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IFB Industries Ltd
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Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of IFB Industries Limited 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. Mayank Bhandari from Nirmal Bang Equities. Thank you. And over to you, sir.
Yes. Thank you, Jacob. Nirmal Bang Equities welcome you all to the Q2 FY '22 Results Conference of IFB Industry. The management is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO, Home Appliance Division; Mr. Arup Das, Head of Marketing, Engineering Division; and Mr. Anand Reddy, CEO of Motor Division.I now hand over the call to management for their opening remarks, post which, we can take questions from participants. Over to you, sir.
Thank you, Mayank. Thank you. Good afternoon to all of you. I welcome you all to the IFB Industries investors call for the second quarter FY '22.Today, we have with us Mr. Rajshankar Ray; MD and CEO, Home Appliance Division; Mr. Arup Das, Head of Sales and Marketing, Engineering Division; and Mr. Anand Reddy, CEO of Motor Division. We hope each one of you and your family, yourself are in good health. A warm seasons greeting to all of you. Now I'll come to the results. During the second quarter ended September 21, the company has reported a total income of INR 958 crores, a growth of 34% over the corresponding quarter of the previous year. During the period, consumer sentiment was good and market demand remained there. EBITDA for the quarter was INR 74 crores as against INR 85 crores during corresponding quarter of the previous year. In spite of revenue growth, EBITDA was lower compared to last year, mainly due to following: hike in commodity price, which could not be fully recovered through price increase; increase in promotion expense in AG and e-commerce business. And besides that, last year, we do rated salary cars in first quarters, and there is no increment last year. So as a result, there is a gap. YTD revenue for the period ended September reported a total revenue of INR 1,510 crores, a growth of 52% compared to same period last year. EBITDA for the quarter -- for the YTD was INR 44 crores against INR 54 crores during corresponding quarter of the previous year. Lower EBITDA were mainly due to commodity price hikes like I've already explained. Like the [indiscernible], we have spent INR 30 crores in sales promotion expense, which is additional, higher salary compared to last year and the commodity price hike, which is the main reason.With this, I will request you to start the question-and-answer session, please.
[Operator Instructions] The first question is from the line of Abhishek Ghosh.
Sir, if you can just elaborate the deterioration in gross margin that one has seen. In subsequent quarters, how should one see the restoration of that? And also, is it to do with unfavorable product mix because your proportion of microwave and AC is kind of going up vis-à-vis that of front with us? Any thoughts around the gross margin aspect of it, if you can throw some light?
So this is Rajshankar here. The reduction in the gross margin by the 2% or 3% that you will see in the data is coming because of the unrecovered portion of the material cost, and this is across the product categories. So what we have done is that on the import categories, like dishwashers, microwaves, we have begun to pass through the price increases based on foreign exchange or the changes from the pricing at the source. We started in the month of October. So by the month of December, that is in this quarter, this will be completed. On the front-loading washing machines with an upgrade in the platform, we have passed through some portion of the unrecovered material costs. So the remaining portion, which is not passed through, will be passed through in Q4. Right now, as of this moment, we are not able to see an opportunity to completely pass through. We will do that in Q4. So by Q4, this gross margin will go back to what it was. Does that answer your question, please?
Yes, sir. So what is the kind of price hike that you would have to take? Is it like a 3% to 5% kind of a price, that product price...
It's about -- weighted average is about 4% across all product categories, basically.
Okay. That's helpful. You have also made a mention in the press release that these price hikes may have some impact on the demand in the fourth quarter. Sir, if you can just help us understand that aspect.
See, the -- I mean what we have written in the investor presentation is that the unrecovered portion of the material cost is an issue with everyone. And when we pass through price increases are made of what is pending and there is also an issue that is now emerging about the steel industry wanting to push for further price increases, over the last 15 days, there is the aluminum-related shortage and price increase that is emerging now. So what we have written is that with the price increases being made by everybody into the market, which we expect to happen in Q4, there is an issue around whether the demand will soften, which is a risk to be just kept in mind. That is why we have put it there.
Until now, have you seen any -- still the -- you already -- or almost half the quarter done. Have you seen any impact on demand or the demand momentum whenever you've initiated these price hikes until now?
As of now, we have not seen any change in demand. Demand touch would have been actually quite healthy.
Okay. Okay. And so the other thing is if you look at your growth, especially on a 2-year CAGR basis, the growth is very strong. But sir, that's largely led by microwave and ACs. So any thoughts around the growth trajectory in front load and top load? Any market share indications? If you can just help us with that.
