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V Guard Industries Ltd
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Ladies and gentlemen, good day, and welcome to the V-Guard Industries Limited Q1 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.
Good afternoon, all. On behalf of PhillipCapital, I welcome you all to V-Guard Industries Limited Q1 FY '23 Earnings Call. Today, we have with us management represented by Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran, COO; and Mr. Sudarshan Kasturi, CFO.
Without taking much of time, I would like to hand over the floor to management for their opening remarks, post which we'll open the floor for Q&A. Thank you so much, and over to you, sir. Thank you.
Thank you. Thank you, Deepak, and thank you PhillipCapital for hosting this call. A very warm welcome to everyone present, and thank you very much for joining us today to discuss the operating and financial performance of our company for the first quarter of financial year 2022, 2023.
We are pleased to report a robust start to the financial year, to the fiscal year, with the consolidated net revenues of INR 1,018 crores in Q1, carrying forward the momentum from the previous quarter. This marks the highest ever revenues for us in the first quarter, another successful quarter with revenues crossing the threshold of INR 1,000 crores. We have delivered 80% Y-o-Y revenue growth this quarter, albeit on a low base given the impact of the second wave of COVID-19 across the country last year.
Consumer demand has held up despite significant price increases during the last 4 quarters, while Electricals and Consumer Durables segment continued to report strong growth. The Electronics segment has also stepped up to deliver an improved trajectory this quarter.
During the quarter, we witnessed a broad-based contribution from both South and non-South markets that witnessed Y-o-Y growth of 68.2% and 95.6%, respectively, with the near doubling of revenues from the non-south market compared to the previous corresponding quarter last year. They contributed almost 47% of the total revenue in Q1, higher than 43.2% last year Q1. The sustained growth in the non-South markets bodes well for the progression of V-Guard as a strong nationwide brand characterized by a more diversified revenue profile.
On the product side, the Electronics -- Electrical segment, which is our largest revenue contributor comprising of wires, pumps, switchgears and modular switches, we registered a growth of 60% Y-o-Y. And Consumer Durables segment where we market fans, water heaters, kitchen appliances and air cooler, Q1 revenues doubled witnessing a growth of 99.7% Y-o-Y.
In our Electronics segment, comprising of stabilizers, UPS and inverters, we improved traction in summer months to achieve a growth of 90.8%. Y-o-Y. Input prices are still higher on a Y-o-Y basis and gross margin in Q1 FY '23 was 29.8%, vis-à-vis, 33.0% last year in Q1. We expect this to recover to normative levels in the next 1 or 2 quarters.
On a quarter-on-quarter basis, we have witnessed a slight improvement in gross margin as the price actions undertaken in prior quarters for some products have now flowed through the distribution channels.
At the start of the quarter generated further transaction of around 3% across electronics. However, as we witnessed, the commodity presence speak, it obviated the need for further pricing actions, especially in the Consumer Durables segment. We are closely monitoring the situation. And the slight easing of commodity prices is helping to address the gaps in select categories where the complete transmission to the end consumers had not fully been undertaken.
The EBITDA margin was at 8.1% during the quarter, has declined on a Q-on-Q basis as significant drop in copper prices during June advocate the margin for wires and this is likely to extend some more impact in Q2 as well.
With the risk of supply chain disruptions, we have reduced -- started to reduce inventory levels. We had a strong positive cash flow for the quarter. We believe we are well placed to meet consumer demand over the coming months, and this will enable us to get to normative inventory levels, resulting in stronger cash flows from the business.
With that, I conclude my opening remarks. I would like to thank PhillipCapital and Deepak Agarwal for hosting this call, and we'd like to open -- ask the moderator to open the floor for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Rahul Agarwal from Incred Capital.
Just 3 questions very quickly. Firstly, on the ECD, Mithun, I thought the growth was very strong. Could you elaborate a bit which category did well? And what's the outlook on ECD margins? You're still hovering in single digit, I'm pretty sure because of price hikes and raw material coming down, the margins should actually track back. So any comments, please?
So ECD, the 2 large categories in ECD is fans and water heaters. Fans had a pretty strong quarter because of very good seasonal demand in the first half of the quarter. However, the demand is slightly subdued. Water heaters also had a very good growth in the first quarter, but it would have been on a lower base.
And on the margin business?
Margin, like we said in the opening call, a lot of the commodity prices have started to correct and that correction is ongoing. So we think that there is some respect for us. I think from Q3 onwards, we should start to see the margins.
Okay. Got that. Second question was on the acquisition of the balance 26% in regards to Electronics. Could you just help us recap what is this about? And what does this company do, the subsidiary?
Yes. Ram, do you want to take this?
