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IFB Industries Ltd
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Ladies and gentlemen, good day, and welcome to the IFB Industries Limited Q2 FY '20 Earnings Conference Call hosted by Nirmal Bang Equities Private Limited. [Operators Instructions] Please note, this conference is being recorded.I now hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Equities. Thank you, and over to you, sir.
Thank you, Vikram. On behalf of Nirmal Bang Equities, we welcome you all to the Q2 FY '20 Results Conference call of IFB Industries. The management is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, CEO, Home Appliance Division; and Mr. Arup Das, Head Marketing, Engineering Division. I now hand over the call to the management for their opening remarks, post which we can take questions. Over to you, sir.
Thank you, Chirag. Good afternoon, ladies and gentlemen, and welcome to the second quarter FY call conference. With me, we have Mr. Rajshankar Ray, CEO of HA Division; and Mr. Arup Das, Sales Marketing Division, Engineering.The company during the quarter has recorded a total income of INR 694.96 crores, a growth of 5.5% over the corresponding quarter of the previous year. The EBITDA margin stood at 7.5% during the second quarter compared to 6.7% for the same quarter previous year. For the year, company has reported a total income of INR 1,371.74 crores, a growth of around 9.5% for the same period of the previous year. The EBITDA margin stood at 6.1% for the YTD period in September. And again, 6.3% during the corresponding year. During the -- this second quarter and the year as a whole, the engineering growth was subdued because of the sentiment, and the market get any auto -- is not doing -- auto industry is not doing well for a number of reasons, such as lower demand, the high equity cost at GST and those issues. And we [indiscernible] HED has done better than the last 2, 3 quarters. So with that, I would request you to start the con call -- the question-and-answer session.
[Operators Instructions] We have a first question from the line of Aditya Bhartia from Investec.
So my first question is on revenue growth in the washing machine business, which appears to have slowed down in the last couple of quarters. What is contributing to the same? And have we shared a plan of entering into 6.2 kg washing machines?
This is Rajshankar here. With specific to the previous quarter, what we have done, which we have shared in the last investor call, was that we have completely redone the front loader range in terms of new models. And what we did in the last quarter was that we had to ensure that the stocks in the market are [indiscernible]. They're all moved out so that the new models could enter smoothly. So the revenue growth that you've seen with previous quarter is because we have consciously cut down on the stocks to allow the new models to some -- the actual change to customer percentage is much higher than the revenue growth that you are seeing. That is the answer to the first question. As far as the 6.2-kg related question is concerned. Yes. What we have currently decided is that we will be focusing on the profitability-related issues [indiscernible] solely then we will think about the future.
Sure. And in terms of your response to the first question, hasn't there been a case that new models stocking would have also commence and that should have ideally compensated for any loss [indiscernible]
No. [ Don't ] enhance. So what absolutely what we are introducing are multiple models together. What we want to ensure is that the movement of material from the company to the dealer end is at lowest possible so that the dealers and stocks are such that they don't carry old models. So we have consciously big stopped and the [ dealering ]. So that all the old model moved out and the new models can coming through this. And there's no mix up in the market as far as the customers are concerned.
And is the whole pace now complete? And from the next quarter or a couple of quarters, should we start seeing the benefit of restocking panning out?
No. We've already finished that exercise. So the ramp-up of the new models have already begun, and it will show its effect in this quarter itself.
And we should also be seeing the benefit of restocking happening. So there will be secondary sales growth, and we should end up recording even stronger growth because inventory would get replenished at the dealer end. Is my understanding correct?
Yes. You will see elements of that as well, yes.
Understood. Understood. My second question is on margin versus revenue growth core income. Now in this particular quarter, we have seen margins in the home appliances business improving, but to a certain extent has some at the cost of revenue growth. Has that been a case that we have not passed on the benefit of lower commodity costs and consequently have seen some market share loss?
No. So actually, the 2 things are not limited because the revenue growth is what I explained to you on your first question, that what you are seeing has a [ lessor ] washer growth than the normal growth is simply because we have [indiscernible] a complete singular [indiscernible] in those models presentation to consumers. As far as the improvement in the margin structure is concerned, we had shared earlier that the new models, et cetera, that we are introducing in the market are at a much better margin profile for the company. So the improvement that you are seeing is because these models have now begun to enter the market.
Understood. And these models are purely on the washing machine side issue or microwave and Ramsons setting it for now.
Yes. So what we have done is that for front loads, so we have completely changed the range in the new models. For top loaders, we have made minor adjustments, but not as much as the front loads. And in microwaves, we have redone pricing as well as the models booked. So for microwave, this is an exercise that began about 2 quarters back. And this is now complete. And for front load, this is complete. For top load also, it is complete. This quarter is about the ramp-up of the new models.
Understood. Sure. Sure, sure. And lastly, if you could share some insights on how you are seeing the demand scenario and competitive intensity playing out? That would be hugely helpful.
So to ask a competitive intensity is as it was before. There is no significant change. It remains as competitive as it was. As far as demand is concerned, we are quite okay with the demand that we are seeing. We don't see any sort of -- any impact because of the demand. Demand is projected.
[Operators Instructions] We have a next question from the line of Chirag Setalvad from HDFC.
Could you help us understand what kind of profitability we can expect in the whole clients business for the full year? So when you look at the EBIT level, so in the last couple of years, there's been a lot of variations, some are lower [ 2% ] to a higher close to 5%, 6% -- or close to 5%. And this quarter, we've seen improvement in, as you mentioned, for a variety of reasons with home appliances. But what we wanted to understand is for the full year. So you started with the first quarter [ dropped ] 2.5%. In the second quarter, it has been [ 6% ]. This is at EBIT level. What do you think is a sustainable level for this year and going forward, both in home appliances and in engineering from an EBIT margin perspective.
So I'll answer the appliances part and then Mr. Chatterjee and Mr. Das can answer the engineering parts. As far as appliances is concerned, what we have previously shared is that if you look at the profitability issues that we've had -- and we can specifically talk about quarter 4 of the last fiscal year and quarter 1 of this fiscal year. In both of these quarters, we were very heavily impacted by the changes in the inter-duty structures. On 2 categories of import that affected us quite significantly. One was microwave and the other was front loads. The action plan that we had shared was that we will be working on increasing profitability on our washer segment more so that it compensates for the problems that we are having on the index. That exercise will be in about 2 quarters back and that is now being completed, like we just shared a few minutes back. As far as imports impact is concerned, on the microwave, we have fixed issues by repricing and new modeling in the range. That work is over. What remains is the impact that we carry on the air conditioning segment, which today is a stress on the P&L. But with the [indiscernible] own air conditioner manufacturing starting end of January, this factor will also get addressed. So as far as the trend is concerned, whatever your -- improvement you're seeing will continue. But we don't make a strategic forecast about -- probably Mr. Chatterjee and I have shared a year as well. We've got the double-digit EBITDA only something that we are definitely committed to. So the action on the washer is over, microwave is over. And the conditioner action will be over end of January. These are the 3 things that we have to welcome.
So how far are you from achieving this double-digit EBITDA in appliances?
Yes. So we wouldn't want to make a specific forecast on this, but with the air conditioner fixed, I think the work is done.
Sure. And as far as [indiscernible] engineering goes?
Mr. Chatterjee, would you like to take the question or are you...
You answer, Ray.
I think a year ago, our [indiscernible] margins a bit over the previous years, which is -- mainly contributing factor was top line because there is no [indiscernible] top line due to -- in overall automated industry. Now on the volumes [indiscernible] in the stocks, which were line [indiscernible]. So over the last 1 month, we didn't have [indiscernible]. So stock price continually liquidate. Now then comes the [indiscernible] implementation. Now with the advent of GST, we are all ready with the products but as we have fixed for all the OEMs in India. So going by the forecast and understanding, we should be doing better than what we did in coming [ 6 years]. So with the top line increasing, I think that the bottom line should also increase. In that fashion, the deals we do in the past. Because the engineering margins were on [ higher price ] in previous years.
Okay. So -- and lastly, could you tell us what your CapEx plans for this year are?
CapEx plan this year is, for example, we have around INR 150 crores [indiscernible]. With engineering, we have put another INR 40 crores to INR 50 crores. And these online deals, [indiscernible] appliances to be another INR 50 crores.
Sorry. Sir, that's INR 50 crores in appliances -- sorry, INR 50 crores in engineering, INR 50 crores for normal CapEx and INR 150 crores in appliances. Is it?
I'm sure that for the motor division, that motor that we are producing with [ 15 ] to a new motors there should be another INR 48 crores invested.
No. I didn't follow. So what is this, if you could repeat it, the full CapEx for the year would be how much?
Around INR 250 crores -- around INR 300 crores.
Okay. And can you break -- give me the breakup again?
There are INR 48 crores for the AC plant.
INR 150 crores for the AC plant.
Yes. INR 55 crores to INR 60 crores for the normal one. INR [ 15 ] crores in CapEx.
Sure. [ INR 15 crores]. Normal is INR 200 crores. Yes.
INR [ 50 ] crores for the engineering division.
INR 50 crores for [indiscernible] banking, yes. But...
And for [indiscernible] division, it's INR 48 crores.
So what is the [indiscernible] you have under [indiscernible]?
Actually, I was just explaining what's [indiscernible].
Yes. So there is a transition that will happen from the present category of motors that we are using to a new range of motors, which is called a brushless DC motors. So the motor division is investing for a complete localization of the motor, both for top loaders and for washers and for the air conditioners for it to be produced by IFB. It service the IFB capacity and also the India capacity at large because in motors in India currently are completely imported. There is particularly no good quality motor supply base within India. So the investment is towards that.
Sir, INR 50 crores can you give a revenue of how much?
I don't have an immediate answer right now. Is it possible for you to tell you this offline?
Sure. And what is the in-house consumption of motors and value?
The in-house consumption -- currently, if you look at the motor, for example, in top loader, the import content is about 15%, and that will get completely localized. In front loads, currently, the import content would be -- of the total motors that are used, about 20-odd percent is imported. That will get localized. And in the air conditioners, today, 100% of the motors to be used are imported, not only for IFB, but almost for the entire industry. This investment will give India option to be number one with it.
[Operators Instructions] We have a next question from the line of Sonali Salgaonkar from Jefferies and Jefferies.
So my first question is could you help us with an approximate market share in each of the segments that you are in the plant?
So in front loads, our internal estimate is about 40% because the external databases, stone covers, large parts of the [indiscernible], which is our internal estimate, 40%. In top loaders, we have between 8% to 9%. In microwaves, we are between 22% to 24%. In air conditioners, we are still very, very small. So less than 1%. In the industrial product ranges that we have. So we have value share. Now I'm not talking about the volume there, but we have a value share of between 35% to 40%. The last category of exhausts, chimneys, built-in products, et cetera, which we call it kitchen appliances, our share will be roughly between 5% to 7%.
Sir, all of these are value shares, right?
On the front loads and top loads and microwaves, I gave you volume shares. On kitchen appliances and AC, I gave you volume share. Value share is only in the category of industrial.
Good. So my second question is could you help us -- give an update on the distribution of your sales online as how much, how much is offline? And also your exclusive distribution touch points.
So online for us is roughly 14% to 15% of sales. Our own stores, which we call it IFB Points, is also 15% of sales. And the remaining is spread between direct and indirect network, and also an element of direct sales that we have to consume in areas like [indiscernible], office, [indiscernible], et cetera.
Then how much will be our distribution touch points in terms of PAN India dealers and retailers?
Currently, our distribution that is direct and indirect retailers all put together is about 11,500 to 12,000 touch points across India.
Got it. Sure. Sir, in terms of the demand situation right now, especially, how do you see the demand in the festive season? That's the period in Navratri, and secondly the period from the Dussehra to Diwali.