On the front load and the top load, our growth in line with what we want has to come from extraction from the network that we have. So there are 2 levers in this. One is that we have a very large distribution network in place from which the extraction that we are getting is something that we are not happy with, and there is a lot of work being done to fix those issues in terms of manning and the distributor and in terms of the visit frequency to the smaller contracts. So this is one lever. The second lever is that as far as the key accounts are concerned or the larger stores are concerned, we had shared that post the price increase in January, February, we had lost share there. That share we have partially recovered in the June to, let's say, September period. And the remaining share recovery is what we are doing through basically a change in the product placement strategy and also backed up by counter level manning. So there have been gaps that we have had. We are filling up those gaps. Maybe 70%, 75% is already done, 25% is from November and December. And with that, we hope to get our growth trajectory back.
Raj, this is Prabir Chatterjee. Can I add one line?
Yes, sir.
But one thing I want to mention, Mr. Ghosh, that both FL and TL, we got around YTD 30% to 33% growth.
Correct. So there is momentum, Mr. Ghosh, this year, and we hope to increase that momentum. As far as top loaders are concerned, about 3 or 4 months back, we had introduced a series of top loaders with heaters, which is quite unique in terms of a complete series with heaters. That is getting a lot of traction, and we hope to increase momentum on top loaders with that as well.
[Operator Instructions] The next question is from the line of Srinath V. from Bellwether Capital.
Just wanted to understand what is working for us in the microwave space because the numbers have been really strong. Is it a category growth? Have we gained share? And in the investor deck, you've spoken about our new product range. Can you kind of dwell upon that in a little more detail? As in what are those features that are really grabbing attention because I don't think you've ever done this kind of INR 100 crore plus sales in the segment? And previously, there was a margin issue in this particular category, I think because Samsung had played a price war. And so I just want to also broadly understand how the pricing scenario is, given the very strong demand in this segment.
So Srinath, I think 3 things are working for us. One is, if you recall over the last 2, 3 quarters, we have been working a lot on the product range in terms of the models, the capacity, the features and also picking and choosing the model channel combination. So I think over the last 2, 3 quarters, they have been settling into the market. And this momentum in microwaves is actually now probably the third quarter that we are seeing the kind of momentum we have. The second thing -- so I think the first thing is that the product range planning, et cetera, is working for us.The second is that we have managed the supplies quite well this time in terms of ensuring that our [ syn ] rates and availabilities, et cetera, are always in excess of 85% plus. I think we have also gained because the availability has been much better from our end. So I would put it to these 2 reasons mainly.As far as the margin structure is concerned, over the last one year, we have been taking incremental price increases with each model introduction to fix the issues of the margin that we have lost with the changes in the import duty, ForEx, et cetera. So that's what is ongoing. Currently, the margin structure is healthy. It will get better because we are taking price increases with each new introduction. And we have been able to pass it through to the market as on date.
Perfect. Perfect. And are our market shares around the 25% that is historically been? I just want to get a feel.
Our market share has risen about by 2%, 3% in the last 2 quarters. So I would -- here, we were around the 20-odd percent mark. I would expect us to be around the 22%, 23% mark now.
Yes. And will largely be in line with LGM in our leadership position, right?
Yes. It goes up and down a little bit. Currently, my data is that we are ahead of them.
Got it, got it. The second set of questions is, I would like to understand, both in the investor deck and in the opening statement, you have made remarks on marketing spends on e-commerce. So are the nature of these spends like a more like a subvention? Or is it this advertising spends on getting our listings in the top 3 core when search is done? Or is it a discount that we're giving? I just want to understand the marketing initiatives we are taking on e-commerce. And corollary to that, what kind of market shares do we enjoy in our key product categories in the e-commerce?
So we don't count the discounts on marketing spend. That is part of the overall pricing and scheme structure, so that is not included. But spend on content marketing on the platform and spends on, let's say, programs around exchange and finance, those are counted under the marketing spend. And that is what we have increased. Our counters -- I mean, our platform shares on e-commerce are higher than us overall country share specifically.
Got it, got it. Perfect, perfect. And last one would be, I would like to understand the impact of semiconductor shortage in our 3 key product segments, say, in the top load, front load and in ACs. What kind of impact? Are the lower-end SKUs also use significant amount of semiconductors? Or is it largely for the top-end product? And so if you could dwell on that. And how would we manage our AC season given the current tightness in semiconductors?
