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IFB Industries Ltd
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Ladies and gentlemen, good day, and welcome to the IFB Industries Limited 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. [ Prasheel Randy ] from Nirmal Bang Equities. Thank you, and over to you, sir.
Thank you, Diksha.
Nirmal Bank Equities welcome you all to 4Q FY '22 Results Conference Call of IFB Industries. Management today here is represented by Mr. Prabir Chatterjee, Director and CFO; Mr. Rajshankar Ray, MD and CEO, Home Appliances Division; Mr. Arup Das, Head of Marketing and Engineering Division; and Mr. Anand Reddy, CEO of Motor Division.
I now hand over the call to management for opening remarks, post which we can take questions from the participants. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone. Welcome you for IFB Industries' call for the fourth quarter FY '22. Hope everyone is fine and healthy. Joining me today are Mr. Rajshankar Ray, MD and CEO of Home Appliance Division; Mr. Arup Das, Head of Marketing and Engineering Division; and Mr. Anand Reddy, CEO of Motor Division.
Now we'll talk on the results. During the quarter, we witnessed a lower growth of 10% and YTD growth for the year was 22%. The growth during the year was affected mainly because of the lower sales during April and May because of pandemic, and thereafter, growth was moderate. During the quarter, we had an EBITDA of -- EBITDA of INR 6.77 crores and very low YTD EBITDA of INR 68.19 crores on YTD basis as a result of low share as mentioned. And together with high commodity price throughout the year, we included the high rate cost, higher semiconductor prices. And as stated earlier, moderate [indiscernible] in key branches. So overall, the EBITDA was low and is not expected. The continual increase in material costs could not be recovered to price increase from customers.
With this, I will request you to start the question-and-answer session.
[Operator Instructions] We take the first question from the line of Bhargav from Kotak Mutual Fund.
Sir, my first question is that if you look at your gross margins on a Q-on-Q basis, also there has been a decline. So is it possible to sort of elaborate a bit on this in terms of why was there also Q-on-Q decline in gross margins?
So Mr. Chatterjee, would you like me to answer that?
Yes, you answer. Go ahead.
By Q-on-Q margin, you mean Q3 versus Q4, right?
Yes, yes.
Okay. There were 2 things which have impacted that. One is that the percentage sale of air conditioners is higher in Q4 compared to Q3. And as on date, the air conditioners are running at a lower gross margin compared to the washer segment. So the rise in the percentage contribution from AC reduces the cost contribution.
And the second is that there were further material cost increases in Q4, which were not recovered within Q4, to be recovered in subsequent quarters. So the combined effect of the 2 has what has caused the drop.
And within AC, is it possible to break it up between B2C and B2B, which is the outsourcing, please?
So you will see in the investor report this time that we have actually shared the losses that we have made on the air conditioner as a segment. We wouldn't want to give a breakup of the premium versus the brand split between the 2. The gross margins on own sales are definitely higher. But overall, for both, the gross margins are much below what they need to be, which is something that we need to finish work on between this quarter and the next quarter.
And in terms of utilization, what would be the utilization of your AC factory as of now?
In Q4, actually, the demand on the plant was more than what the capacity is, and we lost sales in the month of April and May because we couldn't supply. If you look at the current situation, we are fully booked. If you look at the -- for example, if you look at specifically the last 2 months where our total sale has been around 70,000, and that's about 35,000 a month, our capacity is about 40,000. So we are nearly fully booked.
Sorry, last 2 months, which months are you referring to?
We are talking about April and May.
Okay. April, May, you are already booked, is what you are highlighting.
Yes, yes, yes.
Okay. And this is a mix of both OEM as well as own sales?
Yes. Yes. Correct.
Okay. And in terms of guidance you were highlighting, you wanted to clock a run rate of about [ 1,50,000 ] to 200,000 of OEM sales. Are we on track to achieve that guidance?
Yes, yes, we are on track. So...
Okay. So it possible to -- yes, yes. Go on.
No, please. You are asking something.
No. Sir, you told us that the gross margins on the OEM sales would be lower as compared to the branded sales. But is it possible to highlight, is it a very big difference or sort of a minor difference?
No, it's not a minor difference. It's a significant difference. But what happens is that below the gross margin on the brand sales, you have expenses sitting in the field.
Yes, yes.
Whereas for the OEM sales, once it leaves the gate, there are no further additional costs. So as far as the current situation at the bottom, let's say, PBIT level is concerned, both would be similar where we have to work on both. At gross margin level, of course, there is a difference.
But as the business scales up, is it fair to say that we will be in the high single-digits EBITDA margin for the entire business as a whole, the AC business?
Yes, that is what the internal work is on because this segment has actually had quite a negative impact on our profitability over the last 2, 3 years. So this is the big agenda to fix for this fiscal year.
Okay. And sir, what would be the FY '22 sales from AC? Or if you can give us a breakup?
We are currently looking at about...
FY '22 AC sale was INR 1,52,684 in numbers.
Okay. Okay. Yes. Sorry, you were saying something else as well?
No, I thought you were asking the forecast sales for this year, but Mr. Chatterjee has answered your question.
We take the next question from the line of Amish Thakkar from SG India.
I just wanted to get more insight into your AC business. So you said FY '22 volumes were 152,000. Can you give us the value?
And the second question is, your presentation mentioned that overall appliances division reported INR 43 crores of EBITDA last year versus INR 18 crores EBITDA loss this year, and only INR 37 crores of that was because of raw materials. So what is the remaining delta decline in EBITDA coming from?
The value for AP was INR 522 crores for FY '22.
And this is before discount, right?
No, this is the gross.
And what will be net revenue?
Net revenue, which you can tell, I can tell you someplace.
Mr. Chatterjee, the question was also about the swing in the profitability in Q4, so you could answer that as well.
Can you repeat that question, please?
Yes. So Q4 FY '21, you had an EBITDA profit of INR 43 crores versus INR 18 crores loss this year. So the total swing in EBITDA was about INR 60 crores, out of which only INR 37 crores came from your raw materials. So where is the remaining INR 20 crores, INR 25 crores of EBITDA loss -- swing in EBITDA?
Because there was a huge -- we have been more on sales and sales promotion this year, especially on AC. And balance is on the -- that -- because of the mix [indiscernible] costs are slightly higher, and the employee costs increased because of the increase in number as well as [indiscernible].
Okay. And what is the difference between gross margins in AC division versus rest of home appliances division?
The AC margins are significantly lower as of now. But a lot of things have been done now to -- like, we have already given in our distinct -- which are the -- we are reducing the...
Mr. Chatterjee, we can't hear you.
You can you hear me now?
We can hear you, sir, now.
Yes. You'll have to repeat. The voice had gone blank.
So what I said is that the -- the last year, import content was quite high. So we have done -- we have taken significant steps to reduce the import content, which we have already given in our presentation. So going forward, things will improve substantially.
Am I audible now?
Yes, sir, we can hear you now. Mr. Thakkar?
Yes, that's enough.
We take the next question from the line of [ Prasheel Gandhi ] from Nirmal Bang Equities.
Am I audible?
Yes. Go ahead.
Yes. Sir, could you give a highlight of the price growth you have taken across various segments in FY '22?
If you see from January '21 to March '22, the total increase in price has been around 12% to 13%. This is the average. So in some models, there will be more, some less.
Okay. And for FY '22?
For FY '22, there is...
From April to March?
Another 2% to 3%.
And so have we taken a price hike in Q1?
We have taken a price hike in Q1. We have taken a price hike in Q1 in the month of May. We have done that.
Could you quantify that? Is it possible to quantify?
About 2% to 3%.
Okay. And my second question was, could you highlight your CapEx plan for FY '23?
CapEx, we are in -- for engineering division CapEx, other than losing CapEx, there is nothing. But for the appliance division, we're working on it. For motor, we have a plan of around INR 34 crores because of the new BLDC line.
Okay. We expect to go to -- this BLDC line to go live by September '23. So could you highlight, sir, what would be the incremental cost of BLDC motor versus a normal motor?
Anand, I would request you to answer this question, please.
Yes. See, actually, the regular motor, that one which we are using today, is much more expensive than the BLDC solution that we are offering. BLDC motor will be cheaper in comparison to universal motor, but that savings, whatever we get, will get mitigated by increasing cost of the controller. So net-net, as a package, motor and controller, the cost may increase by INR 1,000 to INR 1,500.
Okay, I have one more question. We recently amalgamated with Trishan Metals Pvt Ltd. So could you throw some light on that? What is the company? What are your plans for the company going ahead?
Arup, please answer.
Yes. Actually, this is a downstream project. It is a rolling mill which rolls sheets, which are used for captive consumption as well as for external sales. Because the fine blanking or the stamping, it uses the CR coils, which will get produced from this plant and used for manufacturing.
Now the thing is that as far as the future projection is concerned, the present capacity of the plant is 1,400 metric tons per month which, with the additional improvements as well as some CapEx in it, will go up to 2,500 metric tons per month. It would be advantageous for all the units which are into engineering business to get materials just in time of the right quality because material scarcity here and there creates huge issues for the OEM suppliers. So this being a downstream project helps all the plants in meeting customer requirements in full.
Okay. So could you quantify some of the cost savings that we can -- that is likely to come through from this amalgamation? I'm assuming that downstream would lead to a lot of cost savings. Am I correct on that, sir?
Mr. Chatterjee, you want me to cost...
Cost savings mainly will come from the area of the -- reduction in waste, while the operational waste reduction would be there, number one. And getting material in supply also will reduce the cost in the other units.
Okay. So could you quantify what is -- if I look 2 or 3 years down the line, what is the cost savings?
No, we are working on it. This should not be -- as of now, we'll not be able to give any guidance on that.
Okay. Okay. And a question pertaining to dishwasher. I see that dishwasher sales have come down drastically compared to the last year's quarter. So could you throw a light? Or is it the normality that we should expect going further?
So the overall market, the demand has come down. That is a correct point. However, we still believe that the market can be grown by expanding displays, focusing on marketing of the dishwasher, and that is what we are working on internally. But the market demand has significantly gone down. There was a sort of an unmatchable demand during the lockdown period. That has gone.
Okay. Okay. So going forward, is it safe to assume we will be doing about INR 150,000 revenue -- INR 150 million revenue?
I'd like to cross check on the revenue side. But in terms of numbers of dishwashers, at the current run rate, we are looking at about 40,000, 45,000 dishwashers a year. We are working to increase this to about 70,000, 75,000 dishwashers a year. So if you take that figure of 30,000, 70,000 and at INR 30,000 each, that's about INR 200 crores, INR 225 crores of revenue.
Okay. And lastly, on the e-commerce segment. So could you quantify how much are sales for Q4 as well as FY '22 was through e-commerce channels?
E-commerce, quarter 4 was only 9% of total sales. And the -- during the whole year, it was 16% of total sales.
Okay. So going forward, do you think our [ reach ], presence, say, e-commerce sales are likely to go up to 20%, 25%?
No. We would expect the off-line and online sales both to rise. So on an average, 15%, 16% would be the e-commerce sales. That is more or less a stable level. In some months, in some periods, it rises to 20% and beyond. But overall, on a, let's say, YTD basis, 15%, 16% is what it would be.
[Operator Instructions] We take the next question from the line of Chirag M. from Centrum Broking.
I just wanted on your comment on the competitive intensity in the industry currently. We have seen a trend for [ GPM ] pushing [indiscernible] high cost inflation. A lot of players have not taken [indiscernible] the competitive intensity really increased. So just wanted your comments on that. And in that light, how do we see FY '23's operating margin translating to?
Yes. So this is a good question and what you are saying is right. There are 2 of the larger players who have actually held back on price increases right through the previous fiscal year. And from a pricing point of view, it has caused a disturbance in the market.
As far as we are concerned, you cannot respond to what they are doing, which is basically losing profit for market share kind of a strategy. So we have been focused on completing the material cost reduction work, which is our biggest agenda. And the second is to continue to focus to broad base our sales from all channels, including the smaller retail networks, which are led through distribution, looking at how we can increase model mix for favorable gross margins.
So those are the actions we've been working on. The results are not shown in the previous fiscal year, but we are trying to ensure that we are able to deliver it in this fiscal year. You cannot specifically respond it to the -- to the kind of things that have been happening in the market in the last fiscal year from the 2 larger players. Does that answer your question, please?
Yes, sir, it answers that. But sir, is it possible to give evidence of an indicative margin profile that our internal measures can -- resulting, assuming that this level of competitive intensity remains the same throughout the year?
What Mr. Chatterjee and I have said for quite some time is that we think that with what we have on our plate, a double-digit margin profile is deliverable. But we haven't delivered it, and that is what we have to work on. So we still feel that even with what is happening in the market today with the actions that we have on our plate, a double-digit margin profile can be delivered or has to be delivered by us.
Okay. And sir, specifically when it comes to washing machine, are we seeing any trend of premiumization in the sense that is front-load washing machine gaining in terms of outperforming growth compared to a semi-automatic washing machine? Or are all this because it's still growing at more or less equal pace?
For many years now, the fully automatics have been growing faster than the semi-automatics. Top loads specifically have been growing quite rapidly and even the front loads have been growing. Now -- but the semi-automatic market is not going away. In share volume terms, it is still quite large, and it is growing. It is not that it is stagnant or [ slowly ] growing.
Your question of premiumization is an interesting one because even within the category, there is a lot of premiumization. So if you look at just front loads, and we look at the last 2 financial years or even specifically the last 2, 3 quarters, the percentage of the higher-end capacities, which is 8 kgs, 9 kgs, have been growing. They are growing more in our country areas, but overall, they are growing. So premiumization is happening within the category. That is a segment like front load or top load, and the fully automatics are growing faster than the semi-automatics, so that is also happening.
Okay. And realization for us, is it pricing and in line with the price hikes that we are taking? Or not because of competitive intensity, even in front-load washing machines, the realization is not rising as much as you would have expected?
No, the realization is rising in line with the price act, so we have not increased the discounting in the market. But what has happened is that we've not been able to pass through the material cost increase as quickly as it should have been done and not still to the full extent. So even today, there is a 3% to 4% lag in terms of what we need to pass through to the market. So the realizations have improved in line with the price increase.
[Operator Instructions] We take the next question from the line of [ Prasheel Randy ] from Nirmal Bang Equities.
Sir, a couple of questions on my side. First on the motor division. We have said that we are exploring opportunities in the EV space. So could you throw some light on that? What are we targeting in that part of area?
See, actually, on the EV side on motors, we are looking at opportunities in 2-wheelers and 3-wheelers to start with. As well as we are looking at opportunities in commercial vehicles. That is 1 ton or 2 ton kind of vehicles, motor and controllers.
Okay. So do we have a product that is ready or we are also into the R&D of the...
We are in the R&D stage. We do not have a ready product yet.
Okay. So something to contribute to a new line would be somewhere '24 or '25? During FY '24, '25, am I correct?
Right, right, right.
Yes. And second question is, we have turned EBITDA positive in our motor segment after quite a long time. So do we expect this trend to continue [indiscernible] or...
Yes, we expect the trend to continue. With the commodity prices pulling down, we hope to have a positive EBITDA.
We take the next question from the line of Aviral Jain from SG India.
Sir, could you please help us there? I have 2 questions. One is specifically pertaining to Q4 FY '22 versus Q4 FY '21. There is obviously a gross margin compression. But from an absolute perspective, what were the key deviations on absolute costs incurred which led to such a large deviation in profitability? That is the first question.
And also for the first time, there was some detailed mention of the P&L for the AC business. So could you also break up the appliances business, the P&L between AC and non-AC? How are you looking at it? What are the similarities in terms of gross margin, in terms of promotion expenses and some of the other expenses?
Mr. Chatterjee, you can answer this.
Like I have already said, the difference in the fourth quarter this year versus last year mainly is the difference because of the commodity price. And we could not [indiscernible] that the price increase which is required to be passed on because the material cost increase was happening on a continuous basis.
Number two, for AC specialties, we did some sales promotion expenses to increase AC sale because the -- if an AC [indiscernible] both last 2 years, 2019, '20, '21, '22 April, May, we lost because of the COVID. These are the 2 main areas. And besides that, volume was also not up to our expectation.
And the second part, what we said, you asked about that the margin at [indiscernible] and AC was the other. Actually, we do not give any guidance or details on the product margin. But we see we wanted to give specifically with the [indiscernible] that the engine, that business did not do well mainly because the material and the volume-related view, and we lost the season during the period April, May, which is the main season for it. These are the main reasons.
And sir, there is no internal product acceptance issue per se. It was mainly because of a shortage of parts or materials for which you were not able to meet your, whatever, internal aspirations on the AC side. Is that fair to say?
Yes, yes, that's right. In fact, on the product acceptance side, the product has done quite well in the market. And the quality levels, performance levels are all in line with what we had targeted.
And sir, related question was, again, there was an update on the AC target versus actual. And May, there is -- the actual is going to be significantly short of the schedule. Any reason for that? Is it because the season is gone, or again, you have supply issues?
We have supply issues on areas like the compressors, et cetera, and there have been a lot of shipping-related problems exit China, for which a lot of the key inputs didn't come on time. So those are the problems that we've been struggling with.
But I -- just to understand the AC [indiscernible], our last high ACs in our fiscal year book has been around INR 320 crores. But if all the -- I mean, I've seen the -- we did INR 174-odd crores of sales in the first quarter or in the last Q4 itself. So would it be fair to say that this will achieve a very significant scale once the supply chain issues get sorted out?
Yes.
The numbers look like INR 600 crores, INR 700 crores-plus in the near term?
Yes. So you see in air conditioners, there were 2 points. One is to get the range right. Because when we introduced the range in January '20, after that about 1.5 years, the price positioning, et cetera, that we have taken was more on the premium side, and we had issues in terms of placements in the market. The profitability, of course, was a problem with the first year itself.
So we had 2 agendas. One was to get the range right and that was completed in January '22 with the introduction of a new series, which has actually significantly contributed to the rise in volumes. Because by March also, it was fully available in the market, and it was received quite well. So that part of the job is over in terms of the range that we have now. The profitability is the area that we've suffered quite significantly in the last year, and this year, we have to fix the profitability. So the combination of the volumes that we'll get this year and the profitability that we need, yes, this segment will have a significant impact on our results.
And sir, what's the range of -- have you introduced a lower-priced, affordable range? Or it just took more effort to get the placement for the initial range that you launched?
We actually segmented the market into key accounts, small dealers supplied through distribution networks, and the market was segmented into 5 segments, and we actually have a room for each of the 5 segments. So it wasn't a question of lowering the price, but it was getting a specification right for the segment and is this where AC was going. So we've corrected all of that actually.
And if I may say that the endeavor would be to have the premium range also pushed into accounts where the indexation is low. And obviously, you are first applying what the channel demand basis, their comfort, what we -- with whatever price value [indiscernible] they want to offer to their end customers, but...
Yes, that's right. That's right. You're absolutely right. So if you see, for example, on the 2-ton air conditioner, which is premium, and we were very short of demand, we have not been able to supply the market properly in the last 3, 4 months. And if we do supply 2-ton ACs to the requirement that is there, then automatically the profitability profile improves.
So it's not just about supplying the more expensive or better spec ranges to some accounts, it is also about supplying the higher capacities in full. Both the things will need to be addressed by us.
And does that require tweaking of the -- specs tweaking? Does that -- is there a significant margin difference for the realization that the company is seeking, or there is material input cost change as well? Because you will use more -- I do not know. Maybe the compressor remains the same either. I frankly do not know what...
Yes. So it is actually -- it doesn't change the profitability profile, but the range is -- specifications are different. So you might have something at a particular wattage and another range at a lesser wattage with a different compressor where the application would be different. So it is not about reducing the margin on the particular range. It is about the specification, which is a material input change as well.
Okay. And automobile business now, it's -- I would assume that it's coming back. Obviously, it's 2-wheeler business is still suffering. Major OEMs are reporting 15%, 20%, 30% decline. But 4-wheeler at least is reporting same level of sales as 2019, I guess.
Arup?
Yes, can you hear me?
Yes, we can hear you.
Yes. So you were absolutely right. It is showing early signs of improvement as far as 4-wheeler is concerned. Chip shortage is a plaguing issue which is continuing now also. Demand is there in the market. Waiting period has increased considerably for the 4-wheelers. Once the chip supply chain issue is resolved, I think 4-wheeler numbers will drastically improve. As far as 2-wheelers are concerned, yes, you are also correct that last quarter are more. I mean, the demands on the 2-wheeler was very, very poor, but showing -- again, showing signs of improvement going forward. So overall scenario, I would say, a bit positive going forward in coming quarters.
Okay. Sir, one last question. Did the freight rate also hit the cost side out of proportion in Q4 and even now? That's what we hear because there is still 40%, 45% [ bond ] is imported at least on the AC segment. There could be a high bond for front loaders as well, which is imported.
Yes. So the freight has increased, but that is not an explanation for the reduced margin rate. Basic availability of freight exits China has affected the supply chain. Freight rates have been high in Q4, but they were also high in Q3. So per se, that is not an explanation for a profitability problem, but supplies is.
That said marginally. But I think the third quarter and fourth quarter freight was quite high, but it is now gradually coming down. But like Mr. Ray was saying, so we treat the irregularities of the supply.
We take the next question from the line of Bhargav from Kotak Mutual Fund.
Sir, so on the OEM side, is it possible to share how many clients would we be servicing to? And what are we doing to ensure that this business is sticky in nature and we don't lose out any client?
We are currently supplying to 3 buyers. I wouldn't want to mention them here, but we can separately give them to you.
And this point about the sticky -- the thing is absolutely right. So in terms of servicing them at the right time, ensuring that the costs are always mutually agreed, this is an area that we have to work on. Currently, they are all regular buyers, but that doesn't mean that they will remain regular buyers, so we have to put in that effort on the OEM side to keep the utilization up. Then we are working on that.
Sir, is there any order book where we have a visibility of, say, maybe next 6 months or 8 months or something like that or not?
Yes, yes. We have a 3-month order book, which is discussed with them and which we are working with it. So let's say if we are sitting in the month of May, then post the new energy norms arriving in July, so July, August, September, we have [ another one ].
Okay, understood. So given that we have not been able to service the demand, as you've shared in your presentation, there's no risk of any of these customers leaving on the back of that, right?
No, there is no risk per se because of this. But of course, there is dissatisfaction because we didn't supply. We will have to ensure that we address that concern by explaining what we are doing to ensure that this doesn't repeat.
Okay. So given that shortages on the compressor side was one of the key reasons, so are we doing anything to mitigate our import dependence? I mean, is it possible to elaborate on a bit?
Yes. So you want us to elaborate for the air conditioner especially or overall?
Yes, yes.
So on the air conditioners, the electronics has been completely localized from February this year, so that job was completed. As far as the -- there are some critical areas like a part which is called a cross-flow fan that a supplier is investing in and that will be localized over the next 4 to 5 months before the next season comes.
As far as the compressor is concerned, which is coming -- exits China, there is a supplier in Gujarat that we are working with, and there is also a supplier who is investing in a plant in Pune and both the suppliers are good suppliers. So by next year, the compressor will also be significantly localized.
That leaves the aluminum sheets that are used in making the condensers. These are currently 100% imported into India. But under the PLI scheme, Indal has begun -- Hindalco, sorry, has begun a project along with the industry to localize this into India. And I think over the next 2, 3 years, this work will also be completed.
So for the IFB and also for the industry, a great deal of import substitution will take place under the PLI scheme, which is the government intention as well, and this should happen over the next 2, 3 years.
And fair to say that as the level of localization increases, the cost will also sort of come off a bit?
The [ sonics-related ] risk will go. As far as cost is concerned, for the suppliers to acquire scale will take a little bit of time. So I would put it at a, let's say, a 4-, 5-year kind of horizon.
As far as IFB is concerned, our biggest lever was on the electronics. And with the localization, yes, the costs have dropped, the impact of which we will see in quarter 1.
Okay. Okay. And now that the utilization in AC has improved, fair to say that FY '22, we are looking at this business to turn profitable?
Yes.
[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. [ Prasheel Randy ] for closing comments. Please go ahead.
Thank you, Diksha. We would like to thank the members -- we would like to thank the management of IFB Industries for giving us the opportunity to host this call. We'd also like to thank all investors and analysts for joining the call.
Any closing remarks from members of management you want to give to your investors?
Thank you all. Thank you all for participating.
Thank you. On behalf of Nirmal Bang Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.