We have seen good demand. We have seen good demand in October. So there is no problem as far as demand is concerned.
[Operators Instructions] We have next question from the line of Rabindra Nayak from Sunidhi Securities.
Sir, regarding the AC plant, what is the capacity of the planning in terms of [indiscernible] of AC?
AC plant's initial start capacity is 450,000 per annum. And with small planning-related changes and upgrade, this can go up to 600,000 per annum without any CapEx. So we restarted 450,000, and we can ramp it up to 600,000.
Okay. And how much margin expansion can we see for day-to-day, the expansion of our markets are there that we have in winter season, in the ACs?
So on the second question that you asked. Currently, we have very insignificant share as far as the AC market is confirmed. And once we have the plant to a run a complete range and the kind of positioning that IFB wants, we expect to have significant shares in the AC market in the first, let's say, 2 to 3 years of operation. As far as the margin expansion is concerned, there will be significant margin expansion because we've shared that the approved abstract [indiscernible], and that problem will stop once the import stops.
And whether we are planning to launch air purifiers recently [ intended ] for in our short-term portfolio?
We are evaluating it. There is no decision yet, but the evaluation is going
Okay. Okay. And regarding, sir, Trishan Metals, what is the industrial exposure for this company, and that is continuing steady point and when -- what is the total capital expenditure we are planning for these 2 subsidiaries that we have? And the second thing is that is there going to be impacting due to India working out or pulling out of itself probably are free to deal recently. Your comment on these two things, sir.
[indiscernible] quality answers. Yes. As far as the Trishan Metals is concerned, the very inception of it was strengthening our downstream. That pioneering issues good supply of [indiscernible] from other sources, both in terms of quality and delivery on time. So that was the first part of why Trishan was [indiscernible] to change. And would be a cost advantage on account of in-house manufacturing compared to competition. So both these key factors was the basic idea for bringing in Trishan, a raw material source for the front line and other requirements.
Okay. Sir, we are planning some capital expenditure to improve the profit performance of the company, what is the plan of CapEx for these two plants -- the two subsidiaries.
It's under the broad approval, the CapEx is continue to improve once the basic reason of having this CapEx is increase the efficiency and decrease the expenses. So thereby, we will improve the margins. So that is under consideration of the board. So once board approved it, we will do it.
Okay. Perfect. So will you [ take ] 100% subsidiaries in Trishan in near future? Or we are not considering it?
[indiscernible] Yes. We have 51% as of now.
We have 51%.
So will we make it 100% or not?
No decided yet.
We have to announce.
That's [indiscernible] as of now.
Okay. And sir, regarding this part will be what is your comment on the outlook for the company? Is there a little bit impacted or the benefit there to [indiscernible]
See, the answer would be -- we've targeted that within a one to will move extremely without any impact on duty. If you look at IFB, then by the end of January, [indiscernible] microwaves, the rest of the large part of the revenue will be localized into India. In terms of the major components to production, which is electronics, for example, we have already localized everything into India. If you look at the air conditioners segment and major imports, like compressors, for example, there are already projects running from localization into India which will be active and completed by, let's say, April of next year.So once, as a company, the RCEP, even though we are watching it very closely. It does not have any significant impact on the company per se. What we -- what the RCEP will do, for example, is that it could be that washing machines, which are coming in from China into India have a particular duty structure currently -- when the duty is reduced, then those washing machines, effecting the pricing, et cetera, can be reduced by the companies out of China. But those things are not entirely relevant because those products are already being subsidized in the India market as a launch strategy or market share strategy, whatever maybe the logic of the company. So if you ask me personally, I don't think the RCEP as far as IFB is concerned, really has any significant impact either way. But we are watching it. We are watching in that case.
We have a next question from the line of Rahul Agrawal from WestBridge Capital.
And this question to Mr. Rajshankar Ray. I think you were earlier alluding to the fact that there is going to be a difference between primary sales and secondary sales because of the new model transition that you have done and you start at the dealer level. So what I wanted to get a sense of was that how was your secondary sales, which is your distributor to retailer sale, how did that compare versus your primary sale? How much was the gap in that for Q2 and for H1, overall?
So in Q2 per se, the secondary sales have been in the high double digits. The only reason I brought up the point is because the question was based on the revenue growth and specifically in Q2 for issues around profitability and the new range introduction. We had to ensure that the market was totally cleaned up. So the comment was only in that context. Actual deliveries to customers have been quite healthy.
Understand. What I meant by, call it, the reason why I asked that question was that should we see a bump up in Q3 because of secondary was robust in Q2, but the destocking would have happened and so phaseout pulled down in Q2 and that will come back up in Q3. Would that be a fair way to look at it?
Yes. We expect healthy volume growth in Q3 in line with what IFB has normally been doing.
Understand. Understand. Q2, the reported revenue growth for our plant division is about 8%. But you're saying that the secondary sales are high double digit. So the gap, the delta there is a destocking?
Yes. That's right.
And the margin expansion. So in Q2, you alluded to again a number of factors, one of which was new models in washing machines. And you said that only the air conditioner sort of part is left. So ex the air conditioner losses that you may have had, where would the EBITDA margin be today for the appliances division?
Yes. Mr. Chatterjee, will you explain?
Yes. For example, that we used to say as our margins and more manufacturing segments, okay? Where we are doing a growth state to increase that. But the -- because of the increasing the duties on microwaves especially an issue along with [indiscernible] last year. The impact to a larger import of [indiscernible] down. Now if you see in the second quarter, saying, the [indiscernible] also lower than the first part of the quarter. And you see now we are going into the complete manufacturing. So that the hit that we are getting come into positive one. But otherwise, internally, with these number tend to see that margins will increase. As a result, you will see the expenditures are more or less contained. And we're in the right track to make a better margin.
