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IFB Industries Ltd
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Ladies and gentlemen, good day, and welcome to the IFB Industries Limited Q3 FY '21 Earnings Conference Call hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Equities Private Limited. Thank you, and over to you, sir.
Thank you, Mallika. Nirmal Bang Equities welcomes you all to the Q3 FY '21 Results Conference Call of IFB Industries Limited. The management is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO, Home Appliances division; Mr. Arup Das, Head of Marketing, Engineering division; and Mr. Anand Reddy, CEO, Motor division. I now hand over the call to the management for their opening remarks, post which we can take questions from participants. Over to you, sir.
I welcome you all for IFB Industries Investors Call for the Third Quarter FY '21. We have with us Mr. Rajshankar Ray, MD and CEO of Home Appliances division; Mr. Arup Das, Head of Marketing, Engineering division; and Mr. Anand Reddy, CEO of Motor division. Now I will take you through the results of this third quarter. During the third quarter ended December 2020, the company has reported a total income of INR 929.53 crores, a growth of 32.3% over the corresponding period last year. We are happy to mention that this is one of the best quarter till date and is better than the second quarter substantially. With this, for 2 successive quarters, we have achieved double-digit margin. We should now try and ensure that we continue to maintain the same trend. Company, however, has lost revenue during the quarter, mainly due to issues such as availability of raw materials, electronic component, finished goods import CTCs. However, situation is better now and have improved. For the year ending period December 2020, company reported a total income of INR 1,929.84 crores, which is not comparable with the same quarter last year due to loss of operation during April to May 2020. EBITDA margin for the period was INR 169.6 crore, with a margin of 8.8% compared to 6.1% margin last year same period. With this, I will request you to start the question-and-answer session, please.
[Operator Instructions] The first question is from the line of [ Akash Jain from MoneyCurve. ]
Sir, I have 2 questions. One is on the AC division. I think you have guided in your note that you were expecting about 1 lakh units of sale in Q4, and given that the larger part of the sale happens in Q4 and Q1, and we have 5 lakh capacity, can you give us a very broad guidance in terms of what you are seeing for the next 4 quarters? That is Q4 that you've guided for 1 lakh and then Q1 and the rest of the year. That is the first question. The second question is basically on the Motor division. Obviously, that is helping the firm a lot. I just wanted to understand, is there also plans to become a supplier for this Motor division outside of internal use of IFB also?
RSR will answer the first point.
This is Rajshankar here. I'll answer the first point. As we had said in the previous call as well, our current plan on the AC output is to have IFB brand sale of 200,000 to 250,000 and OEM supplies of a similar nature. And hence, use of the total capacity of 500,000 per annum, which we have. This first quarter will be when we will just start. And between this quarter, and the next quarter, same period next fiscal year, we hope to reach this full volume of 500,000 per annum capacity level.
So sir, in the next 4 quarters, you are expecting that you will reach 5 lakh capacity utilization, sir?
So if I take the period from April '21 to March '22, the next fiscal year, then our attempt is to deliver the complete 500,000, which is IFB plus OEM put together. If you look at from Jan '21 to December '21, it may not happen that much in these 12 months because this will be the first quarter when volumes will ramp up.
Sir, can I ask you just a quick follow-up question on this?
Yes, please.
So sir, if I understand correctly, obviously, the branded IFB product will have better margins for us, right? Because that's something that we are making our own brand versus probably a little gross margin lower than in the outsourced products that we'll make. But on the other hand, the marketing and distribution costs will be nil for the OEM business. From an overall perspective, do you see big delta in the margins on both the products? Or at the gross margin level, IFB brand will be higher, but at EBITDA level because of lower cost, the assumption could be that the margins in both of them at the EBITDA level will be broadly the same.
So at EBITDA level, the IFB brand sales will obviously be more than the OEM sales. However, our purpose of the OEM is to use up plant capacity, have a base on which the direct and indirect overheads get distributed. And thirdly, our purchasing powers, our intention is to make it better because the volumes will be more. And therefore, air conditioners and washing machines put together on many of the supply chains, which are common like electronics, plastics, steel, et cetera, we would be able to leverage volumes for better pricing. That is the agenda. But on an absolute profit comparison, yes, OEMs will be much lesser than IFB brand sales.
Even at EBITDA level, without the lower -- with the lower cost...
Yes, yes. Yes, even at EBITDA level.
Anand, I would request you to answer the second part, please?
Yes, please. Regarding supply of motors to other customers apart from our own in-house consumption, we already are in discussion with Samsung, Panasonic, LG, Voltas and other people to cater to their motors for air conditioners as well as for their washing machines. So we are developing BLDC motors for them. And mostly in the next 12 months to 15 months' time, we will start supplies to them.
The next question is from the line of Ashwini Damani from Ratnabali Securities.
Sir, my question is on the OEM front, sir, how are we catering to the unsold inventory? Sir, will that inventory be shown in the books of the OEM? Or will it be -- or is that take-or-pay model?
I'm sorry, I didn't understand. You're talking about unsold inventory at our end?
Sir, my question is basically, I want to understand the model side, is it a take-or-pay model with the OEMs?
Yes, it is. I mean what is the take-or-pay model? See, our pricing with them is ex factory. We will produce for them on a rolling plan basis. And as soon as production is done, it will be dispatched to them against a plan that is discussed mutually. So if there is unsold inventory, it will either be 15 days, 1 month, whatever time period it is at IFB's end before it is dispatched. And if it is unsold inventory at the OEMs' end, it will be to their account. Our payment terms are ex factory.