So when the shortage has begun in the supply chain last year, what we had done is to add sources. So if you are working with one semiconductor source, we went to 2, and in a few cases, 3. And that development program is now complete. So we have 2 to 3 alternatives for the pipeline. Now this is point one. However, having addressed availability has not taken out the cost pressures. So let's say, if a particular chip, we were buying at $0.50 per unit, in the month of April, May, we were buying the same chips at $3.50 a unit, sometimes -- some cases, $4. So there has been a significant increase in the cost of the semiconductors.As far as, let's say, this quarter or the next quarter is concerned or even the first quarter of the next financial year for the air conditioners, we think that the availability will be tight, but is manageable. But as far as the cost structure is concerned, I think that will remain under pressure. So you may have a visibility, but it will come at a premium.
Okay. Got it. Just putting in the last one. For the AC season next year, so when we did our dealer check, we've got a very strange feedback that if we don't have a third wave, miraculously seems to always come during the AC season, effectively, we would have 3 years of backup demand while really the third season where we may have demand outstripping the supply of the whole industry given the import constraints. And on the other side, if we do have a third wave, then there may be oversupply. And therefore, retailers are reasonably appliance service carrying inventory. So just wanted to understand how you're viewing it. And would it kind of make sense for us given that we are new to the market on a larger capacity to take a call to clearly hold inventory as we go into March and take the risk, especially given our balance sheet strength.
Yes. So that's a very interesting question, Srinath. And my answer would be that, first of all, the actual customer offtake of the AC has been quite healthy last year as well as this year. So it is not as if the pandemic resulted in demand going to zero. As far as the retailers are concerned, they have had a healthy sales to customers. So let's say, even this year, after the lockdowns were released, et cetera, even in the month of June, July, August, September, there has been early customer sales. So I would not say that there is 2 years of pent-up demand waiting to be served this year. There is pent-up demand, but a lot of it has resulted in sales. So my first point would be this. As far as we are concerned, our primary agenda is to expand our footprint. So if you look at the number of accounts we service compared to the industry, we are still very small. We need to ensure that our ACs get placed everywhere. And we will build up inventory in the month of November, December and January for the season, but we are not going to do any exceptional inventory increase per se. I hope that we have a good season ahead because it will help us to establish the AC volume, which for the last 2 years, we've been wanting to do, but we've really not been able to because of these lockdowns. Does that answer your question, Srinath?
Perfect. Perfect.
The next question is from the line of Lakshmi Narayan from ICICI Prudential Mutual Fund.
Sir, I just want to understand your views on the cash flows because we have grown very well across various divisions. But from a cash flow point of view, there has been a decline in the operating cash flows. So can you just touch upon that? What is the steady state you would like to be? Any -- that is my first question, is on -- related to cash flows. And the second is that, you touched upon AC and you have mentioned that your aspiration is to grow at least 300,000 volume in the next 2 years. Broadly, what is your go-to-market on ACs when you actually scale up? Is it going to be through the IFB points or any difference range, which you are planning to do for your AC in the next 2, 3 years? These are 2 questions.
Mr. Chatterjee, you can answer the cash flow question, then I'll take the...
Okay. See, this first -- because first half -- first quarter, the margin was negative, number one. And the working capital movement was also adverse because the reason being the seasonal AC sales did not happen. Also, we -- that is the main 2 reasons. That is why it is showing negative cash flow -- free cash flow. But I'm quite hopeful, by end of third quarter, situation will reverse.
Rajshankar here. As far as the question on the AC go-to-market is concerned, our focus is on 2 heads. The first head is our reach. So currently, the placement of the air conditioner range across counters, we are at a level of roughly about 2,100 to 2,200. And before December, our aim is to list about 4,500 counters. So this is the first part of the go-to-market. The second part is, unlike the previous 2 years, this year, in terms of the clarity to the channel, in terms of the supplies, the model mixes, the model ranges, et cetera, we would be in a position to have a completely signed off conclusion by the end of November. So action 1, reach; action 2, the supply situation and the model mix clarity. These are the 2 things that we are working on right now.
Got it. And with respect to the OE channel, what has been the traction in AC OEEs?
So the OEE is currently going on with 2 players. And by December, we expect it to expand to 4 buyer. And our agenda of doing about 200,000 within the next year, 1.5 years per annum to OEM, we are still working on it, and we think it is on track.