Understand. And one last question in that, Q2 and Q3 seasonally has generally stronger quarters for the company. So obviously, quarters of sales is sort of over indexed, you have more [indiscernible]. So are the higher margins in Q2, and possibly maybe just [indiscernible] Q3 as well, is a reflection of that? Or has there been structurally the gross margin part, which you were alluding to, because of the new models are done, has that played out and that has been the bigger contributor?
So the bigger impact has come from the structural change in the margin structure. And that is a result of the new model introduction and also the [indiscernible] of the price positioning that we have done in microwaves. So we're [indiscernible] above that. Of course, in Q3, there will be an overall volume benefit, but the larger part of the improvement because of the structural income.
Got it. It's not just because of the fact that Q2 and Q3 are usually seasonally better quarters, and that is addressing operating leverage. I think there has been gross margin improvement as you track it.
Yes. Correct.
[indiscernible] of course, there will be some seasonal impact to [ begin ], which is not fair because, for example, normally during Diwali, [indiscernible] there are some increasing [indiscernible].
Which will be Q3, which will be what we've seen in Q3.
Which are in Q3, in October.
So I think Q2 start to [indiscernible] for this year because now you don't think Q2 is over-indexed per se. So the margin that we are thinking Q2 of 7.7% EBITDA. That is more due to the structural changes. And obviously, if also in that respect.
Yes. Correct.
That [indiscernible] is sustainable.
Correct.
And one last question was around, I know in the last couple of conference calls, you have been saying that a lot of the efforts of the organization has been towards [indiscernible]. Selecting from the existing distribution channel to increase the number of monthly active dealers. Any update on that?
So if you remember, the big issue that we had is that it depends network of 11,500-odd retailers that we have. In terms of numbers of dealers we're seeing on a month-to-month basis, when we started the discussions around this, which we also shared in the investor call, that we are hovering around 3-odd-thousand a month. And that figure now is at about 4,000, 4,500 a month. But internally, we still think that there is a lot more that we can do on that. So to ask the progress is slow, we need to do a lot more on this. And our own internal thing is that, at least, I [indiscernible] [ 6,000 ] should be giving you best for every month. For that this work that we've done on restructuring the sales team, reallocating energy, et cetera. That work is ongoing. A lot of it is finished, but there is still some work to be completed in Q3 and Q4 of this year. We will be fully finished on this work by the end of this fiscal year.
Understand. Got it. And you mentioned that the 6.2 kg has now been postponed because you want to focus on profitability first. Is that a much lower gross margin product compared to your existing products?
Yes. So it was going to be at a lower gross contribution than the 6.5 kg that we have. Also the reason why we were evaluating it because the volume potential on that is very high. Almost 60% of the industry is around that 6, 6.2-kg capacity segment. But over the last 2 quarters, based on the internal discussions, what we concluded is that we will keep it quiet for now. With the actions that we have to complete with respect to profitability, et cetera, we would finish all of that and then we will get back to you [indiscernible].
Won't the 6.2-kg machine also helped to improve the dealer productivity that you talked about? And profit operating leverage on your sales and distribution costs? Is it [indiscernible]?
Yes. So that was the logic with which we started our comment because there is a logic on the volume, logic on the dealer getting volume. So all those [ positives ] are there. But it was just our conclusion that let's finish what we have, get the exercise completed and then do this. So it's just a division aimed at ensuring that the profitability we [indiscernible] fully completed as far as the other work is concerned.
We have next question from the line of Abhishek Ghosh from DSP Mutual Funds.
Sir, your top loaders revenues have declined almost about 4% for the current quarter on Y-o-Y basis. Any particular reason for that? Is it an industrial phenomena or have dealer [indiscernible]? How should we look at it?
No. There is no industrial phenomenon in this. In the end of the fourth quarter of the last fiscal year, and only part of the first quarter of this fiscal year, we have redone pricing on top loaders, and we did it to [indiscernible] of gross margin. So there is one [indiscernible] that eventually settling in required because the pricing differential with respect to other players are increased. Because the overall profitability, we are happy that it's improving. So we insure volume, we will fix into Q3 and Q4.
Okay. And so just to understand, because it is better, what would have been the like-to-like price increase that we would have taken in the top loader segment?
In top loader, the price increase that we made over 2 steps was roughly in the range of 5% to 6%.
And in the front loaders?
In the front loader, actually it is totally different. It is much larger because the models were completely changed. So there is no apple to apple figure. But the new models are at completely different price points. So...
Okay. Sure. And sir, if you look at our overall cash flow statement and the kind of CapEx that reincur next 12 months, will it be fair to assume that there'll be a debt on your balance sheet given the INR 250 crores kind of CapEx that you have laid out?
Yes. There would be some. It could be mainly because of the AC. As I get [indiscernible], we'll take it to the [indiscernible]. So like the reduction of inventory over there.
Okay. So there is some scope of working capital reduction is that you what you see.
Yes.
Okay. And sir, lastly, if we look at it, the AC, which has been -- the margins has been a drag on our overall appliances margins, and as and when your old production kind of comes in because the [indiscernible] in own production, it should able to improve your margins overall. So at what utilizations of this AC plant will you see that the AC margins are no more a drag to the overall margin profile of the appliances segment, what would be the kind of a point of utilization level?
So the -- on the first capacity of 450,000 that is available from end of January, the plan that we are working with is roughly about 40% to 50% being delivered as ISP brands own sales within India, and the remaining thing that we are working on is there are some OEMs, who are interested in buying some ID. And that discussion is going on. The improvement in the margins that we're talking about are basically for the IFB portion of sales. So even at, let's say, 40%, 50% of utilization of the plant capacity, our margin levels will significantly expand.
Okay. So basically, what you're effectively saying that you will increase the effect on by even selling it and being outside manufacturers for others and effectively you will...
Yes. So for air conditioners, the decision we took is that we will try and use the assets for everyone, not just for IFB because there is a need for localization of the air conditioner into India, and there are lots of OEMs who are interested. And as a policy, we said that, yes, we are willing to service demand outside of IFB as well for anybody who is interested.
We have next question from the line of Devang Patel from Crest Wealth Management.