Okay, sir. And sir, how are the margins -- so are we working on fixed margins? Or will we pass on the volatility of the raw materials to the OEMs on a quarterly or a 6-monthly basis?
Yes. So the agreement with them is quarterly pricing on commodities. Based on commodity movement, the pricing would go up and down.
[Operator Instructions] The next question is from the line of Srinath from Bellwether.
Congratulations on a good set of numbers. I just wanted to understand this surge in demand, has it been coming from the old distributor or retail points of 2,000, 2,500, or are we seeing a significant ramp-up in the newer 7,000, 8,000 retail points that we added over the last 3 years? And could you help me understand the reordering that is happening in the newer touch points? And how has IFB Points performed given that a lot of people who were averse to going to a big store, at least pre-Diwali? So just wanted to get a better understanding of distribution?
Okay. So the surge in demand, which has come, is actually across all areas. So for the larger chain stores or what is called as the large format for the smaller dealers, which we have serviced through distribution, there is growth in demand across all the channels. As far as distribution-led growth is concerned, which is the smaller dealers who are serviced through the network that was put in place over the last, let's say, 2 to 3 years, the -- in terms of percentage growth, it is more than the company average because this is a network that is now maturing. It has taken us almost 2 years to put things in place. But now that they have sold IFB, bought IFB and understood the rotation, the growth from them is healthier than the overall growth. As far as IFB Points are concerned, 2 things have happened since, let's say, July till January, there has been an incremental growth in walk-ins to the IFB Points across the country. But there has been a very significant growth in conversion percentages. So overall, the percentage conversions in IFB stores used to be at a country level at an average of about 40-odd percent, that through this pandemic period has increased to about 60%. So I think what is happening is that people are walking a little bit more into stores. But more importantly, they're walking in to convert. So our conversion percentage is very good.
Got it. What could be IFB Points contribution, sir? Now would this be around that 15-odd percent? Or has it gone up?
Yes, yes. It's about 15%, 16%.
And online also would be around that 15%? Or that would...
Online. Mr. Chatterjee?
Online is 20%, I said.
Online has increased, Srinath, through this last few months.
Okay. Okay. So basically, IFB point throughput conversions are higher, online has increased and the general trade that we went through has also seen an increase? Fantastic.
Yes.
Could you help us understand the growth? What has driven growth? Just want to understand how did front load do through the quarter? And what kind of growth did we have in front load? And was this driven by top load, front load, some kind of qualitative feedback on what drove this INR 900-plus crore top line?
So front-load, top load, both have grown, Srinath. And Mr. Chatterjee can give you the -- separately also. And growth has been -- I mean, demand was more than what we could supply. So we had lost sales in October, November, December because we couldn't supply because of the supply chain-related issues, but demand has been driven by both these. Demand was very high on microwaves as well. And of course, in categories like dishwashers and dryers, whatever we were making or getting, we were selling. So it's a uniform growth actually.
I will just take it that front-load had a growth of in number, 33% in quarter 3. Top load 17%, microwave is around 49%. The major I'm saying.
Perfect. Perfect. So after a long-term, you're finally seeing growth in microwave, sir?
Yes.
Yes. So if you remember, over the last 2-odd quarters, we've been fixing issues with the lineup and then, of course, in the last 1 year, we had issues of margin to fix on the microwave because of the duty structure, et cetera. So now the new models have entered, the supply lines are better, so the growth is also coming back basically.
Got it. Got it. And the last question, sir, the last time you had said that channel -- from channel feedback you had felt that demand was outstripping supply significantly. Post festive, as we stand today, how are you seeing the demand environment going forward for this and next quarter broadly?
So I -- my feeling is that the demand is still strong. And if you see our present position, our extraction from the network that we have, even though it has significantly improved from previous level, there is still more that we can get. So one is, of course, the market demand. The other for IFB more specifically is being able to continue to get more out of the network that we have. I think on both counts, overall, the demand is no issue at all.
The next question is from the line of Riddhima Chandak from Roha Asset Management.
Sir, on the IFB point sales, so what is our SSG growth? And what is our strategy on the after-sale services? And what are our repeat customers? Do we track this data?
Mr. Chatterjee, would you like to answer the first point?
The sales percentage in IFB point in the third quarter is around 14%, on the total sales.
No. I mean in terms of SSG growth, same-store sales growth?
Yes. So this is same-store sales growth only because we have not added too many IFB Points over the last 1 year. Especially through the pandemic period, we couldn't add any new IFB Points. So that was [ with the ] same-store growth. As far as the next question that you asked was, could you just repeat that one?
Yes. So our strategy on the aftersales services? And how much is the repeat customers?
So the aftersales services of the IFB point is the same as the after-sale service for any other sales points. It's a common service. There is no special attention to service over and above what we are normally committed to. So this is one point. As far as the repeat customer is concerned, in our present system, we are still not able to properly track the repeat customer walk-in into IFB stores. We are putting in a system now, which we started working on in October. And that will go live from this month onwards. It's a project that we are doing with other way, where this data of customers walk-in and the related customer experiences are all being put in place.
So this repeat data customers, you are putting in only IFB Points or other MBOs and other sales areas?
Yes, across all customer touch points, specifically. I can give you some broad-level figures of IFB Points repeat purchases today, but they would not be very accurate because there is no accurate data behind it. So for example, we sell our IFB essentials, consumer goods from IFB Points, and that's a fixed set. So somebody who buys one keeps coming back. But to put an absolutely accurate data system in place that will start from this month, with this exercise that we've been doing since October.
[Operator Instructions] The next question is from the line of Nirav Vasa from Anand Rathi.
So sir, my first question pertains to the PLI. So would we be bidding for the PLI which government proposes for air conditioning?
Yes. Yes. We have filed papers for the same. Some of the finer details in the program are still being worked out, but we will be participating, yes.
Okay. Great. Sir, next question is, like, sir, with regards to contract manufacturing, we are doing contract manufacturing for both ACs as well as washing machines? Or how is it?
Only for air conditioners as of now.
So do we intend to expand into washing machines also?
See, right now, there are only discussions happening, but nothing is concluded. For the immediate future, which could be, let's say, 1 quarter or 2 quarters, there is a need that we have to fulfill our own demand, which is our primary focus. By this time in the next 2 quarters, we would have experienced the air conditioners OEM supplies, and we would review it after this point, please.
Got it. So sir, actually, I wanted to understand what is our broad plan. Because this working as a contract manufacturer as well as having your own brand can be quite conflicting also as well. So going forward, maybe if I look at from maybe 4 to 5-year perspective, how would we like to position our company as a brand or as a contract manufacturer?
So our primary positioning is the brand. But as we had shared, the strategy behind the OEM play in air conditioners is, that for the specifications and quality levels that we carry, there is a market for that. And therefore, we would like to associate with a few 2 or 3 players and build volumes with them. And that helps us in 2 ways. We are still servicing the high end of the OEM market, not the mass or the low end. And secondly, it increases plant utilization, distributes overheads and brings to us purchasing power basically. So if you talk about a 5-year horizon, this strategy will remain the same. Our primary position, however, like I just said initially, is the IFB brand. Our primary position is not a OEM supplier.
So sir, now like who actually are our customers in OEM? Can you name around top 5, top 5 customers?
Yes. So it is essentially 3 players. I would just request as soon as the supply starts and then we'll inform you, but it's all been finalized. We will be servicing only 3 players, starting next month onwards.
Okay. And sir, we have been hearing a lot that there is some -- there are several issues with regards to getting some electronic components from China, and there is some supply side disruptions. So are those supply side disruptions over? Or how is the scene on that front?
Yes. So those supply change disruptions are severe, and they are still continuing. There is a global shortage on chips. The typical cycle times, which used to be, let's say, a quarter, have now stretched to more than 6 months. And in general, it has become extremely difficult to buy electronic subcomponents. Now that stress still remains with the system. They are one of few selected items, which is quite high, but it is something to be managed. So like we handled the Q3, we will also handle Q4, but it's not become easier. It is as difficult as it was in Q3.
The next question is from the line of Manoj Gori from Equirus Securities.
Sir, first of all, given that the raw material prices have increased sharply. And obviously, the impact of this raw material increase would be visible more into fourth quarter and in the coming quarters. So currently, what's the pricing strategy? What price increases we have taken on a blended basis? And how confident we are on maintaining this 44%, 45% kind of gross margins. So can you throw some light on that?
So Manoj, we have made the price increase as of 1st of January. The blended increase was between 5% to 7%. This covers the expected material cost increase up to, let us say, Jan end and specifically, the increases have been very high on areas like plastic, even on electronics. The price increase was passed through on washers, microwaves, dishwashers, et cetera. On air conditioners, the price increase is quite heavy with the inputs on copper, et cetera, having gone up substantially. We will pass-through the price increase in this month, around end of February. The attempt from our side is to keep the gross contribution level similar to what they have been. However, this quarter, and the next quarter, the impact of the price increases and if they continue from this quarter to Q1 of the next year is something that we will have to keep a watch on. But as of now, whatever impact was there, we have passed it through to the market.
So given the current level of RM prices for EBS and for metals, so we have largely covered ourselves, but if any incremental inflation in RM prices will definitely -- we will assess those situations. Is that understanding correct?
Yes, that's correct. We will even assess them again end of March, early April. Because right now, there is a lot of unnatural price increases if I can use that quarter. And there's no logic for what is going on. So we will just keep a very close watch on it. But we are not planning to absorb any raw material increases.
Okay. So all the key component issues have been sorted out. So if you look at during the quarter, obviously, our home appliances business has registered strong growth, albeit on a favorable base also. But if we look at -- we would have gained some market share in any of the categories?
So I expect that we would have gained share, but we have to see the data and then understand it better. So I think by mid-February, we'll have a better idea, Manoj.
The next question is from the line of Kashyap Jhaveri from Emkay Investment Managers.
Just one question on the cost side. I joined the...
Mr. Jhaveri, there is a disturbance coming from your line, sir?
Can I come back in the queue again? Maybe I'll reconnect and come back.
Okay. The next question is from the line of Ashish Jain from Macquarie.
Sir, my first question, is it possible for you to share your revenue breakup for the Home Appliances business between the various products that...
After the meeting or tomorrow morning, sometimes, I will answer you.
Sure, sir. And sir, secondly, in terms of the AC supply chain, can you give some sense of what is your dependence on imports? How much is local third-party sourcing and at what level are you backward integrated in-house?
Import is around 67%.
When we started, imports is at 65%, 67% and the localization plan, including controllers, et cetera, all put together, was bringing this down to about 35%, which we will achieve by the end of this Q4, and then it will remain stable at that level of 30%, 35%.
Okay. So you are still dependent on 65% on bill of material on imports. Is that...
As of basically January, yes.
Okay. Okay. But -- and sorry, I didn't get it in that case. And this 65% goes down to?
About 35%.
Okay. By Q4 this year itself?
Yes, that's right.
Okay. So sir, then is it fair to say that the 35% is largely compressors is what we will continue to import and for pretty much everything else we have?
Yes, yes. It's compressors, some amount of copper, aluminum all of that put together.
And PCB and all will be local?
Sorry?
PCB and all will be local or?
Yes, we have -- we started the localization process on the AC controllers, about 6 to 7 months back. We are now in the final stages of testing in the field. By the month of March, the entire controller would have been localized.
Okay. Sir, one more question I had. So if you're targeting 100% capacity utilization by March '22, and you said that the focus remains on the brand. So what's the thought process on the growth beyond that? Will it come through CapEx? Or will the mix keep on changing in favor of brand and your OEM sales will go down? Because, let's say, with a 2, 3-year view, if you could share some thoughts on that.
So when we want to go beyond 500, 000 level, and the first step of growth is a plant that produces in 2 shifts instead of 1 shift. Then in some areas, like basically sheet metal, we would add in a press or you would ask a supplier to come and put up a capacity next to you. So the incremental additions as far as equipments are concerned are small. It is more investments at the supplier end in terms of toolings and the plant improving productivity further and producing in multiple shifts instead of single shifts. So the growth beyond the 500,000, obviously, doesn't require the same amount of CapEx.
Okay. So sir, just for my understanding sake, is it fair to think that, let's say, 500, 000 to 1 million units over whatever time frame you achieve that, it can be done largely through a bit of, let's say, debottlenecking and supplier and CapEx and all? Or like 1 million is an aggressive number through multiple shifts and all?
No. So when -- if you look at our plant, and you talk about 500,000 to 1 million, then it would require some degree of expansion on the sheet metal area, it would require substantial increase in suppliers manufacturing capacity. But it is -- this same plant can produce 1 million provided we put in the inputs basically.
The next question is from the line of Ram Modi from Prabhudas Lilladher.
How has been the channel response to this 5% to 8% price increases with the special...
I'm sorry, Mr. Modi, there is a disturbance coming from your line, sir.
Is it better now?
Yes, I would still request you to mute your line after your question, so that the management can answer your question, sir.
I just wanted to check, how has been the channel response to the price increases which you have taken? And is there any pushback in terms of customer demand or have you seen some softness post the price increases which you have taken?
So the awareness of the significant increase on the raw material prices and customer prices, I think is an industry-wide phenomena. So people know that prices have significantly increased. And that is not just for IFB, it is for all companies, and it is not just appliances, it is happening across the board. Even for products like food, you have seen the kind of increase that has happened in the last 3 to 4 months. So as of now, I don't see any problem. But having said that, price increase was passed through on 1st of January. So it normally takes 1 or 2 months for the full impact of that to be felt. So we will have to just watch it in this quarter. But everybody has increased prices. So personally, I don't see any problems in there.
And sir, would we have to invest more in terms of CapEx, if we win the bid in the PLI scheme?
The PLI scheme calls for a commitment of investment over a time horizon. We have looked at the figures, and we looked at what we would normally need to do for the growth of the air conditioner as a business overall. And the way the targets have been set is fairly reasonable from the government side. So once the details are clear, we will move the formal papers. But as of now, it is very reasonable in terms of what is to be expected from a company mix change for the PLI support.
The next question is from the line of...
Excuse me. Can you take Mr. Das' line, he's lost the connection?
Yes, sir. I'll just call him. The next question is from the line of Kashyap Jhaveri from Emkay Investment Managers.
Yes, sir, am I audible?
Yes, please.
Yes. I have just one question. Rest all have been already discussed. On the cost side, and I'm not sure I joined the call about 10 minutes late, so if this was discussed. But our operating costs have been relatively flattish Y-o-Y as well as quarter-on-quarter. So any line item which probably could like help you or something which could probably bounce back going forward in absolute terms as well as, let's say, as a percentage of our -- percentage of our top line?
Mr. Chatterjee, would you like to answer?
I don't think so. We will retain this thing actually. Whatever the...
We're taking about INR 160 crores, INR 180 crores a quarter, right?
Please, I beg your pardon, I missed it.
Sorry. So when you say it will remain as it is for the quarter, we have a quarterly run rate of ex employee and ex raw material -- other operating cost number of about INR 160 crores to INR 180 crores a quarter. What you mean to say is that will that number remain the same in absolute number?
More or less. There is -- there are 2 parts to it, which is variable in nature, which will vary with the volume and revenue. There is some fixed part of it. There could be minor changes here and there. It may not be exactly same, but this will not affect the bottom line.
Okay. And the variable part, A&P and would warranties also be part of that?
Of course, these are linked to the unique volume actually.
Okay. Okay. And what would be that number for 9 months?
I didn't get you.
For 9 months, what would be that number, A&P spend for 9 months?
Cost you're asking?
Yes, advertisement and promotion cost?
So sorry, this is Rajshankar here. If you look at cost of our spend, they will be similar to quarter 3 spend because in quarter 4, the investments on the ACs will rise a little and the others will fall. So by and large, what you see is a quarter 3 spend, you can add that to quarter 4, and that will give you the 9-month figure. Does that answer your question, please?
Sorry, I missed the last part, sir. Unfortunately, I could not hear.
I said the quarter 4 spend will be similar to the quarter 3 spend. Because in quarter 4, the normal operational advertising and promotion will reduce, but the spend on ACs will increase. So overall, it is similar. So if you add up Q2, Q3 and project Q3 as Q4, you will have your number. Does that answer your question, please?
Yes, that does. And also, if you can probably disclose for 9 months, how much have you spent in total?
So can Mr. Chatterjee answer that to you separately, please?