Yes. So that's a company, which is in the business of switchgears. And we had acquired them as part of building supply capability for V-Guard. And at the time that we had acquired the company, we had structured the transaction to be able to acquire 76% upfront, and the remaining 24% was to be acquired after -- sorry, 74%, 26%. The remaining 26% was supposed to be acquired after 5 years. So I think we are now fulfilling the last leg of the agreed transaction by acquiring the remaining 26%.
So what is the cost of this? And this is like manufacturing facility for switchgears, is it?
Yes. Manufacturing facility for switchgears, yes. This company was in the business of switchgear manufacturing and sales and supply. And we had acquired the company to secure switchgear supplies and to support the growth of the switchgear business of V-Guard.
And what are the investments for this 26%?
Sorry, I could not understand your question.
The investment needed for acquiring this 26%?
It's about INR 6.5 crores, I think. Ram?
Yes, yes. Yes, Mithun. Investment, is it? Yes, yes, INR 6.2 crores, yes.
INR 6.2 crore. Okay. Got it. And lastly, just a bookkeeping question. Other expenses that INR 145 crores for the quarter. Any one-offs here? It looks like a bit higher on a historical basis?
Sudarshan?
Yes. So I'll just cover that for a moment. So the other expenses have certain items, which are factory expenses and certain items, which are volume related. So a lot of them are in line with the turnover growth. Other than that, A&P has gone up and a few overhead items like the impact...
Traveling has gone up.
Is the main thing, yes.
So basically travel, some are volume related, like site outward and all that, some are factories related like packing material and also manpower, et cetera.
Out of that total increase of about INR 55 crores, about INR 30 crores, INR 32 crores is our volume-related items and about INR 78 crores is A&P. The balance is largely travel and selling manpower cost.
Wish you all the luck for the rest of the year.
The next question is from the line of Aditya Bhartia from Investec.
So my first question is on the Electronics segment. If we look at the growth of the segment on a, let's say, 3-year basis, essentially comparing it versus pre-COVID time, the growth appears to be pretty tepid. I mean, it's something like, in Q1 FY '20, we had some INR 280-odd crore of revenues from the segment. Now, it's grown only to around INR 300 crores. So what is that really on account of because what we were picking is that, at least for ACs demand has been fairly robust for the season?
So there was a good demand for ACs from April 1 to let's say, May 10. For the last 45 to 50 days was quite bad. So the demand was not as it should have been. However, the AC sales were good. I mean we had a very good growth in the AC sales -- stabilizer sales. But the growth in inverters and battery business was not as good. We had some supply issues for inverters also because we were not having the requisite electronic items. So some of the supplies are also impacted.
Ram, anything to add to that?
Yes. Just one more point. I think quarter 1 FY '20 was exceptionally strong for stabilizer. So I think that's one factor that we need to keep in mind, yes.
Sure. And sir, when you think about this segment and both stabilizers and digital UPS separately, what is the kind of growth potential that you see over a 5-year period? Are these categories likely to be growing at a very, very slow pace? Or could they be actually plateauing out at some stage?
See stabilizer is a fairly mature category, I think V-Guard hold very high market share in the organized trade. So unless the category grows, the ability for V-Guard to grow further than the category growth may be limited.
In the case of inverter battery, V-Guard is a very small market shareholders. So definitely, the growth prospects are very good. We are setting up 2 factories, one to manufacture inverters and one to manufacture the battery. And hoping that in the next 18 months, they should come online. And that will really improve the competitiveness for V-Guard products. And today, we are just having a 3% share of the INR 12,000 crore market in inverters. And we can definitely improve that.
Understood, sir. Sir, also if you could spell out how exactly lower copper prices have impacted our margins in Electricals vertical? Is there any inventory write-off or inventory revaluation also that may have taken place? And what could be the quantum of overall impact of low copper prices?
So just in June -- month of June, we had a write-off of about INR 10 crores, would be the impact of copper crash. So that has impacted the results by about 1% in EBITDA margins for the whole organization. Yes. So mainly from coming from wires.
Understood. Understood. And will we be still carrying some high cost inventory and consequently, should we estimate some impact flowing through to second quarter as well?
So I think what could happen is some impact will be there in the month of July. But August and September, the company should get benefit of the lower cost input. Sudarshan, do you want to supplement it?
No, that's fine. Nothing to add.
Understood. And sir, my last question is that you've referred to coming back to normative margins in, let's say, 1 to 2 quarters' time. What do you consider as normalized margins for the company? Should we look at something like 32-odd percent?
Yes, 32.3% of gross margin is about what we're talking about.
Pre-COVID margins is what we embedded, that's what the 32%.
Next question is from the line of Charanjit Singh from DSP Mutual Fund.
So first of all, on the fan segment, specifically it's been highlight now, what is the mix for us in terms of premium versus economy? And we had set up the capacity to ramp up our premium offering. How is that scaling up? And from in-house manufacturing perspective, what proportion is right now being catered by the in-house manufacturing in fans segment? That's my first question.
