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Ladies and gentlemen, good day, and welcome to the Orient Electric Q3 FY '23 Earnings Conference Call, hosted by PhillipCapital India Private Limited. [Operator Instructions]. Please note that this conference is being recorded.
I now hand the conference over to Mr. Deepak Agarwal from PhillipCapital India Private Limited. Thank you, and over to you, sir.
Thanks. Good morning, everyone. On behalf of PhillipCapital, I welcome you all to Orient Electric Limited Q3 FY '23 Earnings Conference Call.
Today, we have with us the senior management represented by Mr. Rakesh Khanna, Managing Director and CEO; Mr. Saibal Sengupta, Chief Financial Officer.
Without taking much of time, I will hand over the floor to the management for their opening remarks, post which we will open the call for Q&A. Thanks, and over to you, sir.
Thank you, Deepak. Good evening, everyone. A very warm welcome to all of you, and thank you for joining us for our quarter 3 financial year '23 results discussion. I'm Rakesh Khanna, and with me, I have our CFO, Mr. Saibal Sengupta.
We are pleased to share that the company registered record high revenue for the quarter with a growth of 8.9% year-on-year to INR 739 crores in quarter 3 financial year '23, owing to growth in the ECD and Lighting and Switchgear segments. Our 3-year CAGR for quarter 3 performance is 14.2%, while the 5-year CAGR is 16.4%. The gross margin was 28.6%, improving by 234 basis points quarter-on-quarter and 102 basis points year-on-year, driven by better cost savings initiatives. The EBITDA margin registered a decline of 237 bps year-on-year, partly due to onetime costs on account of investment in growth, but grew by 515 bps quarter-on-quarter in Q3 financial year '23 to 7.4%. Although pricing pressure and high cost inventory weighed on margins, better operating leverage resulted in expansion of the EBITDA margin on a sequential basis. Excluding onetime costs, the normalized EBITDA would have been 9.1% in quarter 3 financial year '23, a modest decline of 17 bps compared to quarter 3 financial year '22 normalized EBITDA.
The profit after tax margin was 4.4% in Q3 financial year '23 compared to 5.6% in Q3 financial year '22. Our working capital improved to 20 days in the quarter from 34 days in Q3 financial year '22. The increase in revenue to a substantial extent was supported by 11.9% Y-o-Y and 73.8% Q-on-Q growth in the ECD segment led by Fans and Air Coolers. The Fans segment recorded the highest Q3 sales ever, which increased by 15% year-on-year, following aggressive restocking by trade channel ahead of BEE star rating implementation from January 2023. The current restocking of fans combined with severe cold weather in the north may cause some temporary blips in trade takeoff in the coming months, but we expect the trade to normalize as soon as consumer offtake starts in February-March.
The EBIT margin for the ECD segment was 12% for Q3, registering an increase of 755 bps quarter-on-quarter and an increase of 89 bps on a year-on-year basis. The company has been able to sell its entire non-star rated fan inventory amidst BEE transition. Presently, we have upgraded 350-plus SBUs from non-STAR to STAR-rated fans, and have attained B rating certification for 400-plus SBUs. The company has [Technical Difficulty] in the BLDC Fans segment with its established product portfolio, further supported by planned rollout of new SBUs in quarter 4.
In quarter 3, Air Coolers registered a 2x sales growth Y-on-Y, while Water Heater sales grew by 21% Y-o-Y, supported by a 2.5x sales growth in e-commerce compared to last year.
We are happy to share that our direct distribution strategy has generally stabilized in states of Bihar, UP, Orissa and Karnataka, and has started yielding positive results as sales in these states grew by 60% in Q3 financial year '23. Andhra Pradesh and Telangana, the 2 states which came in later, still had to stabilize and yield positive results, and we expect them to stabilize by quarter 4 financial year '23. Our focus is on the expansion of distributors, direct dealers and retail touch points in these states.
The Lighting and Switchgear segment recorded year-on-year revenue growth of 1.6% for quarter 3 financial year '23. The overall lighting growth was stagnant in quarter 3 financial year '23 due to the replacement of demand in Q2 FY '23, GST increase and the diversion of liquidity towards stock filling of non-rated fans by trade channels.
The growth in the B2C segment remained flat due to subdued demand and high base of last year. The B2B segment grew by double digits year-on-year, driven by infrastructure spending and robust growth in the facade lighting space. Further, EESL restructuring is complete and we expect tender business to improve in line with government's infrastructure push towards highways, airports, railways and smart cities.
The professional luminaries space saw record revenue growth with high teens year-on-year growth and improved margins over last year. The company has successfully executed multiple projects for NHAI in Chennai and Chattisgarh, UP Street lighting, HPCL, Jaipur Development Authority and Delhi PWD. Further, the inquiry and execution levels in the building facade lighting segment remained healthy.
The company has successfully completed 3 projects, the Ganga Facade project, the Varanasi Cantt railway station and the Puducherry Smart City projects. We continue to make progress on Srinagar smart lights project, and our company has been awarded the prestigious contract to design and provide facade lighting for Baroda, Bareilly and Delhi.
The Switchgear segment continues to grow with healthy traction in the mass-premium segment. We have also launched house wires in 6 states, namely Rajasthan, Haryana, Delhi, UP East, Bihar and MP during Q3 financial year '23.
The company's exports grew by double digits despite the eco political challenges in key markets; Sudan, Sri Lanka, Ghana, and moderating demand because of monetary tightening in the Western market. We remain focused on driving the growth through Lighting and Switchgear portfolio, increasing the digital revenue, go-to-market strategy and cost reduction initiatives. We have augmented our leadership across various functions to expand our market, brand and segment outreach.
On the Sanchay project, we have achieved INR 37 crores in cost savings till December '22. Our new greenfield Hyderabad factories construction is on track, and we have incurred INR 38 crores in 9 months financial year '23 out of the budgeted INR 175 crores till date, that is being funded out of internal generation. We continue to expand our digital revenue, which witnessed 3x growth in quarter 3, although on a low base. In the quarter, the Lighting category in e-commerce witnessed improving traction on the platform.
In the quarter, we were awarded the CII Supply Chain and Logistics Award for 2022 along with the Fame India Safety Excellence Award and the Fame India Environment Excellence Award in the Consumer Goods electrical sector category.
With this, I would like to open this forum for question-and-answer. Thank you.
[Operator Instructions] The first question is from the line of Aniruddha Joshi from ICICI Securities.
Sir, now considering the direct-to-market route, what is the total sales of the company coming via direct-to-market route? And what is the total potential that -- what is the total scope to do the investment in expanding the depth and width of the distribution for the company? And again, secondly, what are the total savings that the company has achieved from direct-to-market route?
Well, Anirudh, as I said last time also, the total potential that we have addressed through direct-to-market is around 25%. We're now significantly gaining in that side. We are coming closer to our average all India market share. In some parts of the market, now we are even higher than the average all India market share that we have.
Our -- the kind of experience that we have gained in the direct-to-market, it's a great experience, and we feel that we can continue to further expand and take the market share in these states to the highest market share that we have in any of other states. So it's a great experience that we have. Idea is not to do cost savings. There are no cost savings involved, but there are no extra costs also. It's cost neutral by and large. It is only about setting the best ground rules from 0 days in these new states and creating the best practices. That's what we are gaining.
Okay. And sir, second question, considering the entire industry has seen good sales in Q3 itself of non-rated fans. So do you see any likely impact that the industry have a relatively muted growth in Q4 as well as Q1?
There would be some kind of an impact, but I see this to be a small impact. Really speaking, if you see the entire industry, the growth in quarter 3 is not so great that it's likely to impact Q4 and the coming Q1 and the season. It's a small growth that has happened. It's a small trade pickup that has happened. We should not forget that the channel was also reasonably empty in the last few months and maybe 2 quarters, and therefore, so much of pickup is not likely to seriously impact the trade going forward. And I personally believe that as soon as the consumer offtake will start, the trade pickup will again become normal very quickly.
[Operator Instructions] We have the next question from the line of Bhargav Buddhadev from Kotak Mutual Fund.
Congratulations on the good performance. Sir, my first question is on the fact that wherever you have seen direct-to-market, you also rolled out DMS and SFA. So what are the key benefits of this which you've seen and is there a probability of this seeing a pan-India launch also in the fan market for us?
Yes, Bhargav. What the digital DMS and SFA allows us is to have a complete visibility. Our objective is to reach the last mile where the consumer buys from the retailer, and we would want in every state to have a retail viewership of at least 2,000 to 2,500 every state. That's the target. How this helps us is to ensure that the counter shares of each of these addressed retailers are well managed and well influenced. Retailer is an important customer for us in that sense, and we would want to ensure that the retailer is very well serviced, and this visibility helps us to ensure that every retailer is well serviced and our reach is correct. And finally, that is what leads to good market shares. We will be rolling out similar DMS in the other states also. But let me clarify, we will roll out the DMS and SFA for the transparency in other states and not necessarily the direct-to-market.
Sure, sure. Understood. Secondly, sir, I just wanted to know how has been the pricing for these star-rated fans? What we're hearing is that the same have been priced very competitively compared to the erstwhile non-star rated fans, and hence, the consumer demand may not be significantly impacted. Is that assessment correct?
Yes, you're right. Although the cost increase is there, we are working hard to ensure that the impact is minimized through a lot of cost reduction initiatives, through pricing initiatives. And we understand that we do not want the consumer to get significantly impacted.
Okay. And sir, last is, data-related question. You mentioned adjusted EBITDA margin of 9% plus, what was this onetime cost, and can you quantify this? That's my last question.
So there are a few onetime costs.
So Bhargav, I will take that question. Basically, there were onetime costs around -- as you have seen, our employment costs have gone up. So there were a lot of senior management recruitment which have happened. Onetime recruitment costs have gone up. Then we are doing this [ facade ] project, which was not there on the pace, that has added to the increase in the cost. And as well as -- no, it is not onetime, but still in terms of advertisement promotion, we have seen significantly uptick on a year-on-year basis. All that put together has caused us this impact. I'm not talking about the other normal expenditures which have rolled back to pre-COVID levels, including international travel and all that. I'm not regarding that. But yes, the onetime comprises of the McKinsey Consultancy and recruitment costs, those were the bigger ones, plus together with the BF1 brand investments. So all these we look upon it as an investment for long-term sustainable growth.
So sir, can you quantify the McKinsey cost and the age span as a percentage of revenue?
We don't give that kind of a detail, but all that put together, if you can estimate, around 1.7% and 1.8%, all this put together.
The next question is from the line of Nitin Arora from Axis Mutual Fund.
Sir, can you talk about a little on the secondary sales, how it has moved? Because the large part of your volumes and large part of the ECD portfolio is still fans where you've done the inventory addition, plus there was a change in states, direct-to-marketing, which could have also resulted in the high inventory and pushing the volumes to the dealers. Can you talk about more on the secondary sales and as we are closer to the Jan end, how the secondary sales is moving, if you can throw some light on that?
Yes. The secondary sales are in line, they are quite satisfactory. From whatever we understand, the market also, the secondary sales have -- there's no growth that one can talk about, but it's not small. So secondary sales are going well. Consumers are buying. We're just waiting now for the summer to come up when we will see a spike in the next level of sales going up.
Getting it. And the change in the distribution which you have done, any other states which you will be taking going ahead or is it largely done the first 4 and -- 4, 5 states which you have gone through?
See, currently, we will be focusing on just putting these states absolutely right, and we will be putting the learnings in the other states. As I said, there are some great learnings that we're coming across. However, we will always be open to taking any decision any time. What is important is whatever is more suitable in a given state, those actions will be taken in the interest of the market shares in the state.
Getting it. Just one clarification on this cost element. So the employee cost, which is INR 57 crores now, generally, we have been in the range of INR 46 crores to INR 47 crores or INR 45 crores. In that, how one should take the recurring cost on the employee side? Because you said there is some recruitment cost. I did understand what is this onetime recruitment cost. I mean it should get normalized, right? So can you throw some light, what is the normalized employee cost one should assume?
Maybe Saibal can take this question.
Yes. Hi, Nitin. Basically this employment cost, which has gone up, you should see this as a recurring cost because now most of the -- quite many of the senior management team members have already been onboarded. Their costs are coming, so 1 or 2 will get added in the current quarter as well. So what is published in the recurring cost, it will slightly increase as well. The recruitment costs which I talked about is the onetime recruitment for the -- not only senior management or at all levels, a lot of vacancies are also getting filled up at the junior levels as well. All that put together, it's a onetime recruitment cost.
So the way you need to see it is that all of these are upfront costs for the future growth. And as we start growing, you will start seeing the advantage of these costs. So you can see them -- the increase in the cost is an upfront cost, which we are putting in building some part of the organization, which is a growth lever of the organization. For example, we are building a very strong e-commerce team. Now we know that this is an area where we want to significantly grow. So in future, as a percentage of revenue, you will start seeing this coming down.
That's a well point, again, sir. I was just trying to understand that why this 170 bps coming from a one-off, it doesn't look like a one-off. It's the recurring cost, and I understand the future benefits will come as a percentage of sales. So on an absolute basis, I was just trying to understand that we should assume this number or not. So then it doesn't look one-off. That's what I was trying to understand.
The one-off is -- one-off is the other recruitment cost, which is in other costs and not in the [ suggested cost ].
Got it. That would be INR 10 crores, roughly?
Difficult to say.
The next question is from the line of Rahul Gajare from Haitong Securities.
Sir, I have a question on Fans. Now you did indicate even that Fans has grown by about 15%. Could you clarify the volume growth that you've seen in this quarter and for the first 9 months for the Fans business?
Volume growth, value growth are nearly similar.
Okay. Fair enough. Now Lighting -- I was looking at similar volume growth in the Lighting business because we've been flattish in this particular quarter, but in the full year -- in the first 9 months, we've seen a 20% plus growth. I just want to understand the volume growth in Lighting.
In Lighting, it is very difficult to give a volume growth. It's comparing 2, 3 very different products. On one side, you have street lights, on the other side, you have a bulb. So very difficult to put the volume to value. I think one has to see only value.
Let me put it in a different way. I understand there is some decline in the realization in the B2C Lighting, some large part of the Lighting. Is there a significant decline in realization that we've seen in the B2C lighting?
No.