Can you indicate the blended price increase you've taken across categories so that we can understand in this 8%, applying to the revenue growth, what is the volume and pricing mix?
Mr. Chatterjee, would you like to answer that?
You answer this please.
Yes. So the blended price increase, we'd have to calculate that and tell you because on top loaders...
I will say it is around 2% to 2.5%.
Okay. Sir -- and what will be your import content after we have our own AC plant and after we have our own motors. What will the import content come down to?
So if you look at the front loaders, our import content is currently at a level of 25%, 26%. It will reduce a little bit and come down to 20%, 20-odd percent. As far as top loaders is concerned, it is at a level of about 40-odd percent. It will drop down to about 25%. And for the air conditioner segment, the motors will be 100% imported. And that will go to 0 once the motor production starts basically. The stable level of imports for front loads, top loads and air conditioners, if I say, let's say, a year from today, would be roughly around 20% to 25%.
We lost the line of the -- Mr. Patel. So please, we have the next question from the line of Rita Tahilramani from Invesco Mutual Fund.
Sir, just gross margin. If you could help us understand the gross margin across your different products, what is the gross margin you make across different products?
We do not talk about margin, et cetera.
But broadly in terms of your fine blanking business versus your consumer durable business, if you could help us understand that.
Fine blanking would be higher than the home appliance division. In home appliances, definitely the manufacturing product will have higher gross margin.
And I just want to understand more in terms of your strategy. If you help me understand your strategy, internal strategy, of getting into new products like AC versus just entering operating leverage on your existing products where we already have a market share.
So if you -- you see, if you look at it, we are not entering air conditioners because IFB has been selling air conditioners for 6 years plus now. The decision was whether IFB should continue to import and sell or buy from somebody else in India or invest itself. And it is not viable to import because of the import duty and the ForEx level currently. And therefore, the decision was between buying from somebody else within India and investing itself. And we had shared this earlier that looking at the quality levels that we want and the kind of product positioning that we want, our conclusion was that it is much better that we invest ourselves and hence this investment into the air conditioner project. Other than that, if you look at it, the operating leverage on what we already have has been the maximum focus and will continue to be the maximum focus.
Okay, okay. But, in terms of AC, is it -- I'm just trying to understand more from your thought process kind of view that in terms of the AC, since we are -- we are still yet to gain market share or we are still not above the 10 -- double-digit market share per se. So what goes behind thinking in terms of investing versus getting it from the other OEMs?
So I just told you 2 things. One is the quality levels that we want between what is available with some people who supply within India and what we want. There's a difference. So we will not get the quality levels that we want if we buy. And the second is the kind of brand position, product wins that IFB should have in air conditioners, in line with what it already has in front loads and top loads. For us, it was a decision to invest to deliver that to the market. Also, if you look at all the serious AC players within India, all of them have their own investments and their own capabilities. So for IFB to be a serious player in a very large revenue segment in appliances, it makes complete sense to actually invest.
Okay. And lastly, in terms -- you shared during the call that we -- internally, you're targeting to reach a double-digit EBITDA margin. So like, is this a 3-year outlook? Or is it like a near-term outlook? Could you help us understand more in terms of when do you see this kind of numbers internally you're targeting to achieve? And apart from entering new segments and also on other sides where you also rejig your product portfolio, what are the other steps in terms of the cost efficiency which you've taken to achieve this kind of a target?
Mr. Chatterjee, would you like to take this?
The cost efficiencies, for example, material, other expenses, productivity of the resources that we are continuously doing. And for example, with AC, taking insights for production, the pressure on ForEx and the import, especially on duty side, will come down substantially.
Okay. And in terms of time lines or in terms -- thought process that, when you are planning to achieve this kind of double-digit margins, considering the market is quite competitive in the segments that you are present in.
We cannot give you any comments, for example, when will we have in this thing, but we can only say that we are committed towards the double digit. And then we are trying in all areas wherever possible in terms of both increasing the top line as well as the cost efficiencies to reach the double digit.
[Operator Instructions] We have the next question from the line of Manoj Bahety from Carnelian Capital.
I have a couple of questions, sir. First is, like just to take it further on the margin side, like if I compare your margin vis-a-vis competition and if I see your product portfolio, almost 51% is front loaders and 12% -- or 16% is top loaders. And our products are, means if I see in the market, they are priced at premium or at par with the competition. So just wanted to understand like when the competition is making double-digit margin, is it -- and they're also importing some of their components, so what's the reason for the gap in margins between us and competition? Also, AC portion is just 3.5% of our sales. So is it only the import component which is impacting our margin? Or is there something else?
So when you talk about competition, the publicly available benchmark is Whirlpool with respect to IFB.
Exactly. Sir, I was comparing with that only.
And -- that's right. Now even though the AC looks as 3.5% of the revenue, its impact on the P&L is much more significant. So to really answer your question, we will have to show you that once the AC production goes live in end of January, the impact that we have partially in Q4 and fully in Q1. And then you will see the fact that it's just the P&L, how much of difference it makes to the P&L once we are able to localize this completely. The point that you've made on the comparison about the washer -- I mean, about IFB to Whirlpool is an absolutely correct one. And there are 2 elements in that. One is this area around the structure of the gross contribution, which was -- it was a work that we have completed, so that part is over. The sales extraction is a very important part of reaching that sort of EBITDA level, which means that you -- we have a large network, there is an opportunity for revenue and we just need to do a better job to get that revenue. So if you look at Whirlpool's extraction from its network versus ours, that is an area that we need to improve on. So this is the second point. And the third point is the point related to the drag on the P&L from the air conditioners. So the first and the third are both points that will be completed within this fiscal year. And the second, which is related to the extraction, is related to our sales efficiency. We are targeting to complete that also by the end of this fiscal year in terms of all the restructuring that we are doing on the sales teams.
And sir, despite of our products being at a premium price, despite of that, in fact, we should get a delta of premium pricing vis-a-vis competition, isn't it?
Again, I'll add one thing. It's on Whirlpool. Their major sale is from the refrigerator. And more is from the single-door and other things. Understood? We were in the other area actually. It is the difference in the product also actually. The product mix that they sell and what we sell is a little different actually.
Right, sir. Sir my second question is, like, if I see the penetration of washing machine in India and next round of the growth will be because of the increase in penetration. And if you -- if I look at our product, it is more planned for the premium category. Any plan to come out with a new product range which can cater to the masses or mass segment, maybe some other brand or some other SKUs within IFB, any strategy on that?
So what do you mean by new category? Do you mean something like semiautomatic machines?
No. Maybe like the pricing of the product, which can cater to the mass segment. Like, if I see the pricing of the competition vis-a-vis IFB, like -- and if I look at the -- means, the growth which will be coming from the penetration level going up, which may be like to the middle class or lower-than-middle class. So any product which you are planning to design to cater to that segment in terms of product pricing?
Not right now. So if you look at the washer segment and if I look at the 2-year horizon, then we have to strengthen what we have. And we have to extract more from the distribution that we already have. Other than this issue of a 6.2 kg, we are not planning anything else. We are planning to strengthen what we already have. If you look at air conditioners, what we are already launching by end of January next year is a full spectrum range that will address all segments of the market other than the extreme low end, which like in washers, we will not get into. So if you really look at it, the strategy for us over the, let's say, 1-year or 2-year horizon is that we already have a lot on our plate and the big ticket items of getting more out of the network that we have in the market, which is a job that we've still not completed; settling air conditioners into the market and ensuring that the product delivers its targeted aims; and strengthening and continuing to grow our washers. These 3 itself, I think, are a big enough job for the 1- to 2-year horizon. We will always keep evaluating new categories like, for example, the question was raised on air purifiers. And yes, we are evaluating it. But these are more in the nature of projects. They are not the core business targets, if I can use that word, for the 1- to 2-year horizon because the basic profitability will come from these 3 major actions.
Okay. So no plan in going in lower price or lower category of washers and all, right?
No, no, no.
[Operator Instructions] We have a next question from the line of Chirag Setalvad from HDFC Mutual Fund.
Sir, can you tell us -- you've spoken a few times about the drag on profitability because of air conditioners. What in rupee crores is the loss that you had last year and the first half of this year?
Yes. So it will be very difficult to answer a specific question like this. If you could just talk to Mr. Chatterjee offline, would that be okay, he could give you the [ number ].
Sure. Sure.
We have next question from the line of Srinath V. from Bellwether Capital.
I just wanted to find out this 8%, 9% market share in top load, would it be on the base of the whole top load space? Or are we only accounting top load above 6.5 kg?
No. So I'm accounting all fully automatic top loaders...
So would it be right to say that the -- based on addressable market, our market shares would be somewhere near 15% to 20%?
Yes, that's right. If you take 6.5 kg only and above, it will be 15%, 16%, yes.
Okay. On this monthly reordering from retail, while you had shared the kind of quantitative numbers, could you give us a qualitative feel on what measures are we taking? The couple of calls back, you had said, we're putting feet on street kind of to give a custom sale in the retail because the way we sell IFB products are very different from other products and so on. So in the last, say, 3 to 6 months, if there are any other new initiatives, it would be nice if you could share a qualitative feel.
So in the last 2 quarters, specifically, what we've done is that the sales journey plan for a salesperson in the field has been completely automated. So in terms of knowing where to go as per a fixed plan, going there and us measuring results from that visit, in terms of whether we've actually generated a sale or we've not generated a sale, whether we've had the number of visits by a sales resource in line with targets. So we have completely automated this piece. That is the first thing that has been done. The second initiative that we've almost completed is to remap geographies to manpower. So based on a categorization of each counter in the market, looking at what is the sales potential from that, and then defining that one sales resource in that territory, should they look after 4 counters or 40 counters, that is the second initiative that we've totally restructured the manpower and that's almost complete. I think by December, it will be totally complete. And then we have to just make it to give us benefits in Q4. And the third has been related to, when you walk into a store, you need boys and girls who'll explain the product to you. And we call them counter sales representatives. So we have deployed more counter sales representatives in key counters to ensure that we are adequately covered. We were underrepresented. We have increased those numbers. And by the end of December, we would have completed our presence in all the areas that we need to be present with our own people to explain our products to consumers. That is the third initiative. And the fourth that we've done is that while we've been doing 1, 2 and 3, we are also fixing the kind of structure that is required to ensure that the AC is a success. So from simple things like, if you walk into a counter and the washer is on the ground floor but the air conditioner is on the first floor and, therefore, we need 2 people in the store, so how many stores are there like that where we need to have additional people to actually creating a team of specialist AC people who can go and sell to a channel that is called the sales and service leaders, which is a technical channel where today IFB hardly has any presence, which is the fourth initiative. So these are the 4 things that we have been working on. They are still ongoing. Our target is to fully complete them by the end of the fourth quarter of this fiscal. But I would expect that a lot of the benefit of actions from these 4 will also show in quarter 4 as well because we would have completed most of it by December. Have I been able to answer your question, please?
Yes, yes.
We have next question from the line of Romil Jain from Systematix PMS.
Sir, one question is on the AC distribution network. So how are we going to distribute the products? Will it be only own IFB points that we have or all the total network that we have? And what will be the working capital? Will it be very different from the existing appliances for the AC category?
So the distribution will be on the complete network that we have. And in fact, with the air conditioners, we should be able to get into new distribution networks as well because the AC is a much wider distributed product than for -- washers, for example. So the -- there is no specific limitation of channel, we will have it everywhere, wherever we are able to place it. As far as the working capital is concerned, actually, our working capital situation will become better because a lot of inventory gets blocked as far as imports is concerned in finished good form, and we are actually manufacturing it. Our internal thing is that we might actually ease working capital on this.
Okay, okay. And last question is on the recent press release that we had on acquisition. So we had done an acquisition of IFB Automotive Private Limited. So can we get some data points in terms of the profit and loss, capital employed and why we have done it and the way going forward we are integrating the business? So if you can give some details on that?
What I would request, you please talk to me separately. I'll give you the background and the details.
Okay, sir. I will do that.
We have next question from the line of Nirav Vasa from Anand Rathi.
My question pertains to the CapEx of INR 150 crores that we are planning for the air conditioning segment. I just wanted to understand what can be the payback period for the same? And also, I wanted to understand how can we play a mix of both OEM as well as a contract manufacturer for other OEMs. Because, in a way, we are competing with our own customers. Awaiting your reply.
Okay. So the payback for this will be 3 to 4 years as per the internal calculations that we have. As far as the second question is concerned, if we were dominating the air conditioner as a category, then I think we would have had this worry about competing with our own customers. But we have looked at it from the point of view of plant capacity utilization. And the technical detailing we've done is for both the air conditioners, that is the one under the IFB brand and the one with basically an OEM, possibly, to be both technically and esthetically different. So it's not the same product. And we think that if it helps plant utilization and we are able to ramp up numbers faster than our internal project target, then that's a good thing. That is the logic.
I get your point, sir. But here, again, there is a strategic conflict of interest. Because if you're supplying to any of the OEMs, you are actually competing with him in the market and then providing him product in the back end. So that strategy of mix, how can this strategy actually be executed?
So it's a good question that you're making because I think the conflict is probably more at the end of the buyer. Because for the buyer, they are buying from somebody who is competing with them in the market. So maybe IFB would not be so worried, but the buyer will probably be worried. But I think -- and I cannot speak for the people who are talking to us. But I think that one of the possible reasons could be that it has become so expensive to import and the urgency to basically localize is so high that people are interested to evaluate a good quality supply source that is available. That is the way I look at it.
Because sir, the way I see is, apart from compressors, remaining 65% of the air conditioning is actually outsourced in India. There are bigger contract manufacturers available in India. And at this point of time, we don't have that much size and scale which can actually justify an investment of INR 150 crores. Maybe we could have worked more on outsourcing model based of -- with local contract manufacturers. And once we could -- once we have size and scale, we could have ramped up this operation. That's the only concern.
So this is a point that we have been asked before in the investor calls. And the point that we made is that how do you get size and scale. You get size and scale by producing and delivering a product that represents the brand, for a brand like IFB, which is clearly positioned, differentiated and very high quality. And we have done the detailing in terms of possible sourcing from within India, and it didn't match up to the quality levels that we want, and hence we've invested. This is a very large segment. And we are very serious about it. And the investment is actually in that direction.
We have next question from the line of Kunal Bhatia from Dalal & Broacha.
My first question was in regard to your tax change. This time we didn't see any benefit on account of the new regime. So are we going to adopt that or how...
So as of now, we are not being able to adopt that because we have max credit available. Unless -- till we use that up, we cannot go to the next stage. Because once you get into the next regime, then you can't come back.
So how much would be the max credit available to us? And what would be the average tax rate for the current year and next year?
We have around INR 15.5 crores of max credit that is available.
Okay. And the average tax rate for the current year would be?
Rate would be the normal one.
Okay. And next year, we expect to get to the 25.2%.
It is. And again, we have to see basically. Till this thing, if there are some more changes coming, we do wait and see. But as of this year, we're not using it actually. We're going to use -- take the advantage of the max credit.
Okay. And sir, just one more clarification. We mentioned that in case of motors, front load, the imported content is about 20%, top load is 15%. At the same time, we also mentioned that the current imported content in the front load is 25%, which is going to reduce to 20%. So I couldn't get the maths here because...
Sorry. This is 20% of motors used are imported. That is what I meant.
20%?
Motors used. 15% to 20% are imported. That will go to 0. And the impact on the value imports on total, it will reduce by about 5% to 6% basically.
Okay. So this is 20% of the motors used?
Yes, that's right. And in top loaders today, 100% of the motors are imported and 40% is the import content in top loaders. So when all the motors get localized into India, that 40% will drop to 25% by value, by value. Have I been able to clarify?
Yes, yes. Okay, sir. Fine.
We have next question from the line of Rahul Gajare from Haitong Securities.
Sir, I have got 2 questions. One, just continuing on the air conditioning discussion. Now you're looking at spending INR 140 crores to INR 150-odd crores. You already have tied up with an OEM or you're speaking to potential OEMs right now?
No, no. We have the -- as far as the OEM supplies from the factory is concerned, those are discussions which are still going on. They're not concluded.
Okay, fair enough. And the second is on the distribution side. Now, you did indicate that you have touch points of anywhere between 11,500 to 12,500-odd on a pan-India basis with focus more on making the dealers active. Could you just help me, what are the -- what is the universe of these touch points for our kind of production? One, I'm sure air conditioning will be a higher number and appliances will be slightly lower number. Could you just give me some sense on how many -- what is the universe of these touch points?
So if you go by the total universe that we have surveyed, then if you look at all appliance categories, then the number is between 36,000 to 38,000 counters across India. And if you look at what is potentially addressable by IFB in terms of them selling the categories in which IFB is present or is going to be present, let's say, like, air conditioners, then that number comes in the range of, let's say, 24,000 to 25,000. Because there are many which sell only small appliances and things like that. So against that potential of, let's say, 20,000 to 24,000, today, our presence is 11,500 to 12,000.
Okay, fair enough. The second thing is, you did discuss the sales breakup in terms of online and own stores. Could you just help me with the number of own stores that you have, the IFB points that you'll have?
We have 535 as on date.
And what is the plan the next couple of years to expand this.
So currently, we are looking at an incremental increase in this number, no major expansion, going up to nearly 600 by the end of the year, not more. And our focus for this year and for, let's say, the first half of the next year is going to be on the profitability of the stores. Which means that we have franchisees and the franchisees should make adequate money. We should ensure that we drive more footfall to the stores. Instead of focusing on more numbers, now we are focusing on ensuring that this is properly done before we take the next phase of expansion.
