is the job that we have to complete this year. And once the placement is complete, we will get the volumes that we have indicated. In fact, in the counters where we are already placed, our volumes are good basically.
Sir, one more thing. Actually, I just want to understand how much is your EBITDA margin excluding AC and engineering division for other appliances? So curious to understand our actual EBITDA margin as compared to the peer group companies.
So we don't give the segmental margin. But if you could speak to Mr. Chatterjee separately, maybe he'll be able to give it to you. Mr. Chatterjee?
Yes. You can speak to me separately. But normally, we do not give any guidance or any indication on margin product-wise.
[Operator Instructions] The next question is from the line of Pratik Singh from Motilal Oswal.
Could you just give a sense on how the demand or how the sales have been in the month of July and till date August, maybe if not quantitatively, some qualitative aspects on washers and other products?
So the sales in July was good. It was significantly higher than the previous July. And August till now has also been healthy. So we expect the demand to remain healthy. And this is definitely there in the category of washers, microwaves, dishwashers, et cetera. In the case of AC, wherever we have placed AC, there is also healthy uptake.
Okay. So sir...
May I add one thing?
Yes.
In all categories, there are substantial growth actually compared to the July last year, number one. Even if you see last year, we did 2,600. This year, we have done 10,000-plus basically. But the important thing in the case of this year, expectation was much higher. But in all other important categories, the front loading, top loading, dryer, microwave, dishwasher, compared to last year same month, there is substantial growth, both in quantity as well as value terms.
Right, right. Sir, just a follow-up. In terms of ad spend, et cetera, so have we scaled back to our pre-COVID levels or are we still behind?
In this year, we have actually invested for the air conditioner category. So if you look at the ad spend also in this year, they are higher than last year because we took a decision to invest to grow the AC category. So through the April, May, June period and also now, we have specifically put money above the line and also below the line on the AC category.
Right. So we endeavor to continue our ad spend throughout this year just in terms of amount?
Yes. So if you compare it to the last year, then the levels will remain the same. However, this will increase to the extent of the investments that we make to grow the AC category. Yes, everything will remain the same here.
[Operator Instructions] The next question is from the line of Pavan Kumar from Ratna Traya Capital.
Sir, has the AC plant depreciation fully been factored into our Q1 results?
Yes, of course.
Okay. So secondly, on the CapEx side, so we are talking about some INR 34 crores CapEx on the engineering side. Apart from that, are we doing any particular, what is the planned CapEx for FY '22 and FY '23?
There are some routine CapExes there for both engineering and appliances. In the past quarter, we have done around INR 19 crores of addition, fixed cost, fixed assets.
How much, sir?
1-9, INR 19 crores.
Okay. And for the full year, what can that number be?
As of now, the INR 34 crores from the motor division, another INR 15 crores from engineering and retained CapEx of INR 10 crores to INR 15 crores for the AC because for the appliance division, we are evaluating about other tactics. As of now, we have not decided about that.
Okay. Okay. And on the AC side, sir, how are we planning to do 3 lakhs to 4 lakhs since the peak season seems to have already passed? And how far have we come in terms of placement of our AC side products? And also, can you give us an idea of what are the kind of margins you are expecting for doing contract manufacturing with OEM?
So if you look at placements of air conditioners, then as on date, we are placed in around 3,100 counters across India. And our target within this quarter is to take this to 4,000 counters. The availability of the IFB transporter, for example, is 12,000 counters across India and air conditioner placements in the market are much more than that. So as I said, the headroom for growth in AC is beyond 4,000, but that is our immediate target in the next few months in AC.As far as the margin profile is concerned, the OEM margins, of course, are lesser than the brand margins. But as we have shared, the OEM volume helps the overhead allocation in terms of the business. ACs, as a category, overall, we have slightly lesser profitability compared to, let us say, a front-load segment for the company, but it will add a significant amount of gross margin on the same, for similar level of overhead. So the increase behind the revenue is that, at the end of the day, it is the same salesperson going to the same counter. The only incremental addition is the factory expenses. So from that point of view, the revenue is accretive to margins.
Okay. Okay. And have the supply chain issues got resolved and from a raw material perspective, what is the sense of the market as of now?
If you look at commodities in terms of plastics and metals, what happened around December, Jan of the last fiscal year is, there was a significant rise in the commodity pricing and there was also shortage. Now prices have stabilized a little bit, even though, even in July, there have been actually increases, but supplies are stable then.The supply chain for electronics still remains very stressed. So this stress is coming from 2 areas. One is, of course, prices having risen significantly, but there are also shortages on things like chips, et cetera. So our inventory pipelines have increased. All the pipelines have increased. And even though our availability scenario is okay, but it is still very stressed. So I would say commodities are okay as of now in terms of supply, electronics, okay, but still stressed.
Okay. Okay. I got it. And one last question, if I can squeeze in. How much is the amount of further price hikes do you think we require to actually balance further commodity price hike and the component price hike since last January, since this January?
So depending on the category, I think a further price increase of anywhere between 4% to 6% most probably we are going to need. We will have to wait and see what happens in this quarter, but you should expect price increase on that level.
Okay. So 4% to 6% would be further required. All right.
[Operator Instructions] The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.
No. My question was answered.
[Operator Instructions] The next question is from the line of Pavan Kumar from Ratna Traya Capital.
Sir, on the other expenses side this particular quarter, were there any one-offs? Because we are expecting the EBITDA margins to bounce back, is it going to be because the scale of the operations are going to be higher or are we going to try and cut something on the quarter?
I will explain. I will explain. There are 2 things actually. The operating expense, roughly it is 75%, 76% to 80% is variable, okay, for example, freight, franchisee expense, service expense, warranty reserve also. And around 20% is fixed, which over the last year, to a large extent, these operations were closed, understood? As a result, these expenses were lower. But now that we are going back to the normalcy, as a result, the expenses are higher, but the expenses are all controlled. And this is linked to operational.
Okay. So whatever, so on the other expenses side, we should consider it as a regular run rate, right?
Yes. Yes. There is nothing exceptional on this.
Okay. And on the employee costs also, is that...
Employee cost, like I said, that being, last year, April to June, there was a graded cut for all the people actually. And this year, there is no graded cut for any employee, number one. And this year also, the people have been given increment in line with the market decision. As a result, these 2 together will be higher than the last year.
[Operator Instructions] The next question is from the line of Sreekanth, Individual Investor.
Continuing from earlier participants where we are talking about, there are some stress on the electronic components. I could recollect from one of the earlier calls that we were working on localization of control panels. If you could give an update on how that is progressing and when are we likely to proceed with that? That is the question.
So the localization for the controllers for the washers, we had completed last year the switch. So those are completely localized. The air conditioner controller localization is in progress. That means controllers are in field trial from the month of June. We expect to finish the field trial by mid-September. And by October, our usage of localized controllers will start. By, let us say, December or January, we will be on 100% local controllers in the air conditioner. This is the present time frame.
And these localization of these controllers on ASP will be margin accretive, if I'm not wrong?
Yes, yes, yes, margin accretive.
[Operator Instructions] Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Mayank Bhandari for his closing comments. Over to you, sir.
Yes. Thank you. We thank the management for taking time out and sharing their valuable insights on the call. And we also thank all the participants for their presence. Sir, do you have any closing remarks?
Thank you all. Thank you all for joining the first quarter concall.
Thank you very much. On behalf of Nirmal Bang Equities, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.