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IFB Industries Ltd
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[Operator Instructions] Please note that 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. On behalf of Nirmal Bang Equities, we welcome you all to the Q3 FY '19 results conference call of IFB Industries Limited. 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, everybody. And welcome you all to the conference call. I have with me my colleague, Mr. Rajshankar Ray, CEO of Appliance division; and Mr. Arup Das, Head of Marketing, Engineering division.During the quarter, company has reported a total income of INR 671.83 crores, with a growth of 25% over last year. EBITDA for the period was INR 36.03 crores, with a margin of 5.6%. Despite gross margin was high, margin was lower because of the fact, sudden increase in import duty of certain traded products. Adverse exchange fluctuation and commodity price increase. For the year ended December '18, the company has reported a total income of INR 1,926.03 crores, a growth of 15%. EBITDA for the period was INR 115.90 crores, with the margin of 5.8%. The margin was -- like I have explained earlier because of the import duty hike, exchange fluctuation was not up to our expectation. And with this, I will hand over the call to you for questioning.
[Operator Instructions] The first question is from the line of Srinath .V from Bellwether Capital.
Sir, could you please throw some color on the new initiatives taken in the AC space from a product standpoint distribution, and also from a team standpoint?
I will request Mr. Ray to answer this question.
Yes. Rajshankar here. There are 3 variables of initiatives which are currently on. The first is that between the [ carpet] industry, there is a very high percentage of sales that goes through a channel, which is called as the sales and service dealers. And this is a channel that both sales and services achieves, which also has a good reach into institutional fills. So what we have been doing over the last 2 to 3 months is creating a team that will specifically adjust this channel. Now which is the technical part of the same channel and the profile of the people is more technical than the normal sales team. So this is the first initiative. The second initiative is that we have begun a project source localization of the air conditioners, where we have been manufacturing, as opposed to trading, which project has already begun and it is expected to conclude sort of commercial introduction of the ACs in January 2020, which is the early part of next year. And that the third initiative is with what we have, in terms of expanding the volume of the range that we presently have. So this season looking at the network additions that we did over the last 12 months from which we need to get much more extraction, account in terms of where the ACs should be placed for us to increase the volume per se of this segment. That is also what that is going in the last one month or so. So these are the 3 areas of initiatives.
So this sales and service channel would be like an MBO channel. Could you kind of shed some light on that? And the second follow-up would be on the localization, what percentage of our product would get localized post-2020?
So the first part of -- the first question, which is whether this channel is a multi-brand channel or not. Yes. Many of the sales and service dealers do deal in more than one brand, but typically the better part of that channel would be dealing with maybe 2 to 3 brands at any given point of time, as opposed to a typical retail multi-brand store where you would walk in, and you would probably find 15, 20 brands. So the -- what we are doing...
Is it a shop as in -- is it a shop or is it a service center person coming in recommending...
Yes. It's like a small -- these are typically small places, so the people who've been established in the network for a very long time, they normally don't have displays. But they have the network to sell based on their serviceability.You can walk in and maybe see a small display, but by and large these are very small offices inside residential areas close to institutional areas, et cetera. So it's not a typical store that you see.
Okay, okay. And localization post-2020?
As far as the localization is concerned, we are planning for a significant portion of the work to be done in-house by us. So, for example, manufacturing of the heatings, heat extenders, et cetera, which typically people buy out, we'll be manufacturing it in-house. The electronics will be from within India, the #1. Compressors, which are typically imported currently and there are 2 factories which are coming up. So I would expect that a significantly high portion, maybe 50-odd-percent, would be sourced from within India immediately in the beginning. And over a period of 2 to 3 years, I think the entire Indian requirement to maybe 85%, 90% will be addressed by the manufacturing facilities that are coming up within India.
Okay. Just wanted to get one more question. Could you please share the volume share of the 6.2-liter washing machine; and the [ Seala ] twin tub manual washing machine in the top load market for the entire industry?
So if you look at the total industry for top loads, including data sales semiautomatics, than our estimate is that it is about 1.6 million to 1.7 million as on date. Out of that, the fully automatic segment would be roughly about -- sorry, the fully automatic segment itself is about 1.8 million and the semiautomatic segment would be probably about 2 million, 2.5 million as on date.
And we're only getting a product in the 6.2 would be the fully automatic. Are we looking at a product in the semiautomatic space also, sir?
No, we are not looking at that semiautomatic space at all. The 6.2 or the 6-kg segment, where we have not been present as far as top loaders go, account for about 50% to 60% of the industry as on date, of the fully automatic industry.
So that will be 50%, 60% of the 1.8 million?
Yes, correct. So that segment, we have been missing, and with introduction of model in that price point, logically we should be getting volumes on that segment as well.
The next question is from the line of Manoj Gori from Equirus Securities.
Sir, I just wanted to ask on the opening remarks, like more of credit products actually dented the gross margins and had a severe impact. So what kind of credit products -- so I guess, because as far like it's for our understanding if you look at it's only for the 3 liters washing machines and the ACs and on compressors? So what kind of credit components that we did?
Yes. So Rajshankar here. Mainly 2 products which have got affected: One is the microwave and the other is the air conditioner. And the effect was -- or sort of the combined effect, one was the increase in the customs duty by 10%, and the second was the increase in the Forex level. So microwave is a very extremely profitable product, and there was a profit erosion that we had as a result of these 2. And a similar effect on the air conditioners. So these are the 2 major areas that...
Okay. So going forward, what would be the approach of IFB to tackle such pressure?
So there are -- the answer to this is in 2 parts. As far as microwaves are concerned, one is that there have been some commercial negotiations with the suppliers, and we have got some reductions from them. The second has been that we are passing on a price increase, which will become effective from February. And the third is that we have reconfigured the models and the model mixes. So the combined effect of these 3 will address the issues that we had on microwaves to a large extent. As far as the Air Conditioner segment is concerned, there is a price increase that we have already touched through, which will become effective from around end of February. However, as far as ACs go, that will not completely adjust the combined effect of the custom duty as well as the increased Forex level. So that part of air conditioner, which we will not be able to recover, we will have to make up through increased sales of the other product categories. And this will get fixed, once the -- our own production kicks in from January. So till that time, ACs will be partially addressed.
Right. So in this case -- so if you look at it from a next couple of quarters perspective, the gross margins are likely to remain under pressure, despite taking the prices; obviously AC sales would be higher. And do you see any impact in how has the raw material prices have also eased up, so do you see any positive impact coming from your washing machine category?
So we are expecting some softening of the raw material pricing, and the -- if that comes, let's say, from April onwards, then that would obviously be positive to the margins. We are expecting something, but we have to wait for another month or 2 for it to really be realizable.
So at least for this fourth quarter and also for the first quarter of next year, so there could be some pressure on gross margin. Is this understandable?
If you look at the gross margins per se, you will find that our gross margins actually have been quite stable. In fact, on the manufacturing side, we gained the gross margin, both in the previous quarters. But giving of that gross margin from manufacturing were rewarded by the impact on trading. So once we fix the microwave issue and some of the more material cost side work that we're doing on the manufacturing side kicks in, I would expect that the marginal structure of quarter 1 would be definitely better.
The line from sir Arup Das has got disconnected, just give me a minute while I call him back before we take the next question. Ladies and gentlemen, thank you for patiently waiting. We have Mr. Das reconnected to the call now. Thank you. We'll move to the next question, which is from the line of Abhishek Ghosh from DSP Mutual Fund.
Sir, just a couple of questions. This localization of AC project, what will be the overall CapEx towards that?
Yes, Mr. Chatterjee would you like to answer that?
Yes. The overall CapEx to start with would be INR 124 crores for the first year. Over a period of 3 years, we'll be spending around INR 200 crores.
So by FY '22, you will be standing something like INR 200 crores in that, is it?
'23, I would say.
Over '23, okay. And sir, currently, our AC revenue run rate will be closer to INR 200-odd crores. With this capital expenditure or with this capital employed of INR 200-odd crores, what kind of revenue can one do from that?
Yes, this is Rajshankar. I will answer that. This CapEx which is planned in a sales manner linked to volume growth. This CapEx will be good enough to give us 600,000 ACs. So that would be revenue of roughly about INR 1,800 crores to INR 2,000 crores.
Okay, okay. But by -- from FY '20 onwards, large part of it will be through our own manufacturing only, right? Or FY '20 second half -- sorry, FY '21, my bad.
From January 2020, we are planning 100% localization, as a result of this project. I mean, everything will be from the plant in India.
Got it, got it. And sir, just one more thing. Is there an IC receivables quarter-on-quarter reducing by almost about -- closer to about INR 100-odd crores? So what would that be attributable to?
By using market receivables?
Yes, from [ our datas ]?
So our data cycles are actually quite good in fact, and...
And the [indiscernible] quarter...
Whatever the reduction you're seeing because...
There's almost INR 100 crores reduction in the [RIC] Debtors, but correspondingly in the capital employed segment, I'm not able to see that, both for Home Appliance and Engineering division, so...
That's because the data is what happens [ with a big ] seasonal this begins here, so you get back the money, but during the season, it goes up, but after the season, we get back the money. And then you are saying you cannot see the effect, because frankly, inventory has gone up because we're stocking up inventory, obviously, for the season.
Okay, okay, okay. And sir, just one last thing, quarter-on-quarter, we see gross margins to have come...
I would explain this. Like, for example, one part is what Mr. Ray has already stated that the -- because of the sudden imposition of the import custom duty on 3 of the traded items, like when we are affected was the AC and microwave and theForex. But there's another part is there, which is around 3%. That is because you remember last time, there is a question that our expenses went up. Because post-GST, there was a change in how will you are replacing the warranty and AC spared. So because earlier grouped in the other expenses. Now it is -- the second quarter was regrouped again into the material. That is why you will see now other expenses are falling in line.Without that the correction for that regrouping effective 3%. So you're seeing a gross margin difference of 5%. As of that 3% is because of that which will not be there anymore.
So now it is sitting as part of bill of materials there.
Yes. it is part of material because, as for GST coming in, what we used to do for replacement of [ loyalty, ] and aims we used to give replacement of sales. But under GST, whether you've -- even if you won't take anything, it has to be through sales and purchase. The EBITDA margin, it is absolutely neutral, but through that extent, sale and purchase will grow.And it will have an offsetting effect.
Okay. But sir, Even on sequential basis I understand, this is helpful, but our margins have kind of come off on a sequential basis. And what we were earlier doing trajectory of that 7% kind of a margin on an annual basis that is kind of come off in 9 months, so how we're looking -- how are the -- how is the margin profile now looking maybe for next...
See I will tell you. For example, we -- normally, we do not give any guidance, but as already explained by Mr. Ray, that suddenly because of this duty we were affected. Our margins were affected, both in terms of microwave and AC, where we are doing pretty good actually. But because of the duty, Forex and other change, the total market has come down, number one. And in case of imported materials, because you clear up that thing that custom duty, you're not in a position to increase a material -- the increase by MRP afterwards, okay? So for example, that is why 2,3 states like you said, one is we are negotiating with the suppliers to bring down the price via purchase price from them. Second is increasing the price from February and started improving the mix. By these things to a large extent, we will be able to recover the margin in the microwave. But in case of AC, we may not be able to do that. But like Mr. Ray said, we'll try to recover it by increasing volume in other areas.
Okay. Sir, just one last question. What will be the CapEx for FY '19 and '20?
FY '19, '20 would be -- but we are not finalized yet because once we do the budget, we do that, that would be in February and March. But in addition to that, like Mr. Ray has already explained that AC projects around INR 120 crore, INR 125 crore would be there. And the other part, booking in other areas and engineering, we are working on it. Once our budget is over, we'll be in a position to tell it.
The next question is from the line of Mitul Mehta from Lucky Investment Managers.
Yes, Mr. Chatterjee. Yes. Mr. Rajshankar, just wanted to get some understanding on the volatility in margins that we seem to be witnessing since the last 4 quarters. And going forward, how well we can get our business up to a decent sustainable margin. So my first question to you is on the material cost. So we -- are we as a company embarking on some sort of a material cost thing? When you did mention about negotiation, what else are we doing on the material side, so that we can be far more profitable? And secondly, also, as far as other expenditure goes as a percentage of sales there, do you think we can see far more leverage as we increase the volumes and as we put our 6.2 kg in the market? If you could just elaborate on this?
Okay. So I will just answer it in 3 parts. One is, if you look at the material cost-related area, then currently, we are addressing it in 2 ways. One is if you look at the manufacturing material costs, one part of the exercise, which we completed in the previous quarters was localizing areas like electronics, et cetera, completely into India. So if you look at the margin structure of the new models, which we started rolling out from quarter 3, and which will be completed by early quarter 1 of the next financial year, the margin structure of the new range is much better than the previous ones. That is because of the material cost was already done. In addition, on the manufacturing side, we are currently running some projects for reduction of material costs. These are by way of alternate materials in, for example, areas like plastics, where the basic raw material commodity usage-related costs will go down on the manufacturing side. So part 1 of the material cost area is actually to get more out of the manufacturing material cost. For us, that is in the area of front-loads and top-loads. This is the first part. The second part is the material costs related to the imports. And in the imports 2 main categories, which is microwaves and air conditioners. Now the material cost in the third quarter was affected by the duties and the ForEx level. So in microwaves, we've already just said what we are doing on the material cost side is essentially we have completed price reduction discussions with the supplier. We have passed through the price increase. And we have redone the model mix. On the import material costs on air conditioners. Like we just said a few minutes earlier, we will be able to partially cover it up through a price increase, but we will not be able to entirely compensate the impact of the custom duty. We will have to compensate this with the other projects on the manufacturing side. This was the first point of the material cost area. As far as the area around the volumes are concerned, there are 2 things. One is if you look at the network increase that we made over the last 1.5 years, where we went from a network size of roughly about 4,000, 4,500 to around 11,000, 11,500 today, our extraction from the network that we've added has actually just not been good in us. There is far more value that we can realize from the network that we have put in place. So one job that we have, and we have been reconfiguring sales, manpower, redeploying the structures, which is a job that we sort of completed in December '18 is to realign sales and manpower to get much more from the new network that has been added. This is for all the categories of products we have today. Specific to the question that you asked on the 6.2 kg top-loader, that was 50%, 60% of the industry that we were totally missing, the addition of models in that sale. So we'll get us sales immediately because the same network is going to carry it. That is the third part. Have I answered all your questions?
Yes, yes, you have answered. Now, sir, so is it fair to assume that as far as the material cost goes and what you have enumerated in terms of all the exercises ongoing and some of it being completed, is it fair to assume that from year on Q4 and Q1 into next year, we should see increase in gross margins, because your washing machines are -- the value engineering seems to be more or less completed? Your microwave is also more or less completed, and we've increased prices there to counter any cost pressures. So the last one is the AC one, which, again, is not a very significant contributor as of now. So is it fair to assume that our gross market should actually look up?
Yes. So that is definitely something that we are committed to because this is one area that we have really not been able to walk down completely. And for our own listing also, we need a better margin profile. So for us, today, this is priority 1, basically, in terms of what we need to deliver.
So Mr. Rajshankar, in terms of EBITDA margins, what is the number that over, let's say, next 2, 3 years, I mean, what sort of number that you would be comfortable with? Because, I mean, currently, we are not making as much money as we should be making it. So that's in one year. What sort of EBITDA made, you would be comfort?
Yes. So the point that Mr. Chatterjee and I have always made in the investor calls is that a double-digit EBITDA profile is something that we are committed to, and we just have to deliver it, basically. So when you have a quarter like that, like we had in Q3, you are far off from that double-digit commitment, but that is something that we have to deliver. And the projects that we are doing are targeted at that.
Have you appointed any external agency for material cost sourcing or we are doing it by ourselves?
We are doing it by ourselves. So we have a fair degree of experience in this area. And our capability on the R&D side and the depth of manufacturing that we have, we are doing it ourselves.
So sir, in terms of material cost reduction as a percentage of sales, in terms of percentages, can you just throw some light? Let's say, over next 2 years, are we looking at 200 basis point reduction or 300 basis point reduction just out of material cost?
So if you look at the manufacturing side of the material cost a 2% to 3% reduction over the next few quarters, you what the projects will deliver. If you look at the import side of the business, the material cost improvement will be much more because once the ACs are being produced by us, the material cost structure will be completely different. So as far as microwaves are concerned, currently the actions we've taken is to just restore it back to the original level basically.
So let's say if it -- if our material cost is 100, currently what is manufacturing and what is imported? I mean just a ballpark number?
Yes. Mr. Chatterjee, I think, you can answer that?
That's actually -- basically, if you see around 75% to 80% is now 70%, 75% is the manufacturing, the rest is imported.
So 25% would be imported?
23% to 24%.
24%, okay.
The next question is from the line of Ansuman Deb from ICICI Securities.
I do understand the company's taking a lot of -- [ just in group fee ] margins. And one of the things we -- I additionally observed is that all companies in this space has lost gross margins Y-o-Y, we -- because of RM pressures or higher input duties or currency effect. But how easy has it been to pass on these kind of cost escalation in terms -- vis-?-vis your experience in the past because there are a significant amount of new players who have come in. So, a, is the competitor intensity difficult now to pass on the [ peer hike? ] B is, how is the demand situation as an enabler to pass on the price tag? Has it been better or worse in the past?
Okay. So Rajshankar here. If you look at the answer to your question as far as washer is concerned, which is front loads, top loads. We are heavily experienced, no difficulty in pricing and in passing on any commodity price increases impacts or even impacts of Forex. So that is no issue at all. As far as microwaves are concerned, this year, in the first 2 odd quarters, we had difficulty in passing on price increase. That was primarily because one player, Samsung, took a very aggressive position and we couldn't pass through the entire price increase. As on date, we don't see any problem in the price increase that we want to be done, which we have just shared in the call. As far as air conditioning is concerned, yes, we have an issue. We are not in the position to pass on the entire price increase. So my answer will be in manufactured products, no problems. In imports, air conditioner, as on date, yes, a problem. As far as the demand situation is concerned, there -- we don't see any problem on the demand side at all. In fact, with the network addition that we had, we should be selling much more than what we are selling today. And that is a basic sales job that we need to complete.
Right. So the second question was we are present in the premium segment of the washing -- washer, right, in the sense that our products command a premium in the market. So just from a strategy perspective, there are players who are not premium and maybe playing the mass market strategy, and they report a better margin also. So I'm just trying to understand that [ a math and ] high-volume versus premium and a lower share of the market, which strategy do you think -- currently as of now, is that a reason because of our margins being lower?
So, you know, the -- this point that you have made is an interesting point. And the only benchmark that we can draw from a player whose results are publicly available is Whirlpool. And if you look at Whirlpool, as far as the washers are concerned, there is presence in both in top loads as well as on the semiautomatic side. Our understanding is that their margin profile is because of 2 reasons. One is because their refrigerators are dominant and there is a great deal of gross contribution that they join from the refrigerator segment. We cannot benchmark that because we are not present. And the other is that their sales productivity is better than ours. So like I said a little while back, in terms of the network that we carry, we should be extracting much more from the network that provided over the year, 1.5 year back till now. For us to be able to get the kind of sales productivity that the Whirlpool has. Have I been able to answer your question?
Yes.
My point to you, that I don't specifically see this as a mass market versus premium kind of a discussion sort of margin profile. For us, the benchmark is that we need to get more sales. And we're as good -- for example, we cover the entire spectrum of the top load market, fully automatic. We'd be missing 50%, 60% of the market, and we just need to put a product into that and get the revenues that should come to us.
Right. I understand your point. Just that I'm a little bit of -- because our product is quite higher and because our front load is significantly higher -- high-end product compared to the other product, our margin profile being almost significantly different, but you answer it because of your better productivity also. And I'll take it.
So that is that. And sorry, I'll just add one more point. The basic penetration of the washer itself in the Indian industry is so low today that to really analyze and based on -- say that the front load is more expensive, the top loader or the semiautomatic is more mass market. Currently, I think, it is very early stages because the category itself is very less penetrated compared to any index from anywhere around the world. So as the basic power condition will improve and the disposal income in any case rising, the more increase in penetration of the Washing Machine segment itself will give a lot of industry volume.
The next question is from the line of Kashyap Jhaveri from Emkay global.
I had question on your other cost, employee and other operating expenditure. After many quarters, we have stabilized at least for last 2 quarters, in terms of absolute number. What's your outlook on this 2 cost line items, as we go forward?
The other expenses [ royalties], if you see, 75% to -- 75% is [ varied in a lot of things ]. Like freight, franchisee expense and other things. So It varies with the volume. So other than that, 25% is fixed in nature. Which increases in like rent and other things as per the agreement, because that since we are adding IFB Points from rent increase would be rare, otherwise expenses are under control. But in case of manning, for example, when we ramp up operations additional manning if it come, that cost will come and the normal increment that happens yearly that will come. Otherwise, our expenditure-wise, we're absolutely under control.
And in on the rent side, we sort of spend almost about 1 percentage point of top line there. So are the -- sort of the rental agreements, are they sort of fixed in nature for a couple of years, and then they increase...
Yes, that is there. But the one recent increase that you're seeing, for example, we're what around now 170 IFB points, okay?
Right.
What we do [ the rent] but we recover by selling product.
Right.
So that rent, when we increase, it goes up, but all other things are absolutely -- the agreement is already for 3 months -- 3 years with 5%, 7% increase. So these agreements are done like that only.
And how many stores are we sort of IFB Points are we going to increase? How many have you added in '19? And how many are we going to add in '20?
Kashyap? Yes. So could you just repeat that, please?
I mean, how many IFB touch points or IFB stores did we add in '19 and how many will be added in '20?
Yes. So we are, as on date, that's 490. We have 41 new construction, as on date. So that takes us to that 530. And the typical number that we have will be nearly 5 to 10 on a per month kind of basis, basically.
So does this trend imply that variable -- sorry, the fixed cost part also will to some extent grew at about 10%, 12%, including the new stores?
No. Actually, the bulk of the additions now that are happening are in fact almost 95% plus of the additions that are now happening are franchisee-run stores, which are essentially investments by the franchisees. The company, on the stores that we did, were primarily in the metro areas, because there the essential rentals are very high, and there is a marketing level is also that we get by presenting all the products of the brand. So other than the main metro cities, everything else is a franchisee on the metro.
So then at least should we assume that on the employee costs part, plus this 25% of the other OpEx, the operating leverage should start playing from this -- from FY '20 onwards?
Yes, yes.
Yes. We don't see any significant increases on this.
So as -- just to clarify on the employee cost plus 25% of the other OpEx, that should start at least playing out operating leverages go forward, but 75% of the OpEx is still variable?
Yes.
The next question is from line of Ankit Kedia from PhillipCapitals.
Sir, just wanted to know what is the rationale of doing own manufacturing of AC. Currently, we have less than 1 lakh units of sales. Our brand in the ACs is not very strong, and it's the most competitive category. Along with that, we have other manufacturers, like Amber and all who do manufacturing for others at a reasonable cost. So what is our roadmap? For the next 3 years, you said, INR 200 crores would be the expense and a 6 lakh capacity. So how will -- do we envisage 6 lakh sales in 3 years or we'll do contract manufacturing for others as well?
So that's a good question. I will try and answer this. One of the problems, I think, that we have had in air conditioners, is that as long as you import and sell, you really are not taken fully seriously in the market. And if you reflect back on the experience that we had on the top loaders, therefore many years we used to essentially trade the top loader as a category, and we are having volumes of 50,000, 60,000 in a year. As soon as we moved into manufacturing, we could configure this product the way we wanted. So it looked different. It was different. And we had a clear-cut producing as far as IV is concerned, the market immediately responded. The reason we are investing into the air conditioning manufacturing is for 2, 3 reasons. One is that, it is simply not viable to import and sell air conditioners given the current level of the customs duty and the Forex level. The second is that it is a market that will grow because the penetration is still very low. So we think that for a product configured in line with the IFB brand and produced by us, the way we produce the box size, et cetera. We think that will actually have a positive impact as far our sales is concerned. The point about whether we would like to do OEM et cetera because there are 1 or 2 people who are interested, but I think that is very, very nebulousnow. And that really take care of itself, I think, once the factory is built. Primarily, the capacity that we are creating, it's not 600,000 immediately. It's in a phased manner. The first phase of investment, which is about INR 125 crore that we are doing will give out the capacity of 350,000. And looking at the size of the market and the network that we have in place, even a good product at the right price, I think, we can get those at least.
So then, why can't we get it done by Amber, who does contract manufacturing for other brands as well in India? In the sense, such a big CapEx outgo with less than 1 lakh -- 101 lakh units currently we are selling. I can understand once you have reached 3 lakhs, you have the ambition to do own manufacturing because it's a big category. But why at this point of time?
So the answer to that will be the biggest B2B option of buying out from contract manufacturers within India. The quality level and the product configuration that we want to present cannot be done from its root.So we have done our index study on this. And -- which is why we chose manufacturing after the index study.
Ankit, can I say one thing. Mr. Ray just mentioned, the year before we started manufacturing, our top loader sale was 39,000. Next year was 118,000. Year after that was 176,000 there to 225,000. So it have been -- so when we start manufacturing, we have many advantages. We are very sure that we can go the different way.
Sir, just a point. So you are known for washing machines and our front loader was very strong. So with front loaders, top loaders is a logical extension, but -- and competition in the fully automatic category was not that high, compared that to ACs, which is a very, very competitive market, and customization is not very different in all the ACs. Hence the question.
Yes. So, Ankit, it's a good question actually. And it's definitely valid as a point that needs to be considered. Our beliefs are that the market size is big enough for us to really do a good manufacturing process with a direct product at the end of it, and hence, find a clear space for what will be an IFB issue. As long as we're clear that we buy out what we really want to present as a product under the IFB brand, we are unable to do that.
Sure. And sir, with that product, will we be able to give the 30%, 35% trade margins, because we are not present in all the counters today as well because the trade margins demanded are very high. So post that, will we be present across-the-board where our washing machines are -- is currently?
So actually, if you look at what the good players in air conditioners are doing currently, this issue we've got on the 35% margin is actually only limited to a few accounts, so they balanced -- they balance the scheme cost. You would be running networks where the scheme cost is not so high. And there would be some retail partners where perhaps you would meet that sort of a scheme to get the placement that you need. So if you have the right product range, which can address both these type of channels, then you can do exactly what the established good players are doing within India, which we are confident we'll also be able to do.
The next question is from line of Utkarsh Somaiya from Anand Rathi.
So I had a question on your capacity expansions that you undertook for front loaders and top loaders. So correct me if I'm wrong, you've begin that in the Q4 of FY '18, right?
Yes.
So could you please tell me where is it placed as of now? As in when is it expected to get over the entire extension plan?
So that is the last phase of the expansion, which will be completed by 31st March of this year. And that will give us a capacity of 600,000, for front loaders, per annum and 450,000 per annum for top loaders.
Okay. So as of now, capacity stands at what it was prior to that, correct? That is...
As of now, the capacity is in stretch. You can go to roughly similar levels in front loaders and maybe around 300,000 with top loaders. So there's a little bit of the balancing of the operations in-house, which will be completed by 31st of March and next year, capacity plan will be what I just gave you.
Okay. And sir, also, when do you -- in the first year of your operation after expansion, do you -- what kind of capacity utilization level do you expect?
So we have been running high capacity utilization. 85% plus over the last 3 years or so. So this is roundabout the kind of volumes that you'd target for the next year level.
Okay. So you mentioned that your capacity stands at 300,000 for top loaders, and it will increase to 450,000. So do you expect the capacity of 450,000 to immediately go to 100% in your first year? Or do you think...
So if the response that we're expecting from the 6.2-kg price point comes, when it is quantified in the market then these sort of volumes are definitely possible.
Okay, sir. And for front load...
We have to wait and see because we will introduce the 6.2-kg value in quarter 1. Sorry, you were asking something about front loader?
Yes. So I was going to ask the same question for front loaders, like, when about -- would you expect to reach full utilization in year 1. If not then, what are the number you expect?
So full utilization will be year 2. Year 1 utilization will be 85% plus.
Okay. That's very helpful. And also can you please share the volume numbers of your front loaders and top loaders for...
I will request you to talk to me separately, please.
Sure, sure. Sir, I would also like numbers for the subsidiaries. So can you -- should I ask you that separately as well.
If you'll call separately, I'll answer you.
Okay, okay. Sir, and all of the IFB points you said, 490. How many are currently franchising models out of the 490?
165 from our company. Balance is franchisee only.
Sorry, sir, I didn't quite get that. Can you, please...
165 number is for our corporate stores, company-operated [indiscernible] franchisee only.
Okay. So -- and one last question, please. On -- we -- on our front loader exposed to Panasonic and other OEMs, so can you please tell me the volume number you did for 9-month FY '19?
Sir, this year we have not done any exports to Panasonic because they opened that production in their own factory in China, and they're buying from there. So we have not exported anything to Panasonic this year.
Okay. And any other OEMs?
No. As of now, none, basically.
Other than in Nepal.
Sorry?
Some exporting went to Nepal, not much, which is under the IFB brand. In OEM capacity, nothing.
Okay. So on the exposed front, we shouldn't really expect much going forward, right, as of now?
No. I don't -- yes, I don't think anything there's anything much there.
Okay, okay. Sir, I also had a question on the Ramsons acquisition. So just wanted to confirm, now a capacity strength has increased to 400 kgs, right, from 160 kgs earlier?
That's correct. We can bring it up to 350, 400 kgs as earlier.
Okay. So you think, you can give us an idea about how big this market is as compared to what it was before you acquired? Like, the difference between 200 kgs -- 400 kgs and 160 kgs, the market price?
Yes. So this is actually a market waiting to be created because as far as the industrial laundry is concerned, the equipment replaces manual washing. So I can just give you an example. In the last 2 months, in Chandigarh, 1 or 2 of the jails actually went from washing clothes manually to actually investing in laundry equipment, where the inmates are now washing with the rest of their inmates, including all the hospital -- all the jail linen, et cetera. And so -- which have opened up a big market for us, thus it is replacing manual washing. So if you just look at the vertical of jails across India, that still will be a huge market. The key challenge here will be that we will need to go to all these buyers, we will need to sell the concept. We will need to help further the concept to be converted into a business case for their internal sanctions, and then our sales will come.
Got it. So basically, you cannot put a number to it because your potential customers can be, like, variable. You wouldn't expect a jail, which, it turned out to be, so similarly there can be other institutions which can be potential customers?
Yes, actually -- so we all know that the colleges are very good markets for laundromats to open because the students are outsourcing clothes and everyone's wearing branded clothes. So the growth of this business for us is going to be in marketing. We are actually able to go and convince customers about the business case and the business will come. And now that we have 2 teams, which is the earlier IFB team and the earlier Ransoms teams fused into one, so the numbers are much more now. And therefore, our ability to reach customers have significantly increased.
Okay, very good, sir. And on your modular kitchens, you mentioned you had a good order book this quarter. Could you please throw some light on that?
So currently, we are working in 3 locations, which is Goa, Bangalore and Kolkata. And the order book that we have now is almost 5 to 6 months of sales, but the sale itself is at a very low level because it's only 3 showrooms. So the agenda for the next year will be to pick 5, 6 more locations and expand this business. And the other pilot that we are dealing now in Goa is a combination of an IFB Points and also a kitchen. So some locations rarely currently have IFB Points, could also become locations, whether showroom, good showcase kitchens as well as appliances. But that is currently only at a pilot stage. We will take a few months to really pilot this and understand whether customers respond or don't respond.
Sure. Could you give us the number of the order book, if possible? I understand it's low. Just would like to know how we should look at it going forward.
In terms of value?
Right.
Yes, in terms of value, it is the -- let's say, roughly about INR 4 crores to INR 5 crores.
Roughly about?
INR 4 crores to INR 5 crores.
And we should expect this number over the next year. Or any substantial increase?
No, this will increase. So currently, if you see -- if we do roughly about, let's say, 16 lakhs to 17 lakhs, basically, our money on the kitchens, this should rise to 2.5 [indiscernible] per month based on the pipeline that are building there. It's still small.
The next question is from the line of [indiscernible] from VK Capital.
Sir, can you give us some color on the marketing demand and environment in the present and the immediate next 1 or 2 quarters?
Using market demand across all appliances?
Yes. And especially washing machines.
I think it's still healthy. November specifically was -- or September, October, November, all 3 months were very good. December was a little stressed, but I can definitely see a very normal market demand for this.
So there's some news reports and all that, January, February is very dull and stuff like that?
No, not [indiscernible]...
Total industry, overall?
I don't think so. I mean, it was a little spike as far as air conditioners are concerned, then people just sort of wanting material here and there. Overall, I think it is okay.
So we don't see any slowdown in the market, that's right?
The [volume] was quite satisfactory.
Okay, fantastic. Yes, go ahead.
No, we don't see any slowdown or anything.
Okay, fantastic. And sir, one question I had, are we subsidizing these IFB Points and are our margins a little low because of the costs we are incurring in the IFB Points currently?
Not at all. Because the IFB Points' total number of sales is around 15% of total sales, number one. Number two, it does a branding for us, where we showcase all our products with a focus to coming year, making profit from the industry. We're not losing any money.
From the franchisees?
So there's no question of margin coming down from there.
From the franchise stores, right, sir?
No, I said corporate stores. Franchise stores, they are selling actually. So whatever we sell to corporate stores is all gain. And definitely franchisees are making profit, that is why they're running those stores.
We do need to subsidize them initially for some marketing activation?
No, no. Maybe initially when they start, 1, 2 months we'll give them some support to start with, then they work their own.
Okay. And sir, these, once you're seeing in the urban cities or wherever you're using it as a binding tool, so that -- whatever that binding benefit, that is a hit on the margin in a sense?
No. Only the...
They are, like I said, corporate stores, we are not losing money, we are making.
But the margins would be coming down because of that?
No, no. Margin will not come down, but if you're having your own store, they will become [ renters and assets.]
See, I'll just clarify, Rajshankar here, I'll just second to what Mr. Chatterjee said. When you're running a franchisee store or a new retail store, there is a typical channel margin that you have, so that could be 22%, 23%, right? When you run into CoCo store, actually you're not paying any channel margin, and that is what is actually driving the range. So if you look at the company-operative store or a franchisee-operative store, in terms of the actual margin structure, it will be similar. In the sense of company store, the only differences are the channel margin that's come to the company, and in which, we are actually paying well for some of these locations, which are high rental already.
Okay. So are costs within the -- CoCo stores are within that 20% -- 22%?
Yes, largely. And this is as profitable as any other channel.
The next question is from the line Aditi Agarwal, an individual investor.
My question is given the large market share you have in microwave ovens. Wouldn't it be a better use of capital to start manufacturing microwave ovens instead ACs in line with the previous participant's question?
Yes. So it's a good question. We have considered this, but manufacturing this within China for microwave is so large that it is next to impossible to be competitive in the manufacturing ecosystem within India. So if you look at the typical components like the small transformers, small motors, just the cost of the glass in a microwave, these volume benefits are so large out of China that in India, we will not be able to match the material costs. So currently, it is not viable.
Got it. That makes sense. In terms of the comment you made on, it's been a difficult task to extract value out of your network. Why do you think that has been the case despite the strong brand positioning of IFB, especially in the washing machine category?
So -- yes, so I will answer this question. See, the addition that we have made in the last 18-odd months has been a network that has been created through distribution and typically, IFB, earlier, our -- 90% of the network used to be retail outlets that we were converting directly and even today, the bulk of the sales continues to come from that network. Now the distribution network that we opened up, and we did a screen check at our end to understand how to handle a distribution network, and because these are very small outlets, which have the needs to be trained to sell an IFB product, so they need to understand how to present [indiscernible] or the front loader or the top loaders that fit on the higher end of the price range. So it is taking us time to actually train each of these outlets, get the movement of our salespeople to also cover the newly opened outlets vis-?-vis the existing outlets. So it is just a question of time. And this whole network is only, what, 1.5 years old. We think that we could have moved faster, but I think once we've completed our sales realignment and the training of all these networks, the value extraction from this possibility is very large. You just need to do a much better sales job per se in getting value out of these outlets.
I'm not sure I understand fully. You say they are small outlets, but there is large potential for sales in the future. Are the -- what percentage of the overall industry sales would possibly come from these outlets?
If you look at players like Whirlpool, LG, Samsung, et cetera, they operate more than 70%, 75% of their sales through this distribution network. So if you look at your numbers, we used to earlier have 4,000, 4,500 and they have added around 8,500 through that distribution network. So even though individually they may be small, but put together, their contribution to business can be quite large for IFB. Now am I able to answer your question?
I would like to just follow-up on that, that addresses my question. Is it essentially, my understanding was that numeric distribution is quite irrelevant in this industry, weighted average distribution is more important, but long tail, while quantity wise, from what you're saying sounds 4,500 directly versus 8,500 indirectly, would this contribute to possibly 20% to 30% sales in coming years? Should this network behave the way you expect it to?
Yes. So those weighted average distribution that you use as a term is the correct one. If you look at earlier, our network was probably having a weighted distribution of nearly 65-odd percent, and with the addition of this network, we are now at 85% plus. So in terms of [indiscernible] to us, this would be about 20%, 22% in addition over last 1.5 year.
Right. And following up on that, what percentage of your network would stock more than one of your product category?
A very high percentage. I don't have an exact number of it right now for you, but wherever we are doing business, it will be the front loads, top loads, microwaves. So typically, a retail outlet would buy at least these 3 products. The percent of all accounts [indiscernible], but for front loads, top loads and microwaves, these are present in most accounts. And our section of accounts also has dishwashers and kitchen appliances, those are the product categories that we have.
So just a follow-up to that question. If they are already [ keeping, ] what is the training? Is it the share of sales that, that outlet is low primarily right now and that will take time to ramp up as the salespeople manning those outlets get more comfortable with explaining the features of your products? Would that help drive sales? What would drive sales to the outlets that you're already present in?
You are right because in the newly added network, our share of sales is very low. And those outlets themselves are selling. We need to actually get share from those outlets. So I'll allow people settle in, and they understand how to sell the IFB products better. Our share of business in their accounts have increased. You are right.
For example, would you have any rough estimate, very rough, nothing exact, like, in the top 20% of the outlets that you service directly, your share of business would be, say, 30%, whereas in the bottom, 10% of the outlets to that you added, say, 20% to your share of users like 10%? Any broad...
Yes. So we don't look at it in terms of an overall share. Because if you look at front load, for example, we would be running at 40%, but if you look at an air conditioner, we would probably be running at 1% or 2%. So what we look at in a counter, how do we increases the share of each category, not the overall basket.
Precisely my question. Maybe I phrased it wrongly. For example, in front load, you have 40% share in the overall market. In this 20% of the outlets, what would be your share of front load, for example? Or is it that you're over indexed [indiscernible] that you're already present. Your 50% share in the outlets you're present but 40% overall. I'm trying to understand what's your share [indiscernible] volume growth in these new outlets, the bottom half of the outlets that you've added?
Yes. So let me see how I can answer this. If you look at the, let's say, the recently added network and you go category-by-category. Then in that, our AC share will probably be less than 1%, because of the air conditioners still need to be placed across our entire network. If you look at top loads, for example, if we have, overall, 8% or 9% share, those set of counters, we would probably be operating now at about 3% or 4%, because our sales did not stabilize in those outlets. If you look at front loads, then probably, once we are placed, our share would be more or less in line with our overall share in any case because the front loads are well-established. As soon as we are in display, customer will buy. So my response to your question will be that it depends on the category. Overall, our extraction from the newly added network is significantly lesser than some of the -- than the extraction from the network that we've traditionally been displayed in. Which is why we feel that if we extract more than logically there is a [ lot of ] volume value growth available to the company. Does that answer your question, please?
That answers my question very well. That's perfectly what I asked. A couple of follow-up questions. These 8,500 outlets that you're targeting to a distribution type networks, how many distributors have you appointed for this?
It's about 135-odd [indiscernible].
And would these distributors be exclusive in nature? What could be the -- would they be servicing as well?
So they are not exclusive in nature, regarding a few of them. Most of them are distributors who also deal with other brands. As typically, a distributor -- a good distributor would be dealing with maybe 2 to 4 brands. That would be sort of a thumb rule across India.
Right. So I guess, we'd have to increase our share within the distributor sales as well?
That's right, that's right. So we have to -- one is, of course, get the shares at the counter level, which is the account level. Also, our current distributor is concerned because he is the one who has invested in stocks for IFB. One of the key [ dots ] we also had is to show the distributor that his ROI on IFB is as good as or better than others. So there is a linear work that we need to do also with the distributors.
Right, that makes sense. I guess, it's a slow process, and it takes its own time to show its -- to show progress. I had a question in terms of the category evolution that you mentioned for ACs. It's a pretty -- very bold comment that you made that you could have sold 90,000, but you're at a volume of what you are. Beyond the effect of rise, which is frankly beyond everyone's control, what do you think does IFB need to do in this category to -- what has not worked when you say that could have done 90,000, what is it that you estimated should have worked but did not work?
So that is a very good question. And I will try and answer this to you the way you see this. If you look at the air conditioner market, then it has a range of brands. So you would have a Goodridge operating at one end of the spectrum, and you would have someone like the Mitsubishi operating at the other end of the spectrum. And at the top, you would have a brand like [Old General]. In the middle between these 2, you would have LG, you would Panasonic, [Daike], Hitachi. The Japanese brands sitting towards the higher end and everyone is a little lower than them. I think one of the 3 challenges that we have for the IFB issue is to really be able to convey where we stand. And one of the questions that Ankit asked previously, to which I should've actually added to this point, is that we believe that the IFB brand can actually stand at the upper end of their spectrum. So I think what we have not been able to do is specifically answer the question that you asked, is that we have not been able to position IFB exactly the way we want. So in some parts of India, our people are competing against the Hitachi. In another parts of India, the counter in which we are displayed, the somebody might be actually comparing us to [indiscernible]. So what we would like to do as part of this localization project that we're doing is to configure an air conditioner and present it in a manner that IFB and the brand that IFB is, the air conditioner, matches up with that brand that we position correctly, which is towards the upper end of this spectrum and there is a set of customers who would be willing to accept basically the right products from IFB positioned correctly and that is the volume that we would like to achieve.
The next question is from the line of Manoj Gori from Equirus Securities.
Just one thing. So at the end -- at the start of FY '19, we had given indication about hiring 800 new sales promoters, which be -- which would be generating efficiencies from the newly added distribution network over last 1, 1.5 years. So any progress on that and how many of this 800 have been hired and for the future outlook?
So as of end of January, we have added incremental extra of around 350 numbers and the remaining still needs to be done.
Okay, okay. So secondly, if we look at the top load washing machine, I think the highest [ building screening ] would be 60 [indiscernible], if I'm not wrong.
In the market, yes -- but IFB, it is 6.5 kg. In the market, yes, the 6 and 6.2 kg are much more than the other categories.
So today when we are trying to gain that market -- gain volume from that category, which is the highest selling SKU, that will be 6, 6.2 kg, so why are we usually coming into 6.2 kg? If, ideally, we should combat 6 and 6.2 both if we want to target this entire segment.
So went through the details of the segment in terms of the price points and the certain margin profiles that we would command. And our choice was that we would not address the whole segment but we'd address the 6.2 kg segment. So if 50%, 60% is, let's say, 6, 6.2 category then more than 60% of this is basically this category and the price point that we are targeting of 6.2 kg and we'd like to play in that.
Okay. So can we just, like -- if you can share, like, what are key reasons for not coming in -- with both the variance?
Both the variance, means 6 and 6.2?
Yes.
If you look at the 6 kg, then typically, you will find price points at INR 13,000, INR 13,500 in the market, whereas, the 6.2 kg is at typically that around INR 15,000, INR 16,000 and above. So why we are not doing the INR 13,000 price point is that we don't think it is a good margin profile in that price point. And hence, we will stick to around this INR 14,500, INR 15,000 price point, which is this 6.2 kg.
So this 6.2 kg after launching, it won't be -- like, there won't be any incremental pressure on our profitability?
No, no. It will be a normal profitable business for us.
Correct, correct, correct. Which is why we chose this price point and the models that we've configured, fixed part of the margin profile also.
So it was -- sorry, if I've missed out, when are you planning to launch the 6.2?
It will be early quarter 1.
Early quarter 1. So maybe by next season, we would be ready. So maybe in a month or so...
Yes, yes.
Testing would be ready with the product?
Yes, yes. We will be fully ready, yes.
Thank you, ladies and gentlemen. Due to time constraints, that was the last question. I'll now hand over the conference to Mr. Chirag Muchhala for closing comments.
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 all for joining the call.
Thank you.
Thank you, everyone.
Thank you. On behalf of Nirmal Bang Equities, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.