Sir, my last question is on the demand scenario and what you've done on the e-commerce, what we see as a significant jump up. That's the last question.
Sorry, your question is not understood.
So I'm asking on the demand scenario. For last 2, 3 quarters, we were talking about a slower demand that is being seen in the consumer side. So I want to understand what is happening on the demand side on both ECD business and the Lighting business?
So the demand is not a high-growth demand. I would not call it that way. But also, there is no kind of reduction. We're not seeing the demand is going down. I think it's fairly stable demand, and going forward, we are more hopeful about the demand to further pick up.
We have the next question from the line of Nikunj Gala from Sundaram Asset Management Company.
I just want to understand, in the last 1 month, what are the consumer behavior we have seen in the Fan category, like still people are preferring buying 1-star, 2-star or 3-star and above. Can you just help us with your understanding from the ground, what is the higher contribution from BEE star?
So currently, this will be lot influenced by the trade. And in the trade, since there is a 0-star material, the trade will continue to push the 0-star brands. But going forward, as this inventory will deplete and the awareness of the star-rated fans will increase, it's very clear that the consumers will start going for the star-rated fans.
So in the last month, we haven't seen any -- like a pattern of people moving from like a 0-star to 3-star something, like -- so you must be having some order backlog for the coming months?
No significant shift as of now, as I said, and this is largely also driven by what the trade has stocked because the consumer first has to go to the retailer and speak there, and the retailer will show the stock that the retailer is carrying. Therefore, not a significant shift.
Okay. So as of now, I just want to understand from your production perspective, how the contribution will be from your production side? Like, large chunk would be -- still, you would be producing 0 and 1-star?
No, there is a legal requirement. And effective 1st January, the manufacturers cannot manufacture or sell the 0-star.
I mean for 1-star and 2-star, sir.
Yes.
I'm saying a large chunk of your production still will be 1-star and 2-star, sir?
Okay. Still, we'll be largely be 1-star.
Okay. And just 1 clarification on your comment when you mentioned in the 9-month period in Fans, your volume and value growth are equal. So in the last 9 months, considering the kind of inflation we have seen, is there an understanding that we haven't taken any price increase in the first 9 months?
A lot happened because of the mix change. During this time, because there is a lot of stocking that takes place, that has taken place, a lot of it has been on the lower price side. Just a mix change.
The next question is from the line of Rahul Agarwal from InCred Capital.
So 2 questions. Firstly, our interactions during last quarter with the trade essentially indicated some kind of higher discounts and schemes for liquidating 0-star, your onetime cost, whatever you mentioned, doesn't include any kind of costs related to that. Could I understand a bit more exactly how was your experience in terms of liquidation? Did you -- did this discounting actually impact margins? And what would be the receivables, really? Because I think -- I heard -- if I heard correctly, you said net working capital is actually better Y-o-Y. So just these 2 things, please.
Yes. So the good thing that happened with us is that we cleared the inventory, and we planned well ahead of time. And therefore, by December itself, we had sold most of the inventory that we had. We were not under any pressure to discount, to liquidate our inventory. We were much better off. And in terms of the credit, you would have seen our working capital. The stocks have improved, receivables have improved. I think we have done very healthy selling. We are happy about that.
Got it, sir. And the second question essentially was on margins. So it looks like, obviously, 3Q has been better based on past history purely because of channel building on Fans side, but the gross margin and operating margins have not really reverted to long-term averages. Obviously, that's a function of some onetime costs incurred right now, but any -- how should we look at margins over the next 12 months? Any indication, any direction will be really helpful.
So in terms of gross margins, we have improved our gross margins. Of course, the pressure continues. There is a lot of competitive pressure in the market, but we have improved our gross margins. Going forward, we do hope that our gross margins will further come up. There are a lot of cost-saving initiatives that we have worked in the pipeline. They will help us to improve our gross margins going forward. And we have not put any separate onetime liquidation costs. You see, the entire pricing is a part of the total pricing in the gross markets. So there is no separate thing called that there is a liquidation cost for those, and it's sitting somewhere else. Nothing else is sitting anywhere else. It's the total gross margin earned is what it reflects, which has improved.
So the EBITDA should improve to 9%, 10%, or will it take like real time because we're investing quite a lot on e-commerce, on people, on a lot of other things, right?
Yes. So we expect the whole thing to start giving results fairly quickly. As you noticed, when we took the call of go direct to the market, our lesson was that we recovered this -- the whole thing came back in a matter of 2 to 3 quarters. So the whole GTL is a 3-quarter cycle. Most of these also should start showing results fairly fast. We are already seeing in e-commerce 2x and 3x growth, which is already coming. I'm sure this will stabilize and will continue to give us the benefits. So the Spark projects, in which we have McKinsey working with us, is also a 2-year project, or which 1 year is going to get over soon. And we're already seeing the kinds of benefits that it is bringing in, and that is what is helping us maintain our margins. And with that confidence, I'm saying that the margins will further grow because these kind of very scientifically-done cost reduction initiatives are really showing good results. So we should be seeing the profit margins improving in the time to come.
We have the next question from Mr. Achal Lohade from JM Financial.
In terms of the mix, can you help us with respect to the Fans mix here in terms of premium and nonpremium for 9 months or 1 year?
See, I have always maintained that the premium way we define is very different than the way industry defines. For us, the premium is the top 10%. It's what we call premium, and we continue to change the definition of our premium. Our premium is not a bandwidth, starts at INR 3,000. At one time, it was INR 3,000, today it is INR 5,000. Anything less than an arrow series, we don't call it a premium. All I can tell you is that the premium is continuously increasing. It is in the range of 10%. And with the new 5-star now coming in, the definitions will once again change. A lot of premium will come in the decorative segments for us, and the premiums will once again move upwards. But in the premium category, as we define, we are clearly a dominant player, with more than 40% market share in this particular segment. I'm glad to say that when it comes to aspirational products, Orient is by far the leader in the aspirational cuts.
Right. If I were to ask you a different fashion, if you were to categorize fans in terms of 3 or 4 buckets, what would they be and what their mix would be as we speak?
So the way I would look at it is, one is the basic white and brown fans, and we call them the base fans. The second would be the decorative fans, which have the trends, metallic colors, et cetera. The third will be the premium fans, and the fourth will be the BLDC fans. And then will give the TPW fan and the exhaust fans. So it's a little different way of looking at the product category. But I think coming out of a pure trade base, price-based categorization, I think if we see it from the consumer perspective, the buckets will change, and that's the way we place our buckets.
And what would that mix be, sir, approximately?
The basic fans, the white and brown fans, will still constitute approximately 50% of the total business. And then we'll be -- 10% for us will be the premium fans. And today, the total BLDC will be in the range of another 10% and the balance would be the decorative fans.
Right. Understood. The second question I had was in terms of the season, A, is there any possibility of a price change, whether upward or downward for these 2 categories? And B, any new SKU or differentiated product which -- or new product in this particular categories?
Which category?
Fans and air coolers, sir?
In view of the season.
So on the season perspective, yes, from the upcoming season perspective?
So the pricing is already announced. The pricing, there is not likely to be any change. And in new products, yes, in Fans, there is definitely a strong rollout that's happening. And in Coolers, we have a very strong lineup. So yes, in both of them, the lineup is strong and prices have already been announced.
Got it. And just one last question, if I may. With respect to the gross margins, you said the cost savings initiative. I think you mentioned INR 37 crores. I don't know if it pertains to only raw material costs at the gross margin or the other costs as well. So what is the target here? Is there any particular number in mind, what you aim to achieve every year, or is this just a onetime thing?
Yes. So the target is in 12 months' time, including this, we should be able to save INR 100 crores. That's the target. And we will be moving fast towards that target.
And for how much have we saved for 9 months, sir?
As you said, INR 36 crores.
So you're saying the fourth quarter would -- alone have INR 60 crore plus savings? Have I got this number right?
No. No. We talk of 12 months, rolling 12 months. So...
Rolling 12 months, okay. Okay, okay. Sorry, my bad, sir. Understood, understood. And just in terms of market share, if you could help us in terms of Fans, Lighting and Air Cooler?
Actually, I -- we normally do not talk much about market share because there is no very reliable syndicated data on market share. So if you ask me, my understanding of market share, depending on which brands and how many players do we take in counting that bucket, I think if I take all the known -- well-known brands into account, then our market share in Fans would be in the range of around 18%.
So I presume you're talking about 18% of the organized market, right, effectively?
Yes. So let's not get into market share because there is no syndicated data, and it's very difficult to define what is an organized play, what is an unorganized play. There are different perspectives to them. What's important is this is our market size, and you can compare with the market -- the size of other peer group and arrive at your conclusion.
[Operator Instructions] The next question is from the line of Balasubramanian A from Arihant Capital.
Congratulations for a good set of numbers. I have one question on Lighting and Switchgear segments. Sir, like we are doing project, Srinagar smart city project. And sir, how we are selecting the project? What is the minimum criteria in terms of the margin IRR and other criteria? Could you please explain the same?
Yes. So when we select the projects, basically, we are looking at margin and payment securities and payment terms. So if the payment terms is secure and the margins are good, we take up the project.
Sir, any particular minimum criteria, like...
I would not be able to answer that question. That's competitively sensitive, you can understand. But yes, we want healthy margin, and we want to ensure that our payment is well secured.
Sir, on the ECD segment, could you please share breakup for Fans, Water Heaters, Air Coolers, so that would be really helpful.
So basically, the Fans, as I already mentioned earlier, it occupies around 61%, 62% of the business, and that is continuing. The Water Coolers and Water Heaters, again, the same trend as I had mentioned earlier, between 10% to 12%, that trend continues. As you can understand, there will be seasonal [indiscernible]. And then as far as Lighting and Switchgear is concerned, 27%, 28%. So this organically this is a trend which has continued and the same trend continues in the quarter 3 as well.
The next question is from the line of Ashish from Infinity.
Couple of questions, sir. One is that as this transition happened and the dealer reshaping inventory happened, do you believe that some of the sales this quarter were one-off kind of, or do you not think that there is anything there?
If you see the total sales in the quarter, it is not very high. And therefore, I don't think it is wise to say the sale is one-off. Yes, the retailers, depending on the geography, have tried to overstock a few fan models, specifically the lower end where they expected the price -- the fans are highly price sensitive. But the total stocking is not very high, and therefore, I do not see much impact in the coming quarter.
Right. And secondly, sir, in terms of the slightly longer term and more of medium term, where do you think our EBITDA margins could stabilize? Could we get back to a double-digit, low teens kind of margins or -- maybe in a year or 2 years? Or do you think that -- because we went through a lot of pain in the last 2 years in terms of market disruption, commodity prices, et cetera. I presume a lot of that is behind us.
Yes. And if you see -- if you take out the onetime investments that we are putting, we are already fairly close to the double digits. So yes, we are very clear that we will be hitting the healthy teens in some time as these onetime costs will go away and leave behind the benefits that these onetime costs will give us. All the benefits that the onetime costs are going to give us are going to be ongoing basis, long-term benefits. And once the cost is removed, you will see healthy EBITDA margins.
And secondly, sir, on the other income side, is this sustainable or is there a one-off in that other income?
No. Other income has a one-off, which you would have seen the disclosure that we have given. There's a past due, which was already fully provided for earlier 4, 5 years back from one of the distributors for which we were into a litigation. That has got close to a onetime settlement, and that is a provision reversal which has got done which is, from an accounting perspective, has been disclosed as other income. So that's a one-off. So out of the INR 8.5 crores that you see, INR 5.75 crores is a one-off, which has been disclosed separately in the results.
[Operator Instructions] The next question is on the line of Saptarshee Chatterjee from Centrum PMS.
My question is on the direct-to-market. Our contribution -- revenue contribution from these 4 markets would be closer to 10% or it would be around mid to high teens?
It is more. As I said, we have entered nearly 25% of the potential. And now, we are fairly close to the average market share across the country.
Okay. Actually, the reason I'm trying to understand is, basically, if I back calculate then for the rest of the markets, is like, it's kind of a single-digit kind of growth. So what would be the reason for the same? And if that is the case, then is it not good that we really accelerate our pace and do this direct-to-market across other states?
First thing, you will have to double click on your calculation because I've also said that AP and Telangana today have not given us the growth. The growth that I said 60% is without AP and Telangana. Having said that, you are right that the growth that we would expect from direct-to-market states is high. But at the same time, we have some -- the states where we are already very strong, and they are normal MD operations. I maintained it that our MDs are a very, very strong strength and the great assets that we have with us, and we really value those relationships.
Will there be some other states with low market shares where we may take advantage of the learnings of this? Answer is yes. We will see as and when it is required. However, we will also be implementing the learnings from these direct-to-market states into the MD states and try and further take up the shares in the MD states also.
Understood, sir. Very, very helpful. And can you please give the breakup of revenue mix between B2B and B2C in Lighting?
B2B is around 10% to 15% of the total Lighting portfolio.
And what would be the margins differential between B2B and B2C?
Margin differential is nothing because it's at par because we do not have investments and other costs sitting. There would be a small delta in the gross margin, but that trickles down to the EBITDA, which is at par in core B2C and B2B.
The next question is from the line of Aakash Javeri from Perpetual Investment Advisors.
My first question is that once destocking is completed for non-star rated fans at the trade level and we stock the channel with star-rated fans, how do you see the market changing especially with respect to BLDC penetration, and how does that change our profitability as a company?
Difficult to say how the market will behave, but we can draw parallels from other products that have moved similarly from non-star to star-rated product categories. Water heater being one of them, air conditioners being another one of them. We see that the consumer tends to settle between the 2 sides. On the lower side is the price-sensitive side, and on the higher side is the savings side or the efficiency side.
Similarly, in this fans category, we see the 1-star will be the price-sensitive side and the 5-star will be the power efficiency side. And somewhere in between the 2, the consumers will settle. Fans being more price-sensitive product, the upfront cost is critical for a customer. A significantly large portion of customers will tend to settle for the upfront low-priced product category, which will be 1-star, but a significant size would also move towards the 5-star. We will all see how the market pans out. But the current growth in 5-star is very healthy. It's moving at a fast pace. There are some states which are already showing the BLDC fans in the rate of 25% to 30% market share already. Whereas there are many other high-volume states which are slow starter. They have not picked up the 5-star fans very fast. So we will see how the total grows.