Sure.
The next question is from the line of Abhilasha Satale from Dalal & Broacha.
Sir, I want to know what are the utilization levels at current level in front load as well as top load washing machine? And how much room it lays further for us to reach to 100% utilization? When we will need another -- further capacity expansion is my question?
So on front loaders, we are running at more than 100% currently because we have been producing at a run rate of 50,000 to 60,000 per month, and we have shortages. So we are already above 100%. On top loaders, we are at about 80%, 85%. So there's headroom for another 15%, 20% growth. That's the position for these 2 products.
Okay. So like, are we in the process of announcing any capacity expansion or anything as we are running at 100% utilization, and we have also said that the demand is still there. We are not able to cater the demand. So if you could just give me monthly output for both the products? And do we have any CapEx plan?
Yes. So if you see, we are evaluating capacity additions by the end of this quarter to finalize and then put in place for next year. And they will raise capacity of front loaders and top loaders both. So we can give you these figures in April. The plans are being made, and they'll be finalized through the end of this quarter.
Okay, sir. Sir, monthly output for both, if you could just give, front load and top load?
So can Mr. Chatterjee give you the figures separately, please?
Yes, yes. Sure.
The next question is from the line of Dipan Mehta from Elixir Equities.
Congratulations on a very good set of numbers. My question is that in this kind of growth rates which you are seeing, do you think something has changed in the industry at a structural level? I know that work from home and all made a difference. But now almost the whole country is going to office and going about their regular task. So maybe the pent-up demand also is more or less over and done with. When you're talking to your dealers and customers, what do you think states the fundamental level that perhaps you have gone to a higher growth plane for the next few quarters or years?
Yes. So that's a good question. I can tell you our understanding of this. So I was saying that our understanding is as follows, and I'll try to summarize that. On the product categories on which we operate, which would be the washers, the microwaves, the dishwashers, on these product categories, dryers also, I think there is a fundamental shift during the pandemic because the pride at home used to be the television, the refrigerator, et cetera. And something like a washing machine used to come in last because it was a chore that nobody wanted to do. But the pandemic has elevated washing whether it is a dish or whether it is a piece of clothing to a whole new level because everybody understood the importance of the appliance. And I believe that, that is a fundamental shift. And that demand may not remain at the kind of levels that it has been in Q2 and Q3, but it is definitely going to settle at a much higher level than before. This is the first trend. The second is that if we look at our own data, the growth rates out of the Tier 2, Tier 3 cities has been far ahead of the growth rate from the typical metro towns. So in a Gorakhpur or a Varanasi or upcountry of Madurai, okay, in the small towns across India, in many places, if we were selling 1 dishwasher in 3 months, now we have maybe 150 dishwashers a month and we are short on demand.
Okay. But supply...
Yes. And on -- in these towns, washing machines, people would not buy because it was not important. Now the same people are buying fully automatic washing machines, not even semiautomatic. So there is a fundamental shift. I think this trend is here to remain because the pandemic has essentially changed the way people view the appliances, especially the ones in which IFB is a participant. I'm not talking about things like television, et cetera. As far as air conditioners are concerned, because our sales is still very low, we need to understand the market more deeply. And January to June will be our first season in that sense with our manufacturing range. So we will have insights to be able to share with you at the end of Q2 on how the demand curve is looking like, basically. But at least for the AC segment, there is definitely a pent-up demand, which will get serviced in this season because in the previous season, it was essentially 0. So in the short term, you are bound to see growth.
Okay. Are there any -- my second question would be, sir, are there any other such product gaps that you want to explore? I think air conditioner was a good option, you use your distribution network. But what about cooking appliance? I mean what is on the canvas in terms of new products?
So if you look at the product range that we have, then there are many categories in this where we have a lot to do because they are not well placed across India, sales is still well below potential. So let's say, dishwashers is an obvious category. It is there, realization has grown, our sales can be much higher. We have to supply well and distribute well. If you look at our cooking products, which is hobs, chimneys and ovens, we have to do a much better marketing job than what we are doing. The volumes can be much more in these categories. If you look at dryers, their distribution can be increased. Obviously, in ACs, we are right at the starting point and a lot is possible. So if we look at the next 12-month horizon for AC, then these are the categories that already can bring us a lot of growth, we have to focus on that. And that includes categories like front loaders, top loaders where there is still enough scope for us to expand. Have I been able to answer your question?
Yes, sir.
The next question is from the line of Srinath from Bellwether.
Sir, taking up on the last question on dishwashers. The first part, I wanted to ask you is that we are looking at 1 lakh, and therefore, wanted to ask you how demand is, and I think you've answered that. But just want to understand what are we doing with supply? Are we going to buy parts and assemble it here or we have kind of tied up for 1 lakh with the OE supplier. So just want to understand on sourcing? And is there any scope for localizing?
Yes. So we have done 2 things. Right now, we are not thinking of localizing. But we have put in measures at the supplier end in terms of taking fixed lines of production, putting in more capacity there. And so those actions have been completed about a month back. There were some product additions that we wanted to do within the range, those we have closed. And our planning over a 12-month horizon is that 100,000, you have the figure, right, which we think the issue is now resolved from this fourth quarter onwards.
So what kind of volumes or it's not specific -- what kind of volume growth did we see in dishwasher in Q2, Q3, as in where we will be able to -- did we get supplies during the last 2 quarters?
So we have lost supplies in both Q3 -- lost volumes, sorry, in both Q2 and Q3 because we just couldn't supply, and there were a lot of problems at the supplier end. If you want the percentage growth figures, et cetera, Mr. Chatterjee can give it to you, Srinath.