Okay. Now again, in distribution, in terms of...
Mr. Rahul Gajare, would you like to come back in the queue? We have to take the next question.
Okay.
We have next question from the line of Rabindra Nayak from Sunidhi Securities.
Sir, if you see the balance sheet that is in for the first half of this year, you have done around -- hardly around INR 50 crores or INR 55 crores, roughly. Is it correct?
Sorry. Could you repeat that?
The CapEx that you are planning, the CapEx of INR 300 crores this year, and you have hardly done a CapEx of around INR 50 crores to INR 55 crores. Is it correct?
I will tell you. Actually, we have capitalized around INR 20 crores as of now. INR 50 crores of capital advance and other things given. Another INR 15 crores, INR 20 crores is in the capital work in progress. Remainder was that the -- it will be completed by the end of the fourth quarter, okay? And again, you will get the full result. Because if things are in progress now, not capitalized. This capitalization will happen only when the -- they are put to use. Okay?
Okay. Sir, total CapEx whatever was done currently as of now?
Like I said, that fully capitalized around INR 20 crores, capital advance is around INR 50 crores. And there is certain CWIP of another INR 20 crores, INR 25 crores.
Okay. So then another INR 200 crores CapEx will be done in the far second half, is it correct?
Yes, yes. INR 150 crores to INR 200 crores.
Okay. So would you see your debt level is going up by the end of this year? Or...
Some debt would be there because till date we are not having any debt. We normally take some buyers credit, which we pay out by end of the year. But now, if we're going by 2019 limit, there will be some debt on all this thing. Till date, we have hardly any debt to have any debt equity review as such. But that will not be significant.
We have next question from the line of Saurabh Ginodia from Stewart & Mackertich.
Sir, my question is with respect to the counter sales representatives, if you can share the number of counter sales representatives we currently employ? And also, if you can share the split for the same which are deployed at IFB points and MBOs?
So the total number of counter sales representatives, we don't employ them. They're on third-party rolls, which is a total of 2,500 people. Out of that, 535 would be on the IFB-owned stores, which is the number of exclusive stores we have. And the remaining are all on MBOs.
And is it possible for you to share the annual expenditure we are incurring on these people?
Mr. Chatterjee?
We'll discuss with you, Saurabh, separately.
Yes, sir. Okay. And sir, on this localization of the AC plant, will we be able to get the benefit in the Q4 of this financial year? Or this benefit would start from Q1 of next financial year?
So the full benefit will come in Q1. We are trying to get benefits also in Q4, but the full benefit will come in Q1.
We have next question from the line of Akash Jain from Money [indiscernible]
Yes. Sorry, sir. I got dropped off in between. So I may be asking a question that's already been asked, apologies for that. I just want to understand, see, we are doing a lot of stuff in terms of margin expansion, like you said, right? There is a -- we are putting up an AC plant. We are also introducing new models, which are higher margins, et cetera. If I just want to get a broad sense next year on a like-to-like basis with a similar kind of product mix, what kind of gross margin improvement in terms of percentage can we expect?
See, as of now, it is very difficult to say exactly how much percentage it will go because till the AC plant is in full production and we understand...
But you are done in terms of...
There will be some improvement in the gross margin.
I'm sure you've done some rough estimates. And I'm just asking a rough estimate of what kind of improvement in gross margin can we expect with all these initiatives?
That is what I'm saying. It is very difficult as of now to give an exact guidance on this actually.
Okay. Okay. The second question is on working capital, sir. Given the impact because of lower primary sales because of destocking, do you see the -- would you say that the debtor days for this September end is slightly on the higher side? Or you are not so worried about the increase in working capital?
No, actually, see, traditionally, during the -- this period of the season, both inventory and debtor goes up, but by the end of the year, it comes down [indiscernible] by the credit period.
So we are not seeing an increase in credit days because it is earlier driven by the higher sales in the festive season?
Yes. That's right.
And sir, the last question is basically on the CapEx that you are doing on fine blanking, right? And clearly, that business is going through a little bit of a challenging time because of the auto sales. Do you think it is the right time to commit a CapEx of INR 50 crores for fine blanking at this stage?
This is Arup, here. Actually, what we are hoping is that after the BS-VI implementation, the volumes will grow up. And with every drop in requirements customers place in the market, there would be subsequent increases. It's cyclical. So we should be ready with our capacities once it is launched. Now the thing is, because our CapEx is long, it takes a lot of time, it takes 11 to 13 months to install from ordering to installation. So if the market rises and we order them, then we'll miss the bus. So keeping that in mind and the order books what we have and we are bringing forth, we think we should be comfortably placed.
And what kind of capacity increase in percentage terms will this INR 50 crore CapEx provide us?
At least 50% to 60% of capacity.
So if you are at 100, it will become 150?
Yes.
We have last question from the line of Rahul Gajare from Haitong Securities.
Sir, I was -- basically on the sales breakup. Could you please help me with how much does the canteen stores account for in your overall revenue?
All direct sales, which is from the offices, from -- to CSD canteens, police canteens, everything put together is roughly 3% to 4% of company sales.
And direct sales together, it is 5% to 6%.
5% to 6%.
So the CSD would be subset of direct sales. That's what you are saying?
Yes, that's right.
Okay. Now second thing -- the last question really is, where are you planning to put this AC plant?
It's coming up in Goa.
Okay. And the land acquisition, all of that is done or -- what is the status really?
It's -- it will go commercial end of January 2020. So it's in a very advanced stage.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Equities for closing comments. Sir, over to you.
Yes. Thanks. I would like to thank the management for giving us the opportunity to host the call and to all the participants for your presence. Sir, would you like to make any closing comments?
Thank you. Thank you, Chirag. Thank you to all for participating.
Thank you very much, sir. Ladies and gentlemen, on behalf of Nirmal Bang Equities, that concludes this conference call. Thank you for joining with us and you may now disconnect your lines.