Got it.
With good portfolio.
Sure. And what would be the impact -- what impact can companies like Atomberg and Superfans, who focus mainly on BLDC, what impact would they have on the industry as a whole?
So you're right that, for some time, there was a unique position for a few of the players, and they were enjoying a separate space for themselves. As the whole space opens up and all players will tend to come in that space, it will become crowded. It will take different shape, so we will see how it goes. But I can tell you one thing, the margins are more or less similar as a percentage. What you can be expecting is the market to grow in revenue terms because if the average selling price of the fan goes up by even 10%, we will see that kind of revenue growth. And also, if we start seeing replacement happening because of awareness of high efficiency, that will also give us growth. So this BEE star rating change is very likely to give a growth to fans and give it a new life, give it a more involvement from the consumer side, and we all should see a very healthy fan industry in time to come.
And do we see the cost of BLDC fans coming down? And if yes, by how much can it come down?
Anybody's guess. But I can tell you, electronic products have the tendency of constantly coming down in costs. BLDC is -- it would be categorized as an electronic product because a significant part -- the cost of the product is electronics, and this will continue to come down. Over the last 2, 3 years, we all have seen a significant reduction in the cost of BLDC fan, and that's going to be another reason for BLDC adoption to go up because the price difference between induction and BLDC is likely to continue to narrow down. And we will, therefore, see enough swing in this, and that will lead to the replacement demand going up and the average selling price going up.
Got it. And if I could just squeeze in one more question, what are the advantages of keeping our manufacturing for fans in-house versus outsourced?
The make-versus-buy decision is based on a few things. Number one, how critical is the quality and cost in that particular product category. If we believe that technology is important and it requires investments, then this should be in-house. If we believe that there is -- the technology is -- can be very simply duplicated, then it can be outsourced.
The organization has to see where the organization wants to put the bandwidth of the organization. If it can be -- if whatever can be purchased can be purchased at a low cost from outside without affecting the design or the quality or the cost capability, then it can be outsourced. Otherwise, it has to be in-house. So it's a little complex decision, but we constantly keep on evaluating and taking the decision.
I can also add that manufacturing is definitely very important, and it is reflected in our decision for setting up a completely greenfield project in Hyderabad. What we want to achieve from Hyderabad project is a top-class manufacturing facility, which will give us technical ability to produce high-quality products with high reliability at the economical cost. So we will continue to take make-versus-buy decision. It's a great question that you asked.
All the best for the future.
Thank you.
Sorry to interrupt. Before taking the next question, I would just like to correct, I mentioned B2B as 10% to 15%. At the end of December, it is 25%. I just would like to correct that. Sorry for that. Please continue.
The next question is from the line of Rahul Agarwal from InCred Capital.
Just one question on this Hyderabad greenfied project. My sense is, it's going to come in phases. We're spending about INR 135 crores. Could you just give us some kind of understanding when does it start? And some idea on Phase I, Phase II, what are the kind of asset turns or sales contribution or products? I think you've explained in the past how do you want to ramp up fans. It's all premium, top class, low production. But just Phase 1, Phase 2, what kind of products should we see, what kind of sales should we expect from this INR 135 crore investment?
So the initial investment, I would say, the large part of the investment, of course, goes in land building, et cetera, and then is in terms of equipment. The equipment, because it's the tail end, is -- will come in smaller phases, but that doesn't really define the phases of the whole project. Initially, we will take up all our TPW fans there, and we will significantly reduce the Kolkata production and take them here. One of the reasons for taking TPW here is that we would like to focus on the export market with TPW product, and we believe that market is large. And in India, the ability to produce through TPW at that cost and quality is low. We have to fight with China as an alternate, and this factory will give us the footing to deliver that kind of a product at that cost.
We will also be looking at manufacturing the BLDC fans over there, although we have the capability within Faridabad factory also. But we foresee that BLDC fans as a percentage will start expanding, and that's what is going to grow more. That will also come there. This is about the Phase 1 where we're talking about the fans. There will be a Phase 2 in which we will decide to start manufacturing other categories beyond fans, and that we will share as soon as we finalize. But there is significant space left for that.
Just a clarification there. Phase 2, which Mr. Khanna talked about, is not part of this INR 135 crores. This INR 135 exclusively for fans, both TBW and [ BLDC ].
Okay. Got it, sir. So Phase 1 essentially is FY '24, right? I mean, next 12 months, we're all talking about Phase 1. Phase 2 will come like 2, 3 years afterwards, is that the right understanding?
Difficult to say 2, 3 years. As soon as we take a call, we will share with you. But currently, we will be seeing the Phase 1, which is -- and we expect the commercial production to start from June onwards. And with that, we will see the manufacturing of the TPW fans, and some ceiling fans in that factory.
Sir, just a related question since it starts in June, and again, this will be after the season, we'll obviously have the new plant cost coming into the P&L. Will that by any standard impact our margin trajectory, which we are expecting to recover going into next year? Or could we see some kind of pressure from that as well?
The whole objective will be how do we taper down the other factory and reduce the cost there and bring the cost here. There would be a little part transition cost, but our objective will be how do we minimize the transition.
The whole aim is to gain in terms of gross margins and cost excellence as far as Hyderabad is concerned. Those efficiencies will bring in the margin benefit in terms of gross margins were COGS. The only point is that, obviously, it does not happen from day 1. There will be [indiscernible] period, which is difficult to comment at this point of time.
Yes, there could be a momentary few months of the impact, but that our aim is to neutralize that through improvement of the COGS on the margins.
Congratulations for 2023, sir.
Thank you.
We have the next question from the line of Nikhil from SIMPL.
I have one question. You mentioned during the discussion that eventually the company should operate at a double-digit kind of EBITDA margin. And for that we've been doing a lot of investment both on the ad spend side as well as the employee addition, which we have done. Now if we look at from an angle of the categories, so Fans, we have a pretty strong strength. But the other categories like coolers and all, which are still probably subscale. So if you have to achieve that double-digit kind of EBITDA margin, would it be necessary for these subscale categories to become a larger part or would it be more driven by the growth in the Fan category?
So -- and how are you looking at, eventually, the mix for these categories and would you see addition of few more segments in our P&L? Or largely, we will operate around these segments and try to scale up the segments which are subscale? So how are you thinking over the 3, 5 years, our midterm P&L, and our direction for achieving double-digit margins?
So if you see, even as of now, if we remove the onetime exceptional costs, we are close to the double-digit margin. We have in the past delivered double digits, we're now investing in some development projects to remove those costs, we are close to double digits. So double-digit is not a big concern for us. That will happen. Will it be -- how will it be driven? Fortunately, in all the segments we are in, the growth possibility is huge. In Fans itself, the growth possibility is high because we still are not the market leader, and we do believe that we are -- we have all the capabilities to be the market leader, be it from the brand perspective or from the product perspective.
The other categories, Coolers, Water Heaters, yes, they are -- a lot can be done over there. And once again, we have a strong brand. We're getting a good traction. As I said, just now in quarter 3, the coolers have really grown very, very well. They did face a headwind because of the unfortunate 2 years where COVID hit during the peak season and the entire industry got hit. But I think coming years are going to be great years for Coolers as a category. Water Heater is showing a very good traction for us, and we have good plans for Water Heater growth again.
Lighting, you would see it is 1 of the fastest growing in the industry. We are continuously growing very well with very good margin. So Lighting also is a high-growth area for us. So because of the low base of these categories, obviously, the shares will start growing more and we will see an organization which is not only stand dependent, but has a large share of other products. But within them, we can do a wonderfully good job. Margins are likely to continue to grow in all of them.
Okay. And just -- I'm not asking for any direction or guidance. But if you look at companies in the consumer durable, brown goods segment, the kind of scale which company achieved, say, a INR 3,000 crore or INR 4,000 crores, where would you say a company should operate it? Should it be like a 13% to 15% kind of a margin which, with the scale the business has, the company can easily achieve, then the management can always take a call of investing to grow and all? But if you have to get a sense of where can a company -- or where the companies operated at a scale of, say, INR 3,000 crores to -- or INR 5,000 crores. What's your sense? Where should -- as a company, you would say that we should be at least operating at?
So the rate of growth that we have been talking about, barring some period of COVID, otherwise, constantly talking of a high growth rate. We should be reaching in this kind of terrain that you're talking about, INR 3,000 crores to INR 5,000 crores, we should be slow reaching. And in terms of profit, as I'm saying, we've already been demonstrating double-digit profit if you remove the exceptional costs. So -- and it's all contextual to time zone. By the time we will be INR 3,000 crores, INR 4,000 crores, I'm sure the aspiration will be to reach INR 7,000 or INR 10,000 crores. So it's all within the time zones.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Deepak Agarwal for closing comments. Over to you.
We'd like to thank the management for giving the opportunity to host this call, and also we'd like to thank all the participants for joining this call. Management, do you have any closing remarks? Thanks.
Thank you, Deepak. Thank you so much for hosting, and thanks to all the participants for continuously taking interest in Orient Electric. I would like to just reassure you once again that we are doing our best to ensure that we deliver the best performance in the coming period. Our investments are going to be giving us great results and a great trajectory going ahead, and we're very confident about our performance in the coming years.
We do take up the kind of questions that come from you, giving -- telling us that there is a lot of expectation about the growth and aspiration. We do take those aspirations, and we will want to deliver the best. Thank you so much. All the best.
Thank you, Deepak. Thanks, all the participants.
Thank you. On behalf of PhillipCapital India Private Limited, that concludes the conference call. Thank you for joining us. You may now disconnect your lines.