The growth was around 246%.
Wow. Fantastic, fantastic. Okay, sir. So basically, this is your fixed OEM supplies, the channel is ready. And so as you get supplies, you'll be able to service this market?
Yes. So now if you specifically look at Q4 and then in Q1, now we have 2 things to do on dishwashers. One is that now that the suppliers are coming in, we need to service the demand, which we couldn't service. This is one. The second is we need to expand the presence of the dishwashers. So let's say, it was a very limited presence across the channel that we have, but the demand is much more broad-based now. So as a sales team, we have to go and ensure that the placement of this product increases to places that we did not service properly. So the growth will come as a combination of both the things.
Got it. So say, for example, it would have been in those 2,000, 3,000 high-frequency touch points, may not have been in the rest of the 14,000 touch points we have, so on and so forth?
Correct. Correct. So at least in another 2,000 to 3,000 touch points, definitely, there is a very clear-cut demand for a proper placement and then the sales from that basically.
Okay. Okay, sir. And there, we were market number 2, pre-COVID, right, in market share?
Yes, that's right.
Okay. Fantastic. And one last question, sir, on the AC business. Is this plant running 3 shifts or 1 shift? I just want to understand the PLI investments or the investments you're going to make, is that going to be to actually put up a newer facility? Or would it be basically within the same plant and have debottlenecking extractions? Just wanted some...
So the PLI investments will be basically in the existing facility only for the normal cost of growth as we require it. We are still waiting the finer details and the actual final figures, et cetera. That's why I'm not replying very specifically to this as of now. From this month onwards, the plant on some of its areas, like, for example, the sheet metal shop, it will be moving into 3 shifts, and the assembly line will be moving into 2 shifts.
The next question is from the line of [ Disha Sheth from Anvil. ]
Congratulations on a great set of numbers. Sir, I wanted to ask, in this Q4, will AC sales come in, like will we record AC sales?
What do you mean by record AC sales, please?
As in, we will start AC sales in this coming Q4 of FY '20, I mean?
Yes, that's right. AC segment will be a substantial portion in Q4.
Okay. And sir, how has been the response from the channel? If you can give us a broad view?
So in the places where we've sold or we have been placed over the, let's say, the last 1 or 2 quarters, let's say, primarily 1 quarter, the feedback on the performance, the customer feedback, et cetera, has been very positive. Our placement is still very small. And there is much more efforts that we need to do to ensure that the air conditioners are placed across all relevant channels. Now that is the big challenge for Q4.
Okay. And sir, in January, what is the price hike did we take 1st January? That has been how much?
So blended is 5% to 7%. And we've taken that increase in the categories of washers, microwaves, dishwashers, dryers. The AC price increase will happen end of this month.
Okay. So this 5% to 7% will take care of the raw material increase in the Q4. So the margins might stay in the similar levels of Q3. Am I getting it right?
Yes, yes.
Yes. So we won't see a dip in margin because of the increase in raw material?
At gross margin level, we will remain similar. The EBITDA margin, of course, is dependent on our performance in Q4.
Okay. And sir, when you said that the demand the highest it was due to higher demand and network extraction. How much more scope is there for network extraction, if you can just explain broadly in detail the network extraction?
So the network extraction is our largest lever of growth. So if you see, we are active in rough about 12,000, 12,500 counters across the country. If you take a category like front-loading washing machines, for example, then on an average in a month, we would be billing to roughly about 3,000, 3,500 of those 12,000 counters. And we think that the potential is at least 6,000 to 7,000 counters. So it is double of today, in terms of extraction on a monthly active basis. There is a story on -- top loaders, microwaves, et cetera, is very similar. Even in the case of dishwashers, the actual accounts billed per month vis-à-vis the universe is very small. So our internal agenda with our sales team is that the increase in this number of accounts build regularly, business done regularly is the largest lever for sales growth that we have. Have I been able to answer the question, please?
Yes. And sir, in Q4, you see this demand trend, we reported 35% of growth to continue, like other customers converting the same SKUs because Q3 was more of festival, sir?
So if you look at what is possible for us, the AC growth is a straight addition to the top line. And our work on extraction for the other product categories, the kind of levers we have is what I just told you. So there should be healthy growth for us on an ongoing basis. I don't want to specifically comment on the 30% or 35%. But we have the levers for growth on a sustained basis.
The next question is from the line of Rahil Jasani from ICICI Prudential Life Insurance Company.
Yes, I just wanted to ask on AC now that we have a wide range of products, and we expect something in Q4 as well, a new addition to our range. What will be the average selling price for the IFB branded products?
It's about INR 30,000.
Around INR 30,000. And you expect that to increase by whatever price increase you will take in February?
Yes. That's right.
Okay. Okay. And sir, just one last question. Will you be coming out with any range in refrigerators?
So that is under reevaluation. We have not reached the conclusion as yet, but that is being actively studied within the company.
Okay. So can we expect anything in the next year then?
Yes. So we will share it with you as soon as something is approved from -- within the company.
The next question is from the line of [ Shrikant ], an individual investor.
Congratulations on a good set of numbers. In the last quarter, you were referring to a cost rationalization opportunity by combining the supply lines of various product lines, it will be great if you can share the progress on it?
So we began the work on the material cost in May, which we have also shared in previous calls. And a lot of the work was also on consolidation. So if I take the example of a chip, for example, on the controller, and there is a distributor that we are buying it from, let's say, Singapore, then the growth of the AC business as well as the washer business is actually increasing the throughput for that particular distributor by 2, 2.5x in many of the cases. So one was what we could do to drop material costs going component by component. And the other one was the benefits of the consolidation. This is an exercise that we are almost complete. It's in the final stages. So all the actions go into place from the month of March and April. To your specific -- I mean, the answer to your question is we are in the final stages now of the material cost work. Is there anything else that you'd like to know, please?
No, no, that's all. I think the actions will be coming in from March, which will reflected in our numbers going forward.
Yes. So you will -- the impact of this will start in Q1 and the full impact will be in place by Q2.
The next question is from the line of Manoj Gori from Equirus Securities.
Yes. Sir, one last thing, just wanted a clarification on this. There have been a lot of talks across industries, across sectors, that there have been a lot of disruption, especially on the supply chain and for the components and raw materials. So like -- we -- obviously, you already highlighted, like most of the issues have been sorted out. But do you have a better, like current inventory levels with IFB, like how well we are covered for fourth quarter or first quarter?
So we had the issues on the electronic supply chain and let's say, if we had a safe pipeline of 3 to 4 months, let's say, 12 months back, today, that pipeline has reduced to less than a month, Manoj. So in electronics, there is a very serious stress. As far as commodities like steel and plastics are concerned, the material is there, but it's just that people are sort of just putting across any price that they want. And there is some amount of game playing that is going on here. We just have to wait and watch and see how this goes. Specifically, as far as shortages are concerned, I would put Q4 similar to Q3, a little less reduced but on some of the electronic components, definitely, the stress is more in Q4 as compared to Q3.
Right. Because I think this would be a larger concern because even when we do speak with some of the channel partners, they also are looking to build up inventories, I think that there could be some future disruption in supply chain. And obviously, they -- large-format stores, especially would be better positioned to build the inventories. But ultimately, primary sales might be under pressure, maybe Q4 end or maybe in Q1. So that was the key reason for this question.
So as far as the channel is concerned, Manoj, in the case of IFB, the channel inventories are always very thin. Even in the case of ACs, we don't want to play the kind of game that is typically played in the industry when you pump in material in December, which we've had in May. Because if you specifically look at last year, the channel had tremendous stress because of the AC inventory which was not sold. And that stress remains even now in the channel. So that is not the kind of model that we want to build, but inventory buildup at the supplier end or at the distributor end of the suppliers, in some places, yes, we have increased inventory over the last 2 months. For some places, the stress will remain forever. Market inventory, IFB has not gone up.
Right, right. So at least, we are well covered till fourth quarter and obviously, there could be some concerns, but we would be taking care of that?
Yes, yes. We will be trying to take care of that basically.
The next question is from the line of [ Akash Jain from MoneyCurve. ]
Yes, sir, just one follow-up question on the dishwasher. If my memory serves me right, you had last time said that we are importing the products from Turkey. And there were some supply constraints because of all the issues that we were facing in Turkey. Are -- when you say that we have sorted out the supply chain issues in dishwasher, are we indigenizing the products here? Or it will still be imported from Turkey, but the supply chain has become more smooth?
Yes. So it is the second part of your point, they will remain imported for now. And the situation has improved in Turkey.
And we are not adding more suppliers. Is it not possible to add more suppliers, maybe some derisking by spreading out geographically or with more OEM players or something like that?
So that work was also started a few months back. Once it reaches finalization, we'll tell you, please. But we are also looking at that.
The next question is from the line of Sudarshan from Dhunseri.
Am I audible?
Yes, please.
A couple of questions. Sir, firstly, taking cues from one of the previous questions that as we stated that the material rejig that we had started sometime in May, they'll play out -- the expansion will play out starting first quarter of next year. So can I assume that the current gross margin expansion is irrespective of that material rejig. So there is some more scope for that. Is that correct understanding?
Yes, that's right.
Okay. Okay. And second question is, sir, in terms of our -- this new AC capacity, as you said that you will be selling IFB branded at INR 30,000 rate. What should we expect as the peak overall sales revenue number from this part of the business, let's say, at full utilization? But, say, in FY '22. My question is for FY '22.
If you take, let's say, 500,000 air conditioners, and you take a figure of, let's say, INR 20,000 on a conservative basis, blended, then you're looking at INR 1,000 crores plus as a terminal figure.
That's a conservative number, right?
Yes, that is a conservative number, but by itself, it is also a large number.
Sure, of course, unless you are trying to push my expectations a little bit. And sir, one final question. So as you stated in your presentation that you have repaid some of the debts, although at net debt level, we are debt-free and sufficient cash, just want to understand what's the thought process behind because we may be announcing some CapEx, say, starting out next year? So are we willing to cut down or repay the debt? Or we want to be absolutely debt-free or some bit of debt is okay? So I just want to understand the thought process behind it.
We plan to cut down little further, where we may have to bring it down to around INR 175 crores. Because as of now, because even in the month of January, we have repaid some amount to the [indiscernible]. We are expecting to bring it down to INR 175 crore level. As of now, that's the plan. And the CapEx, whatever is required, we will be funding it from our internal generation.
Okay. Okay, sir. So just one final question, if I may, squeeze in. As you said that from our AC division, we can expect the ballpark top line of around INR 1,000 crores. What could be the EBITDA margins in this particular part only, like -- so ex of this, we are currently having somewhere -- in some double-digit number, around 12%. Just want to understand what can be the margin in this part of the business at EBITDA level.
The margin -- we don't give any guidance, please, on margin.
I understand, not exactly guidance, but I'm just trying to understand, like will it be dilutive of margin?
I'll answer this as follows: that the gross margin level on air conditioners will be lower than the kind of gross margins that we have, let's say, on the front loading washing machine category. However, what the additional growth will do is that it will distribute our overheads in functions like sales, et cetera, much better than what they have done today. If you view it on a pure percentage basis, it will be lower than washers. But the impact on the overall company level is going to be accretive. I hope that answers your question?
Okay, sir.
The next question is from the line of Ashwini Damani from Ratnabali Securities.
So from -- we have spent around INR 300 crores over the last couple of years and -- on the AC plant, and we have also stated right now that we want to create a brand rather than depend on OEM. But as a layman customer, I don't see too many advertisements about the IFB air conditioner. So what would be our advertisement strategy going forward and would we involve mass medium because how would the layman customer come to know otherwise?
Yes. So that is a very good point that you've made. And traditionally, we have been below the line, and we have been under the radar. But in the category of air conditioners, we will go for above-the-line advertising. And we are putting the final form to that. It will start from March. And in this season, we will make ourselves much more visible than what we are today. That point is absolutely correct, that you've made.
Okay, sir. And just one last question, sir, you mentioned that we are working at probably more than 100% capacity on front loader washing machines. Is it on a single shift basis? Or could we actually do a double shift or more than that?
So what happens is that you have an assembly line and then you have feeder line. So you have a sheet metal line, you have a plastic line. And then a huge chunk of it is the vendor capacity. So our assembly line might be running, let's say, 1.5 shifts or 1 shift. But the segments that feed the assembly line and more specifically, the supplier capacities, they are basically running at 100%. So if we run a second shift on the assembly line or 2.5 shifts, for example, it will not help because the feed to the assembly line will not be enough. So when we upgrade capacity, we'll be upgrading capacity at supplier end, adding more cooling, adding a few presses. So that is what I meant by capacity upgrade. We will not need another assembly line, for example.
The next question is from the line of [ Anand Mundra ], an individual investor.
Yes. Sir, congratulations on a good set of results. So historically, we have seen that the margin of home appliances division is very volatile. Whenever the foreign exchange depreciates or whenever there is a raw material volatility, our margin fluctuates a lot. So how do you see this time, whether we'll again go back to 2%, 3% EBIT margin in home appliances?
So Mr. Chatterjee and I have been criticized on this point in quite a few calls of being volatile. We will try and ensure that we are not volatile anymore. I hope that answers your doubt.
Good to know that. And sir, with respect to AC division, sir, we have given a target of around1 lakh ACs for the March quarter. And in addition to that, you have said for the next year, you are looking at 5 lakh ACs at INR 20,000. Is that a right assumption that, that is a sales target or that is a production target, which...
No, that is the target for us to sell as IFB brand and also for us to sell to OEMs and that is what we are working on, okay? The exact form of this, the exact revenues behind this, I think it is better to wait a little and then see it. But the figure that you mentioned is the potential on the table, that point is absolutely correct.
Okay. And sir, with respect to AC sales, it will be more through IFB Points and online as compared to distribution network? What would be the strategy?
I think that the largest opportunity will be from the distribution networks. Of course, there will be a percentage through the IFB Points, et cetera, that will be lesser. The -- what you call as the traditional trade is the largest opportunity.
Okay. And sir, can you also share the split between contract manufacturing and AC own branded sales in the March quarter? What is your target of this 1 lakh?
You can take it as sort of a 70 kind of split.
70 in the favor of own branches?
Yes.
[Operator Instructions] The next question is from the line of [ Dhanush Mehta ], an individual investor.
Hello?
Yes, please.
Sir, I have like just a question that, sir, how do you think our operational leverage has kicked in, like post COVID, there've been now change in the buying trends that you've just explained? So now do you think that the operational leverage has kicked in and it is here to go? And if you can give us some idea about variable overheads and fixed overheads in the -- at group level.
What do you mean by operational leverage, please?
So basically, if you see that over the past several years, we were not able to -- I mean, our margins had been peaked at -- EBITDA margins have been peaked at around 9% or high single digit. And last 2, 3 years, we were witnessing high overheads or low utilization. So post this quarter, do you think that -- I mean, the margins are here to remain or the operating leverages you have to kick in from now?
Okay. So the answer to that is on 3 points. One is that the pandemic period actually offered us a terrific opportunity to really look at line-by-line on our cost structures, from the warehousing space that we use, to the travel that we make, to a larger thing like the material cost. So that has genuinely helped us in terms of the restructuring of the margin. The second is that we always had very reasonably good gross margin, but the revenues were not enough to generate the kind of EBITDA level that we should be generated. As a result of the growth in the demand and also because the kind of network work that we have put in over the last 2, 3 years and now that is beginning to contribute to sales because they've understood how to sell IFB, there have been multiple rotations now. So a combination of both has given exactly the kind of revenues that make this new cost structure work. So my specific answer to your question will be, yes, with the opportunity that they offer and what our network offers, in addition to the general change in demand, these kind of revenues give us exactly the kind of margin structure that we should deliver consistently. Have I been able to answer what you were asking, please?
Yes. And just like some walk through on like the cost structure, like what could be kind of a fixed cost if it's possible, like fixed or variable or?
If you could just connect with Mr. Chatterjee separately, he can take you through that.
Okay.
As there are no further questions, I would now like to hand the conference over to Mr. Chirag Muchhala, from Nirmal Bang Equities Private Limited, for closing comments.
Yes. Thank you. We thank the management for taking time out and sharing their valuable insights on this call, and we also thank all the participants for their presence. Sir, do you have any closing remarks?
No, thank you all for participating in our call.
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.