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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 '24 Earnings Conference Call hosted by Nirmal Bang Equities Private Limited.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Prasheel Gandhi from Nirmal Bang Equities. Thank you and over to you, sir.
Thank you, Lizan, and good evening, everyone. Nirmal Bang Institutional Equities welcome you all to 4Q FY'23 earnings conference call for IFB Industries. On the onset of call, I would like to thank the management for giving us the opportunity to host the call.
The management team here could be presented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO, Home Appliance Division; Mr. Arup Das, Head of Marketing and Engineering Division; and Mr. Anand Reddy, CEO of Motor Division.
And now I hand over the call to management for opening remarks post which we can take questions from the participants. Thank you, and over to you, sir.
Thank you, Prasheel. Good evening, everyone. I welcome you all for IFB Industries investor call for the first quarter FY '24.
Dialing with me today are Mr. Rajshankar Ray, CEO of Home Appliance Division. Mr. Arup Das, Head of Marketing & Engineering Division; and Mr. Anan Reddy, CEO of Motor Division.
Now I'll give you a brief overview of the company's turbulence during the first quarter FY '24. Growth during this quarter is marginally higher than last year but below expectation. Lower organic growth is mainly in Appliance division. However, Engineering division has single-digit growth.
The company has reported a total income of INR 162 crores compared to INR 149 crores during the same quarter last year. During the first quarter, EBITDA was [ INR 30.68 ] crores compared to INR 38.4 crores for the same period last year. Despite improved gross margins, and material [indiscernible] dividend [indiscernible] gross margin improvement is mainly because of the reduction in material cost and better [indiscernible]. However, the increase in gross margin to a large extent was offset by higher operating expenses and [indiscernible]. The increase in operating expenses were mainly in the area of sales promotion expenses, traveling and other expenses.
With this, I will request you to start the question-answer session.
[Operator Instructions] The first question is from the line of Aviral Jain from SG India.
I have three lines of questions basically. One is, and we've been asking this question for the past few quarters. So I just wanted to understand [ basis ] of the current or the realized sales of ACs in the last quarter. What's the gross margin and EBITDA margin differential between AC sales and rest of the Home Appliances division as a whole.
And the second question I have is if you can give the breakup of AC sales by value or by volume between -- or by value between contract third-party brand sales and own brand sales for the quarter?
And the third question, Mr. Chatterjee, would you like to answer this?
Yes, separately.
Okay. So in terms of the gross margin structure on the air conditioner, if you look at the quarter 1, then with respect to the company, it is lower. And we don't specifically give figures in terms of product category figures. But just to give you an idea if the company-level gross margins are ex then the air conditioner gross margin would probably be around 30% to 40% as on date.
Okay. And when you say as a -- company as a whole, this includes the Engineering division as well.
No, no. I'm only talking about Home Appliances. Now in terms of the work that is being done to fix this. The work is essentially led by a material cost reduction program. And if you see in quarter 1, there has been an improvement in the material cost percentage, which you will see in the results. And the second part of this program is going to end in November of this year. So in terms of the gross margin structure and the air conditioner coming closer to the overall company average, we will get close to that in the quarter 4 of this year. So that was the first question you asked.
you also asked about the differential between the gross margin and the EBITDA level. The EBITDA is essentially the overhead distributed across product categories. So I think that is more meaningful for us in terms of the profitability issues getting at this, we've been able to address the gross mountain on air conditioner. So that was your first question.
The second question you asked is breakup by volumes that I think Mr. Chatterjee can give it to you separately in terms of the breakup between the OEM and the brand, et cetera. And you said that there were 3 questions. So what would be third one?
Third, so sir basically, it's been reported -- the PBT loss for the AC division is being reported. Now if you could just help us understand what is the quarterly interest and depreciation attributed only for the AC business, then we can work backwards to some of our numbers. In our view, I think I will just let -- if you can just give us those 2 numbers on a quarterly basis, only attributed to the AC division.
Would you like to answer that?
I will give it to you separately.
Mr. Jain does that answer your questions, please? .
Partially yes, partially no. [indiscernible] we'll get in touch with Mr. Chatterjee. And second thing on the -- there is some sales or some mention about the refrigerator sales. So has the commercial understanding been arrived at with IFB Refrigeration between transfer pricing or phase booking. So what's the commercial arrangement given...
Yes. So that is under discussion. In terms of the OEM arrangement between IFB Refrigeration Limited and IFB Industries Limited. It will be completed within this quarter. So I think in the next investor call, we should be able to give you a very clear picture in terms of the buying relationship.
So -- but from what from what I'm gathering from your words. So IFB Refrigeration would be sort of a OEM manufacturers for IFB Industries, is that now it is being manifest?
Yes. Yes. That is what is under discussion. I think it is best to achieve this subject comprehensively once everything is fully signed and then to formally make a presentation to everybody. So I think we will do that once this quarter is over. Those discussions are ongoing basically.