Yes. Ram, you want to take this?
I didn't get the question fully, but I think -- can you -- sorry, I was reading something. Can you kindly repeat the question again?
In the fan segment, premium versus economy, what's the mix right now for us? And we had also set up a plant where we wanted to manufacture more of premium fans. How is that scaling up? And what is the proportion of in-house versus outsourced manufacturing within the fan segment?
Sure, sure. The later part, I did certainly heard. So I think the manufacturing initiative is going well. And I think we are, I think close to -- we expect to fully utilize the, what I would say, the core segmental capacity divided into two parts.
So I think the major part, which is related to what we plan to fully utilized. So I think the -- as far as the manufacturing shift is concerned, that's going well. Most of those fans are in the premium segment. And therefore, the premium segment is significantly expanding in relation to the popular segment.
Now coming to what is our ratio. I think now, we should be at about 40% to 50% on premium or -- premium. We should be in the region of 40% to 50% in the premium segment. This should get better as we move forward, particularly with the BLDC coming in and also the energy efficiency part also coming in.
Okay sir, from water heaters perspective, now what will be our market share? And how is that market shaping up in terms of the competitive intensity going forward?
See, we don't want to give out any market share numbers. All we can say is that we are doing extremely well in the water heater business. We had lost some shares in FY '21 and FY '22, we regained some of that share back. And FY '23, we are growing from there. So that's all we can comment as of now.
Okay. And sir, lastly, from my side, on the pumps market, if you can give some color in terms of how the outlook is there for the pumps market? And what are the kind of price increases which you would have taken, especially in the pumps market? And how is the competition coming from the unorganized segment in this segment?
So pump is part of the electrical basket us, but it's not a very large category. It's probably about 10% of the total revenues of the company, a little less than that. The pump has been impacted in terms of huge income price increases. There have been multiple rounds of price increases. Some increases are yet to be passed on to the market as many of the leading players have refused to take the last of the price increase.
The good news is the commodities have started to correct like iron and steel and all that and copper. So I think pumps should bounce back. The volumes in pumps are impacted. The margins in pumps are impacted.
Okay. Sir, just lastly, if I have to look at overall from a consumer electricals volume growth perspective, will you be able to share any outlook in terms of how is the volume growth expectation going forward for key product categories?
So I think we don't give out these numbers as have said. These are -- we have an annual operating plan, but we don't give out the production number. But the V-Guard, we typically targets 15% growth in volume, and that's what we will be targeting this year.
[Operator Instructions] Next question is from the line of Jay Shah from Capital PMS.
Congratulations sir, for good set of numbers. Sir, I just wanted to know something, if you can throw some light on the business side, basically, in the Electronics segment and in the wire and cables. What is the kind of demand mix that we are seeing, sir? Is it more from the real estate or there is more demand coming from the data centers and the new kind of CapEx that is happening? So if you could give us some light on what is the mix like.
I'm guessing you're talking about wires, right?
Yes, wires, cables.
Yes. So in the case of wires, we got project business is only 5% to 7% of total revenue. 95% of our cables go to the retail market. Having said that, the improvement in demand from the construction sector has meant that the brands, which we're focusing on B2B business have also -- so the hyper competition in the retail business is slightly less now because the construction demand is different. So that's one way to look at it.
Next question is from the line of Bhavin Vithlani from SBI Mutual Funds.
So pardon me if I'm repeating the question, I joined in late. So in the Durables segment, after the fourth quarter call, you had highlighted that the target is to take the margins to about 7% this year and double digit in the latter years, but we've seen the margins are up 2%. Could you just give us where do we see the margins going forward? And what will drive the margins higher?
So Consumer Durables have two components, large categories, which is fan and the water heaters. Inherently, water heaters is a higher-margin business for us than the other businesses for V-Guard. So water heaters typically kicks in, in terms of revenues and margins in Q2 and Q3. So I think some of it is also seasonality.
I think we are hopeful on hitting that number. It may not be double digit, but I think we probably can expect 7% margin in March quarter because the prices of many of the products have -- I mean raw materials have come down. For example, the major cost in fan is 2, one is aluminum and second is copper. Both had peaked in the month of May. So once these higher-value inventories are reducing and we start to procure our products -- raw materials as a new prices, the margins should grow. So I think probably you would have seen the worst of -- for Consumer Durables in the last 4 quarters in terms of margins.
Second, if you could just highlight switches and the switchgear is an area that you have now identified and we have seen that you have been successful in growing the fans and the bigger segment exponentially over the last 3 years. If you could just give us a road map on the switches and the switchgears segment because you've done a couple of acquisitions also in this space?
Ram, you want to take this?
Yes. I think we want to aggressively grow these two categories. But I think we are relatively young. I think in switches, