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IFB Industries Ltd
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Ladies and gentlemen, good day, and welcome to the IFB Industries Limited Q4 FY '18 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. Thank you and over to you, sir.
Yes. Thank you, and hello, everyone on behalf of Nirmal Bang Equities. We welcome you all to the Fourth Quarter FY '18 Results Conference Call of IFB Industries. The management is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, CEO, Home Appliance Division; and Mr. Arup Das, Head Marketing, Engineering Division.I now hand over the call to the management for their opening remarks, post which we can take questions. Over to you, sir.
Good afternoon, and welcome to the fourth quarter con call for FY '18. With me, my colleague, Mr. Rajshankar Ray, is here, Home Appliance Division; and Arup Das, Head of Engineering, Marketing.I will now give you a small snapshot of what happened last year. The year was good as a whole, both in terms of top line as well as profitability. The company has reported a total income of INR 530.6 crores, a growth of 22.5% over the corresponding quarter of the previous year on a comparable basis. EBITDA margin also stood at 8.5% in fourth quarter compared to 3.3% last year. EBITDA for the whole year as a whole was 7.9% compared to 6.1% previous year.We have expanded our gross margin significantly, which is mainly because of the reduction in material costs, increase in sales, favorable Forex, better mix. In engineering division also a lot of job, which was being given on job work basis is now doing it in-house, for which we have already invested in our CapEx. And as a result, it has given a good result.With that, I will request you to go for the question and answer.
[Operator Instructions] The first question is from the line of Ankit Kedia from Centrum Broking.
Sir, my first question is regarding a top load washing machine. You have guided for 25,000 to 30,000 monthly run rate from quarter 2 onwards. Just wanted to know what will drive this volume growth, given that last year average was around 16,000, 17,000. Is the 6-kg category that big enough to give us a 10,000 per month delta?
Yes. Ankit, this is Rajshankar here. There are 2 places where the growth will come from. One in terms of the total percentage of our available network from where we have been able to extract sales of top loaders. That percentage is still much lower than the front loaders. So with an ongoing effort to ensure that the top loader range is properly placed across more and more counters, the placement will drive growth in the coming quarters. This is the first point. The second point. Yes, we are currently present in the 6.5 kg and above range, and we are actively evaluating a 6-kg top loader, which will allow us to be better represented as far as the overall market is concerned. If you see 6-kg top loading segment per se is about 55% to 60% of the total market. Currently, we do not have a placement in that market. That is something that we will be fixing in the coming quarters. So based on these 2, which is natural growth from placement, increase of existing reach and addition to the range in the 6-kg segment. These 2 actions will actually drive the top loader growth.
So sir, just a follow-up on that. So how many counters, in the sense, we are still behind our front loader washing machine compared to top loader? So is there a 20%, 30%, 40% gap? So we know we can do that. Secondly, when can we expect this 6-kg launch to come in?
The answer to the first question is that if you look at the active accounts, which we classify in terms of accounts, which do business with us on a monthly basis, we have roughly about 2,500, 3,000-odd accounts as far as the front loads are concerned. The number for the top loaders is currently at a level of about 1,300 to 1,400. So that is the gap that needs to be bridged, which is quite significant. I mean the front load is almost double that of the top load as on date. So we believe that there is a lot of extraction possible from that. As far as the 6-kg top loader is concerned, what we are evaluating is to be able to release it into the market by around the third quarter. That will depend on the final sign-offs, tests, et cetera, but tentatively the plan is that.
Sure. Sir, my next question is regarding the washer dryer. You have mentioned in quarter 4, we will be able to launch it of this year. Now how big is this category given that Bosch currently seems to be the only player garnering the maximum share? So what advantage will we have with the washer dryer segment? And how big could be the volume opportunity?
The washer dryer segment currently is not very big. And more than Bosch, I think, LG is the player that does the maximum volumes in that particular segment. When we release it in the fourth quarter for the initial 3, 4 months, we would not expect very high volumes. It might come to roughly about maybe 1,000 a month to 2,000 a month. But it is a position in terms of the functionality to the customer, which is the ability to dry clothes and wash clothes together. If you remember, we actually had a washer dryer placement earlier, which we vacated. At that point, we had reached a volume of roughly around 2,000 a month. So we would expect that sort of a volume to come in the initial few months.
Sure. Sir, my next question is on the refrigerator. The pilot refrigerators have come in the market for a couple of months now. How has been the response, given that we are present only in the premium category what I saw? So when can we expect the commercial launch to begin? And what would be the price points we are looking at?
This is actually the second month of the field test. So we will be testing them for at least another 2 to 3 months. As of now, the performance and customer response in the field test is what we had expected. So it is on track. Ice points, et cetera are in line with capacities of 380 liters and above. So the price points would be roughly in the 40,000 and above range. So our plan is to first finish the field trials properly, which would take us about another 2 to 3 months, and then plan the commercial introduction.
Sure, sure. Sir, my last question is on the industrial segment. We have seen one of the best margins in last 7 years in the industrial at the EBIT level and the growth also for 2 consecutive quarters has been above 35%. And the overall company, more than 30%, 35% of the EBITDA is coming from this division. So what is the outlook for this division going into FY '19? And are these margins sustainable, given that Mr. Chatterjee in his opening remarks said more in-house work has been done. So at the gross margin levels, how much more can be extracted from distribution?
Industrial, you mean engineering, right?
Yes, by engineering division?
Das will answer this question.
In continuation to what Mr. Chatterjee said, we have done these CapExs over the last 1 year or so. So we have started reaping the harvest in terms of the -- I mean, which we were giving out for the job work. So this -- it's now being done in-house, so the benefits we are reaping now. As far as the future is concerned, we are quite optimistic and we expect our growth will be good and it will continue in the same fashion in quarters to come, provided there are no hiccups in the market, it will take to oil prices, et cetera. If the automobile speed market there is a slight, et cetera, then it might get impacted, otherwise we expect a good growth to continue. And we will continue in the same fashion.
So the double-digit margins, which we have posted in the quarter, you think are sustainable in FY '19 as well?
We hope so.
The next question is from the line of Saurabh Ginodia from Stewart & Mackertich.
Sir, if you can just share the volumes of front loader, top loader, microwave and AC for the quarter and for the full year?
I'll just tell you, the front loading, the quantity is 84,675.
This is for the quarter. And for the full year?
Full year is 406,285. Top loader, 44,098 and 208,684. Microwave oven, 57,035, 281,263.
2-8-1?
2-6-3.
2-6-3, okay.
AC 26,817 and 72,684.
Okay. Sir, my next question will be with respect to the crude prices being very volatile and going up and even the steel prices are on a rising point trend. So do we expect any kind of pressure on the gross margin? Or are we planning to take any price increase, especially on the washing machine side?
Yes. On the washing machine side, we have already expected a price increase, which has been released into the market. And this took into consideration the Forex level, which we expect going forward as well as the changes in the priced commodities.
Okay. How much price have we increased in the washing machine and with effect from?
So it's roughly about a 3% to 4% kind of an increase.
Across both the front loaders and the top loaders?
Yes. That's right.
And this will be with effect from?
This was with effect from the 1st of June. And given the stocks in the market, et cetera, I would expect by 3rd week of June or 1st week of July, so it is to be fully take effect in the market.
Okay, okay. And sir, what kind of CapEx we have done for FY '18? And if you can split that between the...
INR 53 crores last year.
Sorry.
INR 53 crores [indiscernible].
And if you can just split that between the engineering division?
The engineering is around -- I guess, it is next week. Just give me a minute, please. Engineering is around INR 17 crores.
INR 1-7 crores. Okay. And what kind of CapEx are we working for the next FY '19?
FY '19, we're planning altogether INR 46 crores plus INR 30 crores, around INR 76 crores.
INR 46 crores plus INR 30 crores. And primarily, this CapEx will be spent on which segment?
INR 46 crores is towards the home appliances, INR 30 crores is towards the engineering.
Engineering. Basically for capacity expansion?
Capacity expansion and for the washing machine this thing to increase -- to augment the capacity.
Okay, okay, okay. And sir, at the end of the last financial year, can you share the number for counter sales representative we are having on floor?
The total number of counter sales representative as of end of last fiscal year was about 1,800.
1,800. And do we plan to increase this in FY '19?
Yes, we will be increasing this. For this fiscal year, this number will increase by about another 900 or so.
By about 900. Okay. And what kind of fixed costs are we bearing for this on a monthly basis?
The remuneration for the people at the counter is a combination of fixed and variable. The variable is linked to volumes with different scales depending on the achievement, model mix, et cetera. If you add both fixed and the variable together, then the range would be between 15,000 to 18,000 a month per person.
And primarily, this representative will be on the MBOs or there across?
Look, they are actually available in 3 specific channels: one is the MBOs, large and small; the second is our own exclusive stores, which are the IFB points; the third would be -- there are some of them also available on the distribution network.
Okay, okay. And is it possible for you to split this 1,800 numbers into the 3 segments, between MBOs, IFB points and distributors?
IFB points, you take about 450 out of the 1,800. On distribution, it would be roughly about another 100 or so. So 1,800 minus 550, that is the number on MBOs.
[Operator Instructions] The next question is from the line of Sonali Salgaonkar from Bank of Baroda Capital Markets.
Sir, my first question is on volume number...
Excuse me, this is the operator. Ms. Salgaonkar maybe requested to use the handset please. Your voice is echoing a bit.
Sir, my first question is with respect to the volumes. Sir, could I get the comparable volumes across segments for FY '17 as well?
Yes. I'll tell you. In front-loading deal, it was -- last year was 78,858.
Okay. Sir, for full year?
Full year, top loading was 40,219 -- sorry, sorry, the full year, it was -- last year was 337,778 for the front loading; top loading, 174,661; and micro oven, 208,144; and AC, 60,745.
Okay, sir. Sir, my second question is with respect to local production. Now over the quarters, we have been -- as we understand that you have taken initiatives for increasing your local production, which will cut down your exposure to imports. Sir, any update on this, how is it progressing?
Yes. So it is on track in line with whatever we have communicated earlier. From the last quarter, we began to localize the controllers for the front loaders. That is done 100% for all new models, which were introduced in the last quarter. And in the second quarter, there is another set of new models being introduced where again the controller will be fully localized. With these 2, what we have indicated earlier is that the import content will drop down to about 14-odd percent. So we are completely on track for that.
Okay. Sir, this 14% by when we should expect? Are we already at 14%?
We would be about 50% done. So by end of quarter 2, the entire thing will be 14%. Let's say, right now, 50% of the production is at 14%. By end of quarter 2, 100% of the production will be at 14%.
Sure. Sir, with respect to the new launches refrigerator, so probably over the next 4, 5 years, how much of our total revenue do we aspire that this segment should contribute?
Yes. So we don't have a specific IVR horizon to share on the refrigerator right now because as we had shared in the previous telecoms, our first priority is to finish the field testing, product development on what is now ongoing. Once this field trial testing, et cetera everything is over in parallel we are putting together a plan for internal validation on what we will do on the refrigerator. So I think it will take us another 2 quarters to share our firm plan on this.
Sure. Sir my last question is on the channel inventory in AC. Sir, there are reports in India indicating that probably this season was not too well in terms of volume growth for ACs. Sir, could you share with us an update on the industry as to how we see inventory shaping up a bit from these stoppage of liquidating?
See, there are reports about buildup of stock. But I would not draw a judgment right now because there have been unseasonal rains, that's correct. But it is also possible that with a degree of heat in June and maybe the summer extending into July, you might find that the end of 2 months, no problem at all. As of now, yes, there are reports that there are inventory stock, but I would wait for June and July to be over before drawing a judgment on this. We are -- as far as IFB is concerned, if we take the season of Feb, March, April, May -- as of now, whatever we have thought we are on expected lines only.
Sir, and how far AC proportion -- overall AC volumes, how much does inverter AC contribute currently?
So last year, our inventory percentage was around only 7% or 8%. In this season, that has risen to about 40%.
Sir, that's in Q4 FY '18, you're saying?
It is actually going to be Q1 because there is a hover between Q4 and Q1. So when I'm talking season, I'm talking, let's say, February till date. So as far as going forward is concerned, we would expect inverters to be close to 50%, maybe even a little higher.
Sure. Sir, this thing is helpful?
Market is quite up on this.
The next question is from the line of Mitul Mehta from Lucky Investment Managers.
Compare our gross margin a bit with the peers, we seem to be doing fantastic job as far as our gross margins go. Obviously, the portfolio varies across peers. But -- so the good part of these gross margins, when should we start seeing the benefit of gross margins falling to EBITDA margins? I mean, your thought on this because we seem to be investing also quite a bit on the OpEx. So by when you think we should be able to start seeing the benefits of higher gross margins that we are currently exhibiting?
See, the point is like, for example, whatever we have invested, result of which has already come into the quarter 4. We're expecting the same in the first quarter also. But again, we -- from the end of last year till the last 2 months, the exchange rates are highly volatile because of oil price. Commodity prices are also going up. To a large extent, we are trying to upset that with the price increase. But the issue is the -- whatever good initiative we have taken was in terms of CapEx and OpEx, it supposed to give us results. With volume going up, we are quite hopeful and confident.
So is it fair to assume that -- we've seen other companies reporting double-digit margin despite all the tailwinds of higher steel prices and oil prices and we are still at about 7%, 7.5% EBITDA margin and our volume seem to be growing at double digits. So at some point in time, we will see the benefit of higher volumes and prices.
No, if you remember our past con calls, we have always said that with other initiatives that we have taken, we need a minimum sale of -- some amount actually. Once we reach that, we are progressing towards that both in terms of home appliances as well as engineering division. Once we reach that volume continuously, we are hopeful of reaching this.
So INR 600 crores is the number that one should be looking at to get to that kind of margins?
No, it should be more than that. INR 600 crores is not enough.
Okay. But we are moving towards that.
Yes. We are working towards that, I would say.
Okay, okay. And sir, the CapEx. In terms of the capacity for front loading and top loading, how much we can produce currently for front loading? Or we are fully realized for front loading?
See, our capacity till March was more or less fully utilized with the last year volume. And in another 7 or 10 days, we are completing our capacity upgrade, which will take us to a capacity of roughly about 750,000 to 800,000 per annum on the front loads. And on the top loads, towards the middle of quarter 4, we have already completed the capacity upgradation. So currently, we can do about 300,000, 350,000 per annum on top loads.
Okay. And as far as microwave goes?
On microwaves, per se there is no capacity problem. We would be in line with whatever growth is coming from the market. So the current capacity is with new models and new platforms all put together, I think, we are okay for up to 500,000 a year without an issue.
And sir, as far as refrigeration rep category goes, obviously, it's going to be a completely new category for us. And initially, there will be a lot of learning. So are we going to spend CapEx on that currently? Or we will try to outsource it and see what is the response and then we will go for CapEx -- your strategy on reps basically?
Yes. Our strategy is on the cooling segment overall, if I verbalize it. Our first priority now is to do well on the air conditioner segment. And that is the prime target that we have for this fiscal year. While we do this, what we are doing is that we are finishing the product development and the field testing, validation of the customer response, et cetera as far as refrigerators is concerned. So as far as the short-term is concerned, the priority in the cooling area would be to get our AC game fully stabilized and to test refrigerators through imports. That is the short-term thinking. And like I said a little while back, I think it would take us about 2 quarters to formulate the medium-term thinking as far as the refrigerator is concerned.
Okay. And sir, your overall indigenization plan for controllers, you said we should be at 100% of production fully indigenize. So does that mean that there is some more lever for gross margins to go up from the current levels of 47%?
Yes, definitely there is. I mean, localization is one lever. Value engineering, which is an ongoing activity on current platforms, is the second lever. And we are continuously looking at alternate sourcing, alternate material usage. So there are definitely levers available for increasing gross margins for us more in top loaders, but also in front loaders.
But broadly, sir -- I mean, if you can just give us some indication as to, you think -- I mean, a particular, let's say, 200 basis point, 300 basis point because what we understand in this industry looking at our peers' P&L is that they keep on varying significantly. So what should be a steady-state gross margin? Let's say, if all these improvements value engineering, material alternative, sourcing, import and indigenization, all of this in place. I mean, at what level should be a good number to look at? I mean, you think 200, 300 basis point is easily achievable from the current level of 46%?
I think another 2% to 3% is definitely a realistically achievable target for the company.
So that's a great -- so 49 -- about 49%, 50% is what we should be looking at over a period of time?
There are issues with this. The another variable on this is the mix because we have different mix. The margin of different products are different. At what mix do we sell is important, number one. Although we have made some price increase, but the upward movement of dollar and the commodity price will have some effect. So we'll be able to tell you that only after the second quarter how it is moving.
But we should see trending it upwards with all our exercises.
We are working towards it. That is what we said. There are these many areas of testing, value engineering, substitute material, import substitution, all those areas we are working on. Similarly even in engineering division, they are doing a lot of work. We are hopeful of taking it further up.
Okay, okay. And sir, my last question to you is so -- as far as volume growth goes across category and market share, can you please highlight as to what is our current market share and how they have improved over last 12 to 15 months in top loader, front loader and microwave?
Yes. So if you look at it by each product, then as far as front loads is concerned, our market share would be around 43% to 44% by our own internal estimates. External data, which is available doesn't take into consideration many channels of sales. So based on whatever is our internal estimate, we would be at about 43%, 44%. As far as the top loaders are concerned, in the fully automatic segment, we are currently at about 8%, 8.5%. But we are still not present in about 60% of the market. As far as microwaves are concerned, that is a segment in which we have clearly gained a lot of shares in the last 12 months. We are currently between 19% to 20% based on our estimates.
How much gains we would have made in microwave?
Our estimate is that over the last 12 months, we would have gained about 2% to 3% share.
2% to 3%. And in front load?
In front loads, we would be largely flat or our share would be roughly down by about 1% or so.
Any gains that could happen in front load going into future? I mean, is there a scope for further market share improvement? Or what is a good number to be?
See. Yes, doing in the front load is that we have changed part of the range as far as part -- I mean, as far as part of the range is concerned, we finished that activity in Q4. In Q2, we will replace the remaining part of the range. So by end of Q2, we would have a completely new range out in the market. The places where our market share has been under pressure has been in some of the larger format retail stores, and we have put together an activity in terms of going out to each of those accounts and gaining share back. This is something that we started about 3 to 4 months back, and this will be a key focus for this year. The opportunity, of course, that is the largest volume opportunity is that the network addition that we have made in the last 15, 16 months, our extraction from that network can be much, much better than what it is today. We still have a very large network, and we need to do a much better job in getting more volume out of the network. To the specific point on whether all of this will result in a market share gain, I would not say that now. We have to wait to see the impact of the new range that we are introducing, which I think we will be able to fully see in the Q3 and Q4 of this fiscal year.
And top loader also if you can?
So top loader, like I said a while back, is an area where we definitely see growth in market share and this will come from 2 places. One, the natural expansion in the placement because it is still placed in much lesser counters than what we would like. So the job there is to go out and ensure that the top loader is placed on all the accounts that we have. This will give incremental growth. And the second is the introduction of a 6-kg top loader, which is about 60% of the market. And currently, we don't have a placement there. So if both these actions happen, then there will be a clear increase in share on the top loaders.
Sir, my last question, if you permit me, last question. Sir, we have companies like Bosch, Siemens, IFB, LG, Samsung, Whirlpool, all these 6, 7 players. Just wanted to understand our unique advantage compared to the peers, if you can explain in 2 statements? I mean, what is our USP? Or what is our competitive strength versus the competition?
So I think that our competitive strength comes from 2 very specific areas. The first area is in terms of the products, specs and built. So just to give you a specific example of this, in front loads and also top loads now, IFB offers a 4-year, 100% warranty to customers. No company globally has been able to give this sort of a warranty and it's a sticker on the machine transparently declared to consumers. Along with that, we guarantee availability of spares for 10 years, and this is also a public statement on the machine. Globally, nobody is able to do it. Most of our competition in India struggles to give spares for machines, which are 3 years, 4 years old in the market. We have been maintaining machines upwards of 15 years also in the market. So the first important clear USP that IFB has is on the product build basically. This is the first point. The second advantage, I think that we have, is that over the years because of the presence in India, the understanding of the fabric that India uses, how that is to be washed or for that matter, in a microwave, how the typical Indian food needs to be cooked. Our entire team has built up an understanding, which helps us to create product functionality that I think the consumer sees a very clear difference with. So just to give you an example, you have the dupattas that women wear in India, very long pieces of cloth. You have dhotis, which are very long pieces of clothes. These are very difficult to handle as far as the washing machines are concerned. But the washing rhythms that we have deliver very good performance on all of this. You have increasing use in the Indian consumer base of branded garments. The people are using garments from ZARA, Louis Philippe, all very costly. Our machines can handles dedicate garments much better than any other machines. So the 2 clear heads would be the product build. The second would be the understanding of the usage of fabric or the cooking habits, for example, within India. The third USP, which I think -- which I didn't talk about before, but -- which I think makes IFB very interesting is that we are not just doing machines, but we are doing a system. So if you are using a washing machine, IFB is also carrying home to consumers detergents, fabric softeners, stain remover, optical brightness for the clothes. We are carrying products for cleaning the kitchen. We are carrying products, which will make your dishes smell better when they come out of the dishwasher. So the fact that IFB offers not just the product, but also the consumables, which we call as IFB essentials. I think this system approach has stood up in good stead. And the strategy that we have helps us to carry this to consumers and the consumers seem to like this a lot. So I think that is another differentiator that IFB has in the market.
But are consumers willing to accept your accessories when they buy an IFB machine?
Yes. Actually, we do quite well and significant portion of our profit comes from the service stream. And if you simply take liquid detergents, we are probably India's biggest liquid detergent brand currently. And we've expanded the range over the last 1 month or so. We've added in a lot of interesting products now. They're actually quite good products. And it would be great if you are all able to try it and give us some feedback also on that.
How much of sales would be coming from these accessories as a percentage of your...
As it is, accessories, last year, I think, was about an INR 85 crores hit for us. And this, I think, is a segment that can significantly grow both in revenue and margins for the company.
And how much has this been growing over last 2, 3 years?
25% to 30%.
At least.
25% to 30%. And the gross margins would be very high on this, right?
And the liquid detergent, which as Ray mentioned, growth there is even more.
How much would be gross margin for this?
35%, 40%.
35%, 40%.
So have I been able to answer your question on the differentiator for IFB?
Yes.
[Operator Instructions] The next question is from the line of Manoj Gori from Equirus Securities.
Sir, first thing, I would like to just understand the rationale behind not coming into 6-kg washing machines in the top load category for such a long time, despite such a big market being captured by 6-kg?
So Rajshankar here. I, quite frankly, don't think we have a very good answer for this. We wanted to enter top loaders in the middle to the upper segment and grow the placements from there. We didn't want to really participate in the mass segment of the market. But whatever we are planning now, as far as the 6-kg introduction, I would agree with you, that they should have come earlier from IFB. So I don't think there was a specific strategy not to introduce it or to keep it. We just wanted to wait for the top loader volumes to reach some level before bringing in that particular product.
All right, sir. So also on these margins, sir, what I would like to understand is earlier, you had highlighted like INR 600 crores of sales, and we would be dropping double-digit margins. Now this year, if we look at the expansion plans in terms of your top loads, your front loads and each and every category, so this year, we have expected to do more than INR 200 crores of monthly sales on an average basis. So now, when we're taking price increases, which could fully absorb the rising RM prices and the rupee, INR depreciation. So what would be the other key expenses that would be moving up in such a significant manner, like we cannot grow double-digit margins despite achieving INR 200 crores monthly sales?
There are a few things I will tell you. Number one is, generally, price increase that we have taken is not mirrored -- covered the entire thing, because there are competition; there are model-specific increase and other things. That is one. But the normal other increase that we take is normally, implies -- certainly increases whatever is required. Also for the expansion of the dealer network, to put people in place. For that, you have to spend some money. These are the major areas, actually.
Also, if I'm not wrong, what you mean is like this year, the gross margins could be lower on Y-o-Y basis?
[ That means ] we are working on it, because we are also bringing in house material, like say, material contribution, alternative [ existing ] value engineering. So whatever we could not recover through the price increase, we will get it done through our internal efforts.
Okay. Sir, one last thing, like if you can give any color, like what kind of margin expansion are we, like we are expecting during the current year? Or are we expecting margins to remain stable on Y-o-Y basis in FY '19?
We will stay, as of now, we will say that we'll try to remain stable. But after going 2 quarters, we said that we will be able tell you what -- how the movement would be.
The next question is from the line of Ankit Kedia from Centrum Broking.
Sir, just wanted to know, any update on contract manufacturing? How was it in FY '18 compared to '17, how many units we did? And we are expecting some good orders coming in, what's the update on that?
Will you take -- the order, order book [indiscernible]?
Regarding the Trishan Metals...
Sir, I was asking about contract manufacturing for the washing machines.
Okay, okay, Rajshankar here. So as far as contract manufacturing is concerned, the principal with whom we were talking, they are still testing our products. So if anything concludes, this will be by the end of this quarter.
And so how many units did we sell in FY '18?
FY '18, I think, the figure is about 16,000, 16,500 units in exports.
Sure. Sir, my second question is regarding the increase in counter sales representatives by 900. So total around 2,700 with these. Would it be in the existing, you know, our distribution network? Or are we also planning to expand the distribution network and these would predominantly be in the new center and not in the existing ones?
Well, these will primarily be in the counters which are directly serviced by us. So if you see we have roughly about 4,500 counters which we directly service. And out of the 4,500, currently our placement would be roughly about 1,300. So we would add another 1,000. And out of that, the primary 800 -- 800 -- I mean, let's say, 700 out of 900, 700 to 750 would be added into the directly serviced multi-brand outlets. The remaining 100, 150-odd will go into the existing distribution network, which was created over the last 1 year.
Sure. Sir, how would our distribution network itself improve in FY '19? What is the strategy for that?
So with the work that we did on the distribution over the last 1 year, currently, we stand at roughly about 7,500 to 8,000 active indirectly serviced accounts. By the end of this year, we would have added another 3,000, 3,500-odd numbers to that, realistically. And now, the job for this year is to get more volume out of this network. If you look at the data in the last 1 year, even though we had a large increase in the numbers added through distribution, we have still not got the volume from that, that we should get. Now for that to work what we need to do is to go and train each and every account that we have and get them to represent IFB properly, ensure that the placement is properly done. So the focus for this year will be to get more extraction out of what was done last year, in addition to this 3,500-odd number that we will put in.
Sure. Sir, my second question is on the A&P strategy. In the Bombay market, in one of the FM channels, we have started to listen to IFB Points advertisement from the AC category coming in. So have you changed that strategy from more BTL to ATL? Or is it a Bombay-specific thing, to push AC sales in the season, be tried and tested with advertising?
No, it is something new that we are trying. The BTL focus still continues, but in many parts of the country, we have got good response to the radio-based promotions. So Bombay is one of them, Chandigarh is one of them, Bangalore is the third. So there are 8, 10 places like this. So in this season, we thought about putting more emphasis on this and seeing what sort of benefits we get. But until now, whatever we had expected, we have got. So I would assume that we would do a little bit more of this going forward in this year, especially during the season times.
But also in the washing machine category? Or it will be more selective for the full brand, or more for IFB Points? So how will it be like?
I would expect the more -- the major portion of this to be centered around the IFB Points. And it will be air conditioners in April, May, June. It will be washing machines in August, September, October. We will keep varying this. That would be the IFB Points.
Sure. Mr. Chatterjee, couple of questions for you. Sir, last year, we had guided for around INR 90 crores to INR 100 crores of CapEx, but you have not even used half of that. So how did we miss that guidance? Until quarter 3, we were guiding for INR 100 crores. So -- and this year, again, we are guiding only for INR 75-odd crores of CapEx. So that INR 50 crores savings, predominately came in which area which we didn't do?
One was washer dryer, which we shift direct to this year. The CapEx, we said around INR 75 crores to INR 80 crores last year. The entirety we did not do. There were 2 areas. One was the expansion of the volume in the front loaders and the top loaders. And other was the washer dryer. We initially planned last year, we have shifted to this year. These are the 2 major areas.
Sure, so this year, we will probably do the INR 75 crores for the CapEx, because the expansion has already happened in quarter 1, and washer dryer by quarter 4 here.
Roughly INR 70 crores, INR 70 crores, INR 75 crores.
Sure. And sir, my last question is again on the gross margins. If you see the last 2 quarters, quarter 3 and quarter 4 gross margins, these gross margins we last witnessed in quarter 3 and quarter 4 of FY '10. After 7, 8 years, we're actually seeing these kind of gross margins. So obviously, driven by localization and the engineering division and favorable ForEx. So do you think these gross margins are sustainable, given the price increases of 3% is not enough for the rupee depreciation?
We are expecting to remain stable. And like for example, in each of the -- localization is one. Value engineering is second. Third was favorable ForEx. And engineering, we have done some in-house, which was earlier [indiscernible] but all working. Then favorable mix. The revenue was also good. All of them together, it worked. Volume increase, both in each area as well as engineering together. With all our effort there, we are quite hopeful that it will be stable, at least.
The next question is from the line of [ Parthay Chera ] from Lucky Investment Managers.
Sir, on your commentary on margins, I was a little bit confused. During the year, we had a quarter where you had about INR 600 crores of sales and we had double-digit margins. And at that point in time, you were fairly confident that if the number is about INR 600 crores, then the probability that the business generates double-digit margin exists. When we are listening to you today, is there a change in that thought process? And if there is a change in that thought process, why is the change there?
There is no change in the thought process. It is same. But for example, from one year to next year when you go, there are some, like employee costs, salary and even those things will come automatically, number one. Then there are variables, for example, the commodity price increase, the ForEx movement. These are effects which are not known, actually. So first year, we thought we were working at INR 60 crores levels and the last year, more or less, you were at INR 55 crores, INR 65 crores level, then it goes up. Other times, those vary even. The efforts are there. At -- because [indiscernible] they even will be there at INR 600 crores level. But other variables also varies, then we need a little more of revenue to reach there.
But if you work on the gross margins, which were reported in the last 2, 3 quarters and you're saying those margins are stable, then why do you have a different opinion on the EBITDA margin?
The EBITDA, see the gross margin is only material and other parts. There are other -- for example, we -- suppose, we are increasing the dealers, then we have to put people there. Or we increase the number of field service. We spend some money on ads and these things. Those will have an effect on these thing, but these investments are required even to get the margin. Because you need to have more revenue, the network has to be expanded, these are the areas.
Okay, secondly, on the -- so I'm still not convinced, but it's okay. On the import content side -- hello?
Yes, yes.
On the import content side, you were referring to 14% of import content on 50% of production, which will go to about 100% of production. Now when I'm looking at your total import bill, last year, my guess is it's about 35% to 40% of your raw material. So just wanted to understand, this 35% to 40% of your raw material cost, the import will come down by what percentage?
Yes, so let me just explain this. So what you will see at the company level is a mixture of CBU imports as well as [indiscernible] imports. For example, the air conditioner is a complete import. So that will continue even in this fiscal year. As far as...
So what will continue -- CBU will continue?
CBU will continue for this year.
Perfect.
Now as the front-loading segment is concerned, there the level of imports currently is roughly at around 28% to 30%. And that we said by end of quarter 2, will drop to 14%. And then you have -- since the -- advanced production, let's say, was happening this month, then we have already dropped to a level of about 20-odd percent, because 50% of the production is with localized controllers already.
So this 14% is dropped in what quarter 1 or last year only they are dropped?
No, between the last year level of roughly about 28%, 29%, what you will see in quarter 3, the change in imports for front loader will be from 28% to 14%. That is what we meant.
Okay. So -- sir, what kind of savings is possible if you move to 100% local sourcing?
See what we had said a little while back, is that as far as, let's say, the front loading and top loading segments are concerned, we think realistically, a 2% to 3% expansion in our gross margin is what we can deliver in this fiscal year. So this is one part, which is the, we have combined effect of the localization as well as the rest of the materials projects that we are doing.
This is 200 to 300 basis points on front-loading business or on the overall company?
On the washing machine segment specifically.
Okay, on washing machine, especially, okay.
Now the other part of this is that it's not only about what we see as the gross margin expansion, but it also significantly derisks us from whatever happens on the ForEx side in the future. Because if you see the electronic imports, they are typical, both from the quality point of view and also from the cost angle. And a little bit of movement here on the ForEx this way or that way always has a very large impact on the material costs. So once we are fully localized, we have derisked the ForEx side, which was the original intent with which we started this actually localization project early last year.
And what portion of your sales is washing machine?
Front loading and top loading put together is about 65%, 68%.
Of the total revenues or of the consumer durable revenues?
Of the total revenues on the appliances side of the business.
Okay, so of the appliances revenue, okay. On the growth side, you have so many levers which are there, where you have expanded your distribution last year...
Sorry, just let me correct myself, it is not 68%, it is 58%.
58% of the appliances revenue?
Yes, correct.
Okay. On the revenue growth side, when we are listening to your conference call, we figured out that there are multiple growth drivers in place. So one is your expanded distribution, indirect, FY '18, where you have more counter sales representative being put on, and you have a new product line. You have been growing at about 20%-plus run rate in the last few years now. Is there a case for a slightly higher growth, considering what you have implemented on ground in the appliances business?
Yes, there is, and I think what we have to actually deliver is much more significant extraction on the network side. So if you asked me personally for this year, as far as the new product introductions are concerned, they are really in the pipeline, they will come out as planned. But I think our biggest job this year is to really do this channel extraction work really well. So on 2 fronts: One is on the multi-brand large stores getting the placements right, manning right and increasing shares of business; and on the distribution side, actually getting all the new small dealers to understand how to sell IFB products. The big part of this year, the growth lever, is actually from this network-related work here.
Okay. And I have 2 last questions. You said that 2% to 3% price increase is not sufficient enough to cover the entire cost of materials raise. What is the total price increase actually needed to cover the entire cost of material increase which is there today?
That depends upon the ForEx. For example, it went almost close to INR 68, okay...
So you take INR 68...
Halfway. So depending upon where the dollar is, what we do is we will review it every 3 months. Suppose 3 months from now, we see dollar is closing to INR 70. Then again, we have to take a call, number one. Then in the oil per barrel, we model, we have different competitors and pricing is there. So you to keep that also in mind. It is very difficult to say that at INR 68 level, what would be pricing, INR 69, INR 70, all are different. So we only take call every 3 months, looking at the movement of the exchange.
So that -- okay, so what -- this 2% to 3% price increase is done at what currency level?
We are -- we are pricing currently at a level about INR 68, INR 68.5.
Okay, okay. And lastly, on your EBO expansion, you were until year before last year, you were on a drive of EBO expansion, which was bringing you the fixed cost. What is the state of the EBO expansion and what kind of EBO expansion is planned for FY '19 and FY '20?
So as far as FY '19 is concerned, what we had shared is that by roughly around July or early August, we will reach a number of 500 stores. And the job for this year is to make the 500 stores profitable. That is the primary agenda for this year. We will...
You do not have a higher -- so you don't have a fast-paced EBO expansion now, what you have is a focus on the...
For this year, what we have said is that we will go from 450 to about 500, as far as this period up to end of July or early August is concerned. And our priority 1 in this year is to make all these EBOs profitable in terms of getting more people to visit them. There is some work that we are doing in terms of changing the design language within the stores. So that is what will be the primary focus. The expansion of numbers will be an ongoing job, but that is priority 2 for this fiscal year.
But are you done with this 500? Or the nearer -- it can be even larger than this footprint?
Our -- we had done early last year, an actual mapping by PIN code across the country in terms of looking at population, the IFB population and looking at our product basket and seeing really what can be the number of exclusive stores required to service India fully. If you look at it theoretically, that number comes to about 1,200 to 1,300. So that is potential that exists. But for now, our priority for this fiscal is to actually get more revenues and ensure that the franchises are profitable on the 500 number that we will have.
So then that 1,200, 1,300 mapping, you must have also figured out in how many years you would reach there. So how many years will you take to reach that 1,200 number?
We haven't put a time frame on this, actually, quite frankly, because we wanted to finish off this priority for this year and then look at the expansion. So if we really are able to fix the model of franchising and make it remunerative enough for franchises to invest without any worries, then logically, the 1,200 to 1,300, we should be able to realize very quickly. So I think we have to get this franchising model totally fixed this year. And then the expansion will automatically happen.
So what, from 500 to 1,200, it will be all franchised expansion, that's what it is?
Yes, the largest part has to be a franchised expansion, because what we've done until now, which we did primarily last year, is that we -- in the major cities, metros, the good locations where the rentals were very heavy, we had company-owned, company-operated stores, about 130-odd in number. So going forward, we don't see a very significant expansion in that. The bulk of the future expansion will be franchising there.
The next question is from the line of Vishal Gajwani from Aditya Birla Sun Life.
Sir, can you talk about the growth opportunity that exists on a 2- to 3-year basis in these 2 categories, top load and front load watching machines?
If you look at the data, in terms of availability in households across India, then washing machines as a category is still very underpenetrated. The figures vary from 8% to 12%, depending upon how you segment and cut the data. Now the increase in percentage penetration, as far as India is concerned, will come through 2 main areas. One is the rise in the disposable income, which is also getting fueled by the availability of finance, and the finance companies are penetrating deeper and deeper into India. So that is the first part. The second, the growth as far as the segment is concerned, will come from the availability of power. And if you look at the data in terms of the power projects underway, all the power about to be released between now and the next 2 to 3 years, it looks as if there will be a significant improvement in the power availability situation within India. So based on finance schemes, availability of disposable income as well as power, the penetration for washing machines, if it becomes equal to something like refrigerators, televisions, et cetera, can easily rise from 8% to 12% to a level of about 18% to 20%. And that will be very significant growth for the industry.
Sure. So for the next 2 to 3 years, for you, in particular, I understand top load growth will be possibly much higher than front loads, because of new product introduction as well as low base. So what should the number be?
We would expect very healthy growth. In fact, whatever we have done in the last 2, 3 years, there is no reason why we should not be doing much better in the next 2 to 3 years. Because what we have to do is there is an overall growth in the industry, we can get much more growth by doing our network-related work well. So I wouldn't put a specific number, but whatever we have done over the last 2, 3 years, we can do much, much better.
So 20%-plus kind of number could be possible in the category?
Realistically, more than that should be possible, based on whatever growth we will be having in place right now.
The next question is from the line of Mitul Mehta from Lucky Investment Managers.
Sir, you were discussing about the EBO. Currently we have about 450 stores and our goal is to make them profitable. How much money they would be losing at this juncture, your franchise or company-owned both put together, just a ballpark?
See, if you look at the 450 stores in number, then the concerned area is roughly in the range of 150 to 170 stores. And the loss that they would be having, which we need to fix this year, would be varying between, let's say, INR 50,000 a month to INR 1.25 lakhs, INR 1.3 lakhs a month. That is the range of the problem, basically. Is that what you wanted to know?
Yes. When you say losing, means they would be losing at the PAT level, right?
They would -- we don't evaluate the stores per se on PAT. If you really are to put a thing to it, it would probably be at the EBIT level. They don't have much depreciation, interest in any case, because most of the businessmen are sort of running on their own money. So if you really are to put a figure to it, I would say it would be at the EBIT level.
Sir, you just highlighted about the penetration level of washing machines, which is abysmally low in India. And given the fact that the disposable income will rise, consumer financing is on the rise, we would certainly see a very steady growth. Now to grow this number, let's say, 20%, even we can grow realistically much more, are there CapEx that would go into the system as far as product development goes, and as far as capacity enhancement goes? Will that be a very -- a large number? Let's say, for example, from 2,300, if you want to double the sales, what sort of CapEx would go into the system?
The CapEx would be in the range that you heard Mr. Chatterjee share. The bulk part of the CapEx comes actually if you do a major platform change. Now we have made the platform investments already in the last couple of years. So to create new variants, et cetera, really doesn't cost very significant CapEx. As far as land, building investments, et cetera, are concerned, they're already in place. So if the capacity were to double, actually, the bulk of the capacity addition would take place at the supplier end. And the supplier would have to expand. For say, the incremental CapEx for IFB to expand is a few machineries here and there, some more additional warehousing space, more variants. And the range of the CapEx for those is the kind of range that you've heard Mr. Chatterjee share.
And so far as the AC business goes, is AC a profitable business for us?
Yes, AC is a profitable business, but it needs to be more profitable. And one of the constraints we have right now is that we are doing this business through imports and the combined impact of the ForEx, the duties, the freight, et cetera, takes away a good part of the margin. So it can be more profitable, if we get a localization plan in place for ACs.
But that's a little far away at this point?
Yes, that is not immediate for this fiscal year, but it is something that is under consideration right now.
Okay, okay. And the refs also initially, will have a similar cost structure and then we would start localizing?
No, refs currently, like I shared, is something that we only plan to do through imports. It is not going to be profitable. But we just want to test the market and that will be after the field test product development is over. So as far as refrigerators is concerned, any formal plan that we build on this, it would take us 2 more quarters to be able to really share it properly.
Right. Any number that you would like to share as far as volumes in refs goes for this year and next year, once we launch it?
I think it is better for us to finish the field trial product development and then put a number on it. Right now, it's a little premature.
Sir, my last question is now, incrementally, your business is going through a lot of cash. Our working capital is pretty tight and it's a free cash flow business. So is there any thought to start distributing some cash to shareholders in the form of dividends or not yet?
As of now, we are conserving for the future investments and funding our in-house CapEx.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Chirag Muchhala from Nirmal Bang Equities for closing comments.
Yes. Sir, just 2 data specific questions from my side. So firstly, on the tax rate, so in FY '18, our tax rate was around 30% compared to below 20% for the past 3 years. So what tax rate should one assume going forward?
It will be the normal tax rate, not MAT anymore.
Okay. So will it be more like 35%?
Yes, 34%, that is 30% plus whatever applicable sales is going to be. Because earlier what happened, once we had that INR 100 crores, the CapEx, and the special benefit that government gives, after that, we're getting 100% rebate on the R&D facilities, which are gradually coming down. So as a result, we are coming out of the MAT and our margin is also increasing, so we are into the normal tax rate.
Okay. And sir, lastly, sir, I mean, because our Y-o-Y growth rate numbers are not comparable, so is it possible to share the GST-adjusted growth rates for the 2...
I've given in my -- [ this thing ].
Yes, but for the 2 specific categories of front load and top load for FY '18?
Well, for that, I have to work it out. You call me in 2 days, I will answer you.
Okay, okay, no problem, sir. So thanks, and I would like to thank the management for giving us the opportunity to host this call and to all the participants for your presence. Sir, would you like to make any closing comments?
No, thank you all very much.