The next question is from the line of Venkatakesava Vivekkumar Turaga from Bestpals Advisory Llp.
I'm new to the company since we started following recently in the last 1 month. So my doubt is regarding the Home Appliances division, general understating of how management or the promoter thing before entering any [ new thing ] because I see your leaders in front load, you're -- you have a good market share in micro-oven and you're introducing new -- wherever you've gaps, you're introducing and filling it up. So how do you think about getting in the ACs where there are too many players and then also refrigeration. So I'm not saying you should not or you should, but what is the thinking that goes beyond and what are the strengths in DNA of the company that you think that is giving us the confidence to put in CapEx, do some macro -- some kind of macro-integration and represent across channels.
So you keep on writing in your annual report that we are not getting the sales we want from this, but we want to extract more from the channel. So what is the comment in terms of the DNA of the company that is giving you confidence that we can enter refrigeration also, ACs also when there already are so many players.
When I say confidence in terms of making good ROCE in the long run, I'm not talking about 1, 2, 3 years, but I just wanted to understand how IFB thinks in terms of testing and introducing new categories, especially when this market is like Modular Kitchens you are doing. So many people are doing -- going on there. So how to understand and appreciate what you are doing and comparing what you're trying to create in the -- for the future? So if I can make myself clear, I think I make myself clear.
I think Yes, I've understood your question and I'll try and answer this. It's a very interesting question you've asked. Now if you look at it from the management point of view or the board point of view, as far as the appliances sector is concerned, it rests on 3 pillars. One is what you would call as laundry, washing. The second is what you would call as cooking. And the third is what you would call as cooling. So whether India or globally the entire sector actually rests on these 3 verticals.
So laundry is the washing machines, the dryers whether front load or top loads. And cooking is products like micro oves, hobs, hobs [indiscernible]. We would also add a dishwasher either into washing or in cooking, depending upon how you classified it. And cooling is the air conditioning and the refrigerator.
Now I'm glad you asked this point about the long-term angle in this. But if you look at the dominant players in this sector, which is primarily the 2 Korean companies. So they are having all the 3 verticals. So IFB's intent is to also basically be significantly and strongly present in all these 3.
Now you asked about this question of DNA. So under washing we have a DNA. And we have strength there, both in terms of product configuration and on legacy and the brand power. We're also very strong in cooking. We go head-to-head with the two Korean companies in the markets in which we compete. And the cooling segment was one that was essentially very weak. So air conditioners, now we've been manufacturing since 2020, but we ourselves very unhappy with the kind of progress we've made and remains a weak vertical to be fixed. And refrigerator sort of completes the story in terms of the market presence.
Now why the 3 verticals are important is that if you look at the physical attribute, which is the store. And you see the sales person enter that store to extract business from the store. When that store is actually displaying products in washing, displaying products in cooking, and displaying products in cooling. And unless you are able to span all 3 effectively, we need something in terms of the market placement power, okay?
And what we see happening in the short term is that this channel presence that we have written about in previous -- in past since we have expanded over the last 2, 3 years. We still think that we have not got the extraction that we want from this. The channel itself is significantly increase when we ramp up, you see the way we should be doing and with the introduction of the refrigerators. And the placement of those products actually helps the pool of the other products. So for example, if you have a counter which has air conditioner and refrigerators placed, then the next product that goes into that is a top loader or microwave followed then by the [ sale of ] dishwasher or front loader washing machine.
So over the long term, the IFB presence in all the 3 it's something that the management and the board feel is very important in terms of full strength and all these 3 verticals. And for IFB specifically, across these 4 or may be these 3 verticals, we also have a horizontal line, which is our service. So that is another area to be strengthened in the company in terms of the service connect with consumers and the related revenue opportunity that comes from all the 3 verticals, whether it's laundry, whether it is cooking or whether it is cooling.
Have I been able to answer your question, please?
Sir, just -- if I can ask just a follow on. Like let's take the cooling, just for my understanding, I'm not trying to take the weak point just to throw. But just from my deeper understanding, let's say you take AC, and we have entered it. So in the long run, what is giving you the confidence that we will have a reason -- I'm not saying you'll become the leader, but reasonable returns from this and reasonable market share by presenting it because there are many people doing this that [indiscernible] is coming. I agree that you want to be everywhere but there are companies who are specializing in 1 single thing.
My only doubt is what is giving you the confidence in the next 7, 8, 9 years that you have a reasonable market share in ACs or refrigerators. What are the strengths that you have, which is giving you -- if you can -- because I see many people there. There is confusion, I think if you can address.
Yes. So I will tell you the confidence can come from 3 areas. One is we are confident because we've done it, and we are able to tell you that we've done it. I think that is the simplest thing that we can do, which unfortunately, we have not been able to deliver and we've discussed this in previous calls as well. So our confidence going forward currently is coming from another set of 3 points.