Got it. Sir, my third question is related to the Engineering division. There has been a spending price increases, what you actually mentioned in your investor presentation. Can you just help us understand what is the target EBIT or EBITDA you are looking at for your Engineering division?
I will take the question. This is Arup here. Coming to your first part of the question is as far as the pending price increase is concerned, all the OEMs like Maruti, Honda, [ Euro, Mainland ], there is always a lag of a quarter, if not more. They give the increases with retrospective effect. So for quarter 2, when we did the billing, those increases which happened in quarter 2 did not reflect in the past cost. That gets reflected in the past cost in Q3 when they pass on the increase with retrospective effect. So what has been said is INR 2.2 crores related, it's 2.2 plus 0.97 for [ camping ], INR 3.17 crore, which we are scheduled to get in Q3. So it's the Q2 impact passed on to Q3 because that's the procedure, which is followed in the automotive OEM as on today.
Got it. And what target margins you have for this division and the growth prospects there in 3 to 5 years?
As far as growth is concerned, you might have seen, we have grown Engineering division in the last quarter review. Compare it, it has a growth of around 30%. We are having very aggressive growth targets. So we don't give guidances, both in terms of top line as well as the margins. But we can assure you, we have very aggressive targets for this division, and we hope to keep it -- keep within that line.
[Operator Instructions] The next question is from the line of Manoj Gori from Equity Securities.
So my first question is on the demand front. So if we look at like whatever checks we have done and if we look at some of the industry reports, that demand seems to be -- there seem to be some sluggishness during August and September versus a year ago period. So can you give a broader sense, like how the overall demand environment is playing out? Because we have obviously gained market share, and we have relatively done far better. So can you throw some light on the overall demand front?
Manoj, I think that the demand is healthy. And when people compare it to the last year for, let's say, July or August, what happened last year is that April, May, we're near 0. So when things opened up in the second half of June, there was a surge. But this time, it wasn't a total shutdown barring the month of May because April things were going, June, many places actually started. So some amount of the surge of last year, it was expected that this year, it would not be so much. But if you look at the overall, let us say, April to October, and it is an apple-to-apple because last year also there was lockdown, this year also there was lockdown. I think the demand has been quite healthy. And specific to IFB, Manoj, what our internal messaging is that if you look at our agenda of reach and extraction from our network that we have -- we are working on that we are not happy with of the current state that we are in, actually, even if the overall demand dips slightly, but we are able to complete our agenda or extraction from the network that we have, then we more than make up for any reduction in overall demand. That is how we are processing it internally.
That's right. So is my understanding correct that, mathematically, probably July and August might look sluggish on a Y-o-Y basis, but April to September was relatively pass stronger?
Actually, if you see our revenue growths for Q1 and also for Q2, you will find both percentages healthy.
Great. I agree. So my question was more from an industry point of view. So obviously, your numbers have been very strong.
I think -- okay. I think industry, yes, Q2 would have been better than Q1.
Okay, okay. And secondly, sir, if you look at -- like just now you just give the example of the chips part, like how the prices have increased. And if you look at the metal prices, plus the plastic prices, obviously, have gone up significantly. So what would have been the price increase taken so far? And do you feel like a 3% to 4% price hikes during December and March quarter would be able to suffice the entire impact?
Yes. You see a figure of 4% covers up the entire impact. And in addition, it's a good point you raised because last 2 quarters, we have not been able to pass through the price increase because of what is happening in the market. We had initiated a value engineering program internally also. And in Q4, that will also mature. So the price increase, roughly about 4%, plus the impact of the value engineering that will start coming from December this year, I think, will more than make up for the gross margin reduction.
Right. And sir, one question for Prabir, sir. Like as Raj mentioned, that they need to have some sales promoters -- incremental sales promoters to cover the entire channel. Do we expect like the costs to move up significantly from the current level?
No. We will maintain in the last year's level only. And that additional INR 30 crores still get that we expect. We are also evaluating on that. We see that how well that is paid. So product managers and marketing managers are working on it. So we will maintain a similar level like last year. And in the mean time, we are evaluating what is done good and what is not to our desired level.
Okay. So one last clarification, Raj, sir. So in the first question, you did say like -- because of the limited opportunity, the entire price hike was not passed on. So that entire -- so the opportunity that you were referring -- the lack of opportunity was largely due to the disruption from COVID or is it because of the intensified competition? That's all from mine.
Okay. So the answer to that would be 60%, 70% of it was because of the experience we had in January to March where we increased prices, but LG, Samsung specifically held on to prices. And after that, for the first quarter and up to almost July, August, they didn't pass through the price increases. So we were unable to pass through the remaining portion. So 60%, 65% of the problem was that. The remaining was because of the market scenario under COVID where we withheld the price increase, just to wait for the demand scenario to stabilize. So it's a combination of 2 reasons, yes.
The next question is from the line of Srinath V. from Bellwether Capital.
Yes. I just wanted to find out feedback on the dishwasher space, as in the lockdowns were very limited second time around and reasonably allow. But even after that also, are you seeing a secular trend in the space? Any ground feedback on how the end consumption has been? And the last time you had said that there were demand coming from even Tier 2 -- Tier 1 centers. It's not only the Delhi, Bombay market. So if you could spend some time on how you've seen the dishwasher market given that everything is back to normal.
So there is a reduction in the overall demand, but the spread is still very, very thin. So if we account for benefits that we can get by just making dishwashers available in more counters, that more than makes up for the reduction in the overall demand that was taken place. However, if we compare these 2 previous levels, currently, the change in the level is still very much valid.
Got it. And what kind of market share are we enjoying in this space? Most of the market share, understanding how pre-COVID where we had a very reasonably high market share. But given other players have also come into this market, how are our market shares trending now?
So in the last quarter and when we had measured it, which was beginning in July, our market share was 35%, 36%. We are basing this on understanding of imports. And I would expect that our share has risen in the second quarter. So we'll have to wait for the season. Last measurement was around 35%, 36%.
So between us and Bosch, you would control -- it seem partially control large part of the market, that would be a fair understanding.
Yes, yes.
Okay. Got it. And any views on how the FMCG part of the -- consumable part of the business is doing given that we have actually seen volume traction in all the washing machine products? And I'm listing even the dishwasher products, you would have FMCG sales happening through our service network. So any -- what kind of growth are we seeing in that business? And how is it going? Any qualitative comments also would be very useful.
Mr. Chatterjee, would you like to answer that?
Yes. Because the -- both entities are the same, the growth is quite healthy actually. And through our franchisee network, we sell it and we're absolutely okay.
So what kind of sales are we doing in that segment? Sir, where you roughly -- just to get a -- because it's not covered in the presentation, so I just want to understand.
There are 2 possibilities. I will give it -- give this separately to you, this production.
Okay, okay. Okay, sir. I'll get back into the -- last one is what would be subvention -- a percentage of top line in the consumer segment, which was financed using subvention? Any data that you could share?
Dishwasher is 23%.
23%. And e-commerce sales, sir?
E-commerce during the second quarter is around 30%.
Okay. That's a significant jump from our historic numbers within -- I thought we were doing a much lesser, like a 15% kind of...
We are doing 23%, 21%, it might vary. But during -- because of the -- that big billion days and all those things are there, the other -- they were there. And because of lockdown also, people were concentrating on e-commerce sales.
Microwave have a higher sale in e-commerce?
Yes, yes. So [indiscernible] here. Our e-commerce sales, as we put in the investor presentation, also have seen a significant uptick. Our shares are given. And microwave, of course, as a part of that, have done quite well.
Got it. So driven by microwave and all categories have also seen a bump up.
Yes, yes.
The next question is from the line of [ Sreekanth D ], an individual investor.
Congratulations on a good set of numbers. I just wanted to understand the progress on the modernization of controllers for ACs. That's one. And second, with regard to the AC number target funds applies what was mentioned in the last call, are you confident about the [ CLAC ] number we will be able to hit this year overall?
Yes. So this is Rajshankar here. On the AC controller localization, the field trials have been completed. And the production of the controllers for use in commercial production will start from the month of November, and it will be completed to 100% level by end of January. So this is the first point. And as far as the volume projections are concerned, over the 2-year time frame, yes, we are confident about meeting the numbers that we've spoken about.
Okay. No. My question is regarding to this financial year, in the sense that earlier it was [indiscernible] you said that we'll do 3 lakhs, both key accounts or third-party and our own sales together. Does that number holds good or it can go here and there?
So I don't think we'll be able to do 3 lakhs, but we would be closer to the 2.5 lakh kind of a signal basically.
[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Mayank Bhandari from Nirmal Bang Equities for closing remarks.
Yes. Thank you. We thank the management for taking time out and sharing their valuable insights on the call. We also thank all the participants for their presence. Sir, do you have any closing remarks?
No, thank you. Thank you all for joining our call, please.
Thank you. On behalf of Nirmal Bang Equities Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.