One is, do we have a product that is good? And is it better than most? So the answer to that, we believe, yes. And whatever presence we have in the market today and the customer feedback or the channel feedback that we have tells us that yes, we have a good product. So our confidence for the future comes from this first point.
The second point is that do we have the gross margin profile and the material cost profile of the product right. Because if you have a good product, you need the right material cost before you actually reach the market. Now this is an area where we have failed in last year because our material costs were high when we benchmarked it to the market. We've made 50% progress in this quarter, and we are fully confident of achieving the right material cost profile by the end full end of Q3 for full impact in Q4. So the second area of confidence will be material cost profile for the product that we want to make.
And the third comes from being able to get it right in the market, which is in terms of different -- having the people who can run the [indiscernible] company, ensuring that we are able to get extraction from the counter once we've placed this. Third area is the area where we have not been able to deliver what we have ourselves wanted. And we've also now delivered things that we've been discussing during calls like this.
Now this is the area that we have to fix, but these points need to be fixed, not just for AC, but it also needs to be fixed for the other products that I referred. And this is related to people and getting processes right and our entire retention from the senior team today is on getting this third angle fixed.
I hope I've been able to explain to you where our...
Are you targeting any market -- yes, sir, I got it, but are you targeting any market share in each of these products? Or no, you just take care of the products quality and you just represent in the channel and you -- I'm not saying [ are you ] you wish that which will turn into some market share in the long run. So did I understand it right? Or...
No, no, no. We know that for a sustainable play in air conditioners, we need to be 10% plus of the market. And that is the figure that we are working with. So it's not like we just take whatever comes. We need to be at 10% plus to have a meaningful footprint.
So that is where my question was coming on, how are you confident that you will be there -- so because of the competition. So I think you're saying it's costing and distribution and marketing will your...
Yes. And also, since you've asked this so specifically, if you look around India and you look at places where we've got our sales management right, we got our network, addressability and connect site. Actually, today, IFB [indiscernible] market share in excess of 10%. So at all India level today, there is a lot of work we need to do. But in the pockets where our sales team has been right, we've got our processes right. We've actually got this share. And hence, our commitment internally as well that we need to make this product category of success because it is very well in terms of gross margin overhead of resumption and also in helping general network reach to it.
[Operator Instructions] The next question is from the line Madhur Rathi from Counter Cyclical Investments. Please go ahead.
Sorry to interrupt, Mr. Rathi, your audio sound is very low.
Am I audible right now?
Much better.
So I have a few questions. Sir, what is your current capacity utilization? And what kind of revenue can you generate at full capacity utilization in both divisions, the Home Appliances as well as [indiscernible] division. And sir, going forward, what kind of steady state operating margin that you can expect once -- since quarter 3, things start moving in our direction in the refrigeration, as you said. So if you could answer these, I'll ask my other question afterwards.
Mr. Chatterjee, would you like to answer that, please?
Yes. Mr. Chatterjee, would you like to answer that, please?
Mr. Prabir Chatterjee are you able hear with us?
Yes, I can hear you now. Can you repeat the question, please.
Yes, Sir, what is our current capacity utilization in both our divisions. And what will be the revenue that we can expect at full capacity utilization in these divisions? And what will be the steady-state operating margin that we can maintain once -- since Q3 our refrigeration limits getting full -- hitting full. If you could answer these so...
Washing machine capacity utilization is around 85% to 90%. AC capacity utilization is slightly lower now. Engineering division capacity utilization together is around 90%-plus. And regarding the revenue, when we roll out the total capacity utilization, we do not normally give any guidance on revenue on earnings.
Okay, sir. And so we have invested 34% in IFB refrigeration. So what is the rationale for buying only 44%? And are there any plans to take it far more higher.
Sorry to interrupt, the line for Mr. Chatterjee has got disconnected, please stay connected while I reconnect him.
We have the line for Mr. Chatterjee reconnected. Over to you, sir.
Sir, I -- like my question is regarding the rationale for buying only 44% in IFB...
I'm not being able to be hear you, speak a little louder, please?
Am I audible, sir?
Yes.
Yes. Sir, so what is your rationale for buying only 34% in IFB refrigeration. And are there any plans to take it -- take our shareholders further?
Sorry to interrupt, but for Mr. Chatterjee has got disconnected once again. Please stay connected while we connect him.
Should I -- Mr. Chatterjee, are you there?
We have the line for Mr. Chatterjee reconnected. Over to you, sir.
Sir, can I repeat my question once again?
Yes, please.
Sir, just wanted to understand the rationale beyond buying only 44% in IFB Refrigeration. And are there any plans to take this for [indiscernible] further.
Yes, Mr. Chatterjee, are you there?
Sorry, but we have lost Mr. Chatterjee once again.
Okay. So this is Rajshankar here. In terms of the holding structure in IFB Refrigeration Limited. This question that you are seeking, I think it would be right if this is addressed as a part of the overall discussion on the refrigerator business, including the question, which was asked earlier. So if it is okay with you, this is done comprehensively in the next investor call or would that be okay? Because then not just this points the other points could also be discussed.
Yes, sir. That is -- and just my final question, sir. So when I look at the [indiscernible] schemes and discounts for FY '23 versus FY '22, it has gone up materially. So are we giving out more discounts and offerings? Or can you help me understand that? So that would be very helpful.
So there has been no change in the discount structure as far as the market is concerned, the figure that you see at the overall company level is a blended figure that is coming from discount structures on air conditioners, microwaves, washers, all put together. So if the AC sales rise, like they did the last year when the air conditioners were at a higher discount structure. So the company's overall percentage increases. But on a given product category or a particular channel there is no change as far as the discount structure is concerned.
The next question is from the line of Narendra Shah from [ RoboCapital ].
I would like to ask about the margins. Are we doing anything to improve on that front? Or are you happy with the current levels?
If Mr. Chatterjee, please?
Sir, I'm just trying to connect him.
You can just connect him.
Sure sir. We have the line for Mr. Chatterjee reconnected.
Yes, may I repeat my question.
Yes, please, you could just to repeat your question.
Yes. So I was asking about the margins. So are we working on improving our margins? Or are we happy with the current level. If you could [indiscernible].
Not at all. [indiscernible] margins. Areas to improve margins, one is increasing the revenue. Second is we are also taking a number of states in terms of material cost reduction, reduction of other fixed expenses to improve the margin.
So I'm sorry, I'm just interrupting. There was a number in Singapore that will be connected. Could you please connect that once again, please?
Mr. Ray, can you hear me now?
Yes. We can hear you.
Mr. Ray, can you hear me?
Yes, yes, we can hear you. We can hear you.
Okay. I think. This is Bikram Nag. And I have gone through the conference call minutes for the last few quarters. And I am very well aware of the fact that we've not delivered on what we've said, especially in air conditioners. And I had a clear chat with the management, which is Mr. Ray, Mr. Chatterjee and others. And a lot of work is being done to put things right.
However, it's taking a lot of time because state by state when we are going to restructure sales team whenever required, that is really taking much, much longer than I would have liked. There's no excuse for this, but that is what is happening. And I think a significant portion of the sales structure has to be changed, which Mr. Ray is doing. Mr. Ray and Rajan are doing this, it's just taking longer than what we thought it would take us.
I missed a part of the thing, but the questions on you see is absolutely valid. There was no reason to get into those and then having the issues that we've had. Having said that, the product has been received well, which is the most important thing. But if you have a very good product that you can't sell it, then that's an absolute disaster. So this is being put right state by state. And unfortunately, in some of the states, we really had an issue with people understanding distribution requirements. And we are certain before the season starts again, which is normally, in AC think Mr. Ray, the dealer start picking up stock by December, January, right? January I think.
Yes, December.
So that, I think issues will be fixed. More importantly, the material cost, et cetera, which has an impact on pricing will also be fixed. We have this review every Saturday morning. I attend the review. And huge amount of work has been done, and I think the effect of that will be very, very visible.
To a question I heard on refrigerator, et cetera. The last speaker was talking about it. Regarding why did we buy 44% and all of that. And I think the major reason there was strategically IFB industry should not get into it from the point of view of taking debt on its balance sheet. And hence, we derisk that part. And I think the reps have started this accepted well. It was started, I think, 2, 2.5 months back. It was started now, we are doing about -- Mr. Ray, how much [indiscernible] about 1,000, 1,100 a day. About 1,100 a day, and I think it will be ramped up.
Regarding the point on capacity utilization. I think [indiscernible] business by the fourth quarter, I think it should be fully utilized. I think or in [ May have been fully utilized ]. Mr. Ray, if you [indiscernible] so please comment on it.
And regarding with Mr. Chatterjee's point on [indiscernible] , it's not fully accurate from the point of view. We are still working on single shift. So we have a lot more we can do. We have put in the decision to do -- to look at exports, et cetera, including OEM, et cetera, and we'll see how to increase capacity utilization, we'll be ready with [indiscernible]. I've given clear instructions that capacities must be fully utilized. And that is where overall cost will fall and we could then [indiscernible]. And yes, that's all that I have to say. For rest, Mr. Ray carry on please.
The next question is from the line of Vivekkumar from Bestpals Advisory Llp.
This is continuous from my previous question, you want me to take time so I get [indiscernible] Sir, you told that you wanted to be -- there are 2 Korean players, Samsung and LG. I'm not asking to name them, but given the scale and given depth and number of years of experience, I would normally think about when you take on decision because the [indiscernible] also very high and when you get into refrigeration, when you get into AC. So this is the [indiscernible] coming from there and my first question was related to this when you see these 2 players being across the segments and we're also trying to take on this big guys. When I say taken, I'm not saying you will display them, but get market share where they have inherent strength, age-old strength. How do you go ahead and be there and get your share of market in the long run. So if you can -- it is saying if you can -- because the [indiscernible] so high in this each area of your Home appliance [indiscernible].
So I mean, the -- there is no perfect answer to this, but the way we look at it is that we like to do our own thing, which is in terms of our products, which is true to be the product belief that customers have, our positioning and our customer connect and our efforts in the field. So I don't think it is in our mind, so much in IFB versus an LG or Samsung but it is more about IFB and what potential it can realized for itself.
I would assume that if you were to stand the market and with some stores, we would see that there is a distinct customer base for IFD given our reputation for product quality and our presence in India for many years, and we want to leverage that strength. We don't per se in our discussions,, we think so much of growth in terms of taking somebody else's growth to grow ourselves. It's not about realizing what market potential is for the company.
Am I able to answer your question?
Mr. Ray, I think for us, LG, Samsung is actually 2 very, very inspiring stories because you look at these companies, you see what they come out with so fast. You see how they straddled the market. You see their designing, competence, et cetera, et cetera, vis-a-vis the Europeans. And I think you should learn from them. And hence, we put the decision to bring in Koreans into our company and it's very difficult to be competing with them.
But I think they are 2 very, very inspiring stories to learn from. And I think -- and this is what I tell my team day in and day out, you do the best that you can. The problem today is -- the problem today that we are facing is in many markets or segments, we are not doing the best that we can, and that is where we are failing. I don't think we are failing on the product side per se. I think in certain cases, we failed in bringing our products fast enough. And hence, Mr. Ray has reset our entire project management team, et cetera. I think these are things that we need to grapple with.
But I think the market is big enough for everyone to be doing well and for us to be doing well. And I think we started getting market share back in FL, and we have a clear strategy to get back to a significant market share lead over others. And I think you will see that by Q4.
So you're saying that you've market and there are things that you can do to improve [indiscernible] not very like them, but don't hear them from some areas be better than the market is large enough to be have our share of market, right?
I think so, yes.
The next question is from the line of Manoj Gori from Equirus Securities.
Yes. Thank you for the opportunity, and thanks to Bikramjit sharing his views on this call. My question first would be if you look at the Home Appliances. So over the last 3, 4 years, specially these definitely been off track with regards to growth. Historically, when we look at we have consistently delivered 15% kind of CAGR growth in the Home Appliances. But over the last 3, 4 years like we have somehow missed that part. And probably for possible growth we have seen in the last couple of years has been largely because of the Home [indiscernible]. Correct me if I am wrong, probably some contribution would have been from the price hike prospect. So can you throw some light what are the single growth in terms of product [indiscernible] we're well placed, but [indiscernible]
So Manoj, the answer to that is that we should have grown much more than what we have grown, and we've just not done a good enough job as far as extraction is concerned. And growth can come from 2 ways. I mean, it can come from increasing extraction from the same counter, and it can come by just increasing the reach and therefore, getting more growth.
And the reason why over the last 2, 3 years, we've not got the growth that we should get is because we need to do a much better job as far as the market extraction is concerned in terms of reach. And this is a point that Mr. Nag also baking in terms of [indiscernible] the sales approach, ensuring that we have people who understand distribution better. And those are the areas where a lot of work is being done now to ensure that those type of growth percentages come back. So your point is right, and there is no explanation for it other than the fact that we should have done a much better job.
Mr. Ray, can you please explain to them regarding our data, which talks about counters where we have CSRs and counters where we don't have CSRs and how the thing works.
Yes. So Manoj, this you recall in 1 of the earlier investor calls, we have spoken about this many new counters, which the industry caused us in-shop demonstrators and our terminology is counter sales representatives. And our data shows that currently, we have about 30%, 35% odd of counters, which would be typically the large counters, which could be the chain stores or the modern retail formats where we are currently not placed with people. And therefore, we lose sales there.
But where IFB is placed, and we have a person basically representing the product and dealing with the consumers, our share within the counter are significantly higher. So one of the key agendas that we set for ourselves is by end of September or early October, to ensure that each of these little gaps are bridges. And that itself if you do the math is pretty good growth [indiscernible] to be taken.
But they don't have any incremental impact on the employee cost, right?
No, it doesn't because the counter sales representative had a salary cost, yes, but they also operate on a variable earning based on the sales. In terms of a per unit cost, actually, it is not much. So as long as we...
No, but the point is valid. Today if you take a person in a counter and the person doesn't sell the amount he should sell.
Then it's an added cost. We have to get the productivity, Manoj. And then that cost is very good cost for the company. But the sales opportunity is far in excess of the cost basically.
Right, so probably, this is one area of like placing our employees or promoters or the counters would be ending better sales. Can you throw some light in a detailed manner, probably what are the efforts we are taking to improve the gross margin because of late, I would like to appreciate that during AGM and even today, we have emphasized and even in the previous con call, we have emphasized a lot on margin improvement. So we have identified the areas. Can you give to some like what were the measures that we would be taking to improve that?
So there are 2 specific measures, Manoj. And we've committed this internally to the Board, and it is also shared, for example, in a public platform like the AGM. And the 2 specific measures for the gross margin improvement are a, the material cost. And some part of that we have already shown in the quarter 1, but there is a significantly higher percentage, which will be completed by end of quarter 3. We are fully committed to this.
And the third, which is more specific to IFB appliances, for us, is a reduction in the fixed cost base. And we have set a target for that, and that is also being reviewed by Mr. Nag and the Board and that is something that we have to complete by Q3. So the impact of both will begin to show from Q3 and a full realization in Q4. And that will fix this gross margin percentage that you're talking about.
So probably now, from a trend point of view, from fourth quarter onwards on sequential basis primarily at least on -- in the directional manner, we should see improvement in margin gradually from fourth quarter onwards.
Yes, we are committed to that Manoj. We are commented to that. And that, for us, I think, is 80% of our priority now.
Sir, lastly, on the capacity utilization. So I just -- if I'm wrong, Bikramjit sir just shared that we are operating at 80%, 85% for our washing machines. Is that correct?
It's -- Manoj, it's actually lower because what Mr. Nag just punched out, the plants are running at a single shift on the assembly line with some of the back-end running in 2 shifts. So if we are able to generate the sales throughput, then the plants can actually produce much more. So it may not be 85%, maybe we can increase capacity from whatever we are delivering now by as much as 50%, 60% more.
So capacity is something that is very quickly upgradeable, Manoj. And it doesn't call for much CapEx per se. It's just supplier capacity getting up [ today]. So if I look at washers, overall, which is top load and front load put together, then if you get the sales 50%, the plants could go up by 50%, 60% from wherever we are today.
Right. And so on the refrigerator parts, you just mentioned like we are doing daily 1,000 to 1,500 units. So if I do account like proper math, probably we are somewhere around...
No, Manojji, we are not doing that. That's being done by -- Manojji, that's being done by IFB Refrigeration Limited, not by us.
Okay, got it. Got it.
That has to be corrected. Some amount will sell through IFB Industries. And so that is still being worked out.
The next question is from the line of Sumil Sethi from SG India.
I just wanted to check a few things. So in the investor presentation, you have given sales split by product category. So is this like based on gross sales or net sales net of promotional discounts?
Mr. Chatterjee, would you like to answer that, please?
Sethi sab, you are talking about the pie graph?
Yes, the pie chart that is given for the home appliance.
That's on the gross sales.
That's on the gross sales. Okay. Yes. So just a follow-up question here. You earlier mentioned that you have to -- you are giving the higher promotional discounts as you compared to your other Home Appliances. So is this bound to converge towards the home appliance number, any time in the future as your price realization improved or in general, the industry -- in the industry ACs at a higher -- operate at a higher discount as compared to other Home Appliances.
So if you typically see the structure in the market, ACs do operate at higher discount percentages. But ultimately, I think what really matters is irrespective of what that percentage is, are we being able to generate a healthy gross margin? So I would look at it more like that.
Okay and sir, you mentioned that currently, you are making a 13%, 14% lower gross margin on ACs as compared to your Home Appliances and a large part of that recovery will be done through material cost reduction program, which will be done through the end of this year. So I just wanted to understand would improvement in 5 years realization going forward will also be a big portion? Or do you think that the ACs are priced well in the market as of now?
So whatever internal targets we are setting for ourselves are minus any increase in price realization. For a specific answer to what you've asked, given the sort of dynamics in the AC market over the last 6, 7 months, the scope for any price realization improvement as of now looks quite [indiscernible]. We don't anticipate any increases from price realization as of now. Whatever we are doing is purely led either by material cost or by delivering the sales that we should be delivering in any case.
Does that answer your question, please?
Yes, yes, that answers my question. Just 1 other small question. So can you give me the capacity utilization for the AC plant as of this quarter.
So the AC plant capacity is 500,000 per annum on the assembly line running at single shift basis. And the rest of the plant, which would be, let's say, the [ feeder ] lines making the coils, evaporators, et cetera, all of them running it on 3-shift basis. And [indiscernible] translated, that comes to roughly about 40,000 per month. That is the full capacity.
And any data points on what is the capacity utilization for this quarter?
So for this quarter, it is much lesser. It is not better and Mr. Chatterjee can give you the figure separately. But we are working on is how to get 100% capacity utilization by, let's say, mid-third quarter or latest 100% by fourth quarter.
Okay. And sir, just wanted to understand what is the strategy around contract manufacturing. So is this something that you will continue to do for the longer term? And I just wanted to understand, are you supplying to the brand, which will be perceived as our competitor or you are supplying a completely different range of ACs for the [indiscernible].
So yes -- so that's a good question. And what we have explained in some of the earlier calls, the way we look at it is that the OEM supplies that we are doing help plant capacity utilization. So let's say we were to do 500,000 per annum in the short term, and we have 300-odd branches and 200,000 volume, it has the plant to cover overheads. It also helps purchasing power because volumes are ramping up. That was the intent with which we began the OEM supplies.
Going forward, we still see that the selective volume supplies will contribute. The product that is being supplied is essentially similar, but there are differences in terms of features, statics based on whatever the OEM suppliers want. So the DNA is the same, but it will be minus features, some performance areas, et cetera. That's a customer requirement that we focus.
So you think this the same platform basically...
Yes, the platform is the same. The platform is the same, yes.
Mr. Ray, one thing, I think what is trying to get at is this, what is our strategy for OEM, et cetera. And I think the strategy must be much more robust for us to get a much higher share of the OEM business. And I think we have discussed that point whether in India or outside, I think now that you've got a person fully dealing with this, I think you'll get positive results in the coming months.
But I think you have to set a target for OEM and then really chase that and to make definitely margin in that, just like we make in Engineering business. We are in the OEM business in a different way, I mean, we supply to OEMs in Engineering division, and I don't think this is different.
The next question is from the line of Madhur Rathi from Counter Cyclical Investments.
Sir, this [indiscernible] margins in a steady state operating environment? And when can we achieve to a double-digit kind of margins?
Mr. Chatterjee, would you like to answer that, please?
Sorry, I couldn't say hear it properly, there is some issue.
Yes. What will be our operating margins in a steady state going forward? And when can you achieve a double-digit operating...
I can't hear you voice.
See, what he is asking is when are you going to have steady double-digit margin, et cetera, going like forward?
Yes. So Rajji, fix up the revenue, which we involve products including ACs, capacity utilization is a bit better and the states regarding the material cost reduction and other fixed cost reduction states that we are taking, when these are all implemented, we'll be in a better position and the margins would be better.
Okay. So no like exactly your time line or the [indiscernible]?
No, I don't think we would like to give a guidance. But I'm being very emphatic on this. I'm being very enacted on this. We, as the principal shareholders are, of course, not happy about the fact that margins have been low or the fact that we have not achieved numbers. We are the most affected by this.
So all the discussion within the company day in, day out is to ensure we have a robust team in place which can deliver on what we've discussed. Point number one, state by state. I'd like emphasizing this point on state-by-state because that's very, very important. And it is our intent that in appliance division, we hit over double-digit margin. That's what we would like. This is not a guidance statement, but that's what we would like. And of course, for Engineering division, which is now operating at decent like margins, we need far more growth and a much higher margin also.
I would like or I would like to think at least that by end of Q3 or thereabout November, December, I think we should be in a much better place. But double digit, I think, to be steady. That's your question. I think from Q4 onwards should we, Mr. Ray and Mr. Chatterjee's drive. That's what we would also like as principal shareholders.
And sir, just a follow-up question. With the inclusion in the...
Sorry to interrupt Mr. Rathi, can you speak a bit louder? We are not able to hear you.
Yes. Sir, with the increasing EV penetration on our Engineering business. So the [indiscernible] division, you kind of just highlight what are our plans going ahead? And are you looking for some kind of acquisition instead of shifting up our own capacity in this segment?
No, Mr. Rathi. I think the existing capacities that we have and cater to sizable EV business, whatever little CapEx we need to do, we can do internally. I think we've got orders of nearly INR 50 crores, INR 60 crores for EV business. This will significantly improve because marketing has been directed to get more EV neutral business -- sorry, EV business. IC and the neutral business, sorry. And I think a significant amount of work has been done. We have started supplying to -- we have started supplying via Midea to people like Tesla, et cetera. And I think a lot more work on this will be done.
As far as acquisitions go in the auto component space, we are on the lookout. At this point itself, we are talking to some like companies. And these are all IC and the neutral businesses. And I feel that for engineering Business to grow our strategic decision has been we cannot grow by being CapEx led because it takes a long, long time. We have to be acquisition-led, but we need CapEx in the existing plants, whatever little that we need. And therefore, we need sizable -- we need to purchase a sizable business.
Now what that word sizable can mean, that is still being discussed within the company. And how we will finance it, et cetera, the Engineering division, which is fine blanking and stamping together has debt of only around INR 30-odd crores, INR 30 crores or INR 32 crores, which -- and we have inefficient inventory and debtors of around INR 30 crores. So we can pay it off tomorrow, and we can easily leverage. And I think by 2, 3 -- maybe by October, November, I think we'll stabilize at about 16%, 17% margin. And therefore, for us to finance and takeover should not be an issue.
That was very helpful. And just a final question, is sir. Sir, is the IFB brand held...
Sorry to interrupt. Mr. Rathi, Can you speak a bit louder or you audio is not...
Yes. Yes. Am I audible right now?
Yes. Yes, you're.
Yes. Sir, in the IFB brand held in the mean of our company or the promoters, that will be the final question.
No, no, no. Promoters don't own anything. Promoters -- we have nothing, we only have shares in the company held through other companies, which is disclosed to SEBI. It's very clearly disclosed to SEBI just like everybody else has had. Promoter does not own the IFB brand at all in his personal name. No, not at all.
The next question is from the line of from Keshav Garg from Counter Cyclical PMS.
Sir, I wanted to get to what [ you've ] said, what you think that [indiscernible] feels that instead of focusing either on the marketing side or on the manufacturing side, we are trying to do too much and the management bandwidth will be distributed in lots of small, small divisions and hence, we are not able to ramp up our business.
Yes. I mean if this question is for me, which like division is small because if you look at it, for example, Engineering division, with fine blanking and stamping is sizable now. And I think we will soon make it much, much, much more bigger. It's a very good cash generating business. And it does not take takeaway bandwidth for me per se because and the Engineering division has its own full-time management in place. Appliances division has its own full-time management in place.
So per se, I don't think management has an issue in terms of time. As far as my thing goes, I take decisions for capital allocation, et cetera, et cetera. In the case of AC as on this, it has not gone off then. And I am very concerned about it, and we spend a lot of time on it. But I think these things happen, and we will put it right, you need to put tighter. But the management of Appliances doesn't spend a single second in Engineering as well as [indiscernible]. So I don't think there is an issue on that.
So my question was not that I'm saying our Engineering is doing just fine. The problem is in the consumer appliances business in which we are getting into involve everything instead of focusing on the major segments. And sir, now for example, we have got into Motor, so for Motor, we are using it now. Now for automotive motor also, we are trying to make. Sir, [ so be ] at specialists, which are only doing automotive motor. And so we will complete the [indiscernible] part time, basically.
So I think the appliance motor division and the automotive motor division, both have been there for 15, 20 years. Nothing new with that. The only thing we've done in the appliance motor is we've gone into BLDC motors, which is required by the washing machine division and air conditioning motor, which is required by the air conditioning division. Nothing else we've done. Air conditioning motor is the only new thing that we've done. Otherwise, everything has been there.
And if you see the advent of [ using ] it that clearly tells us that motor is the most important thing here. And strategically, we think motor is an area that we must be in. And -- I mean I don't see an issue with that per se, but I've understood the question.
So another thing is that the contract manufacturing company Dixon, sir, our revenues were more than this completely FY '16 and now their revenues are 2x our revenues. And soon, they will do in one quarter what we do annually. Now to be a [indiscernible] manufacturer to now they can -- they market cap is like 9x our market cap. We can buy you [indiscernible] equity can raise that capital as our market cap and such huge plants [indiscernible] sales. Sir, so -- [indiscernible] we as sitting with other small plants and trying to market our own products. And sir, even the OEM, even a chance between IFB and Dixon, they would surely try to hire from Dixon rather than trying to hire IFB company also. And down the line, 1 [indiscernible] sales pick up then the question will arrive that will you first cater to your all AC sales? Or will you cater to the third party?
I think if you look at any Chinese company, including Midea, et cetera, brand and OEM have gone handy. And I don't think any of the Chinese companies have ever failed the OEM customer and neither have they failed the market. So we've seen that. For example, we buy microwaves from 1 company Galanz . So now that we started buying [indiscernible] from like Midea. Galanz is very strong in brand in China. But they also do a sizable OEM business. If you see Beko, for example, that Tatas have tied -- Voltas has that had tie-up with Voltas Beko, they have grown through OEM. However, our OEM strategy needs to reset and we really need to look at the volume side of OEM business. And we are doing this, and we will reset this and make it extremely viable.
Sure. So sir, I think the example that you're given. Firstly, we scaled up their contract manufacturing business and then they tied up their own business whereas we are trying to do the reverse. So, also best of luck for you.
Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.
Mr. Ray, at this point on the contract manufacturing change. We'll discuss it tomorrow, but I think this is a point and we really need to step on this and have a proper strategy for it for AC as well as for others. I mean, refrigerator, you already got an order of 100,000, but AC and all we really need to fix this.
Mr. Chatterjee, would you like to summarize that?
Thank you all for joining us. Thank you all.
Thank you, is the management team. Ladies and gentlemen, on behalf of Nirmal Bang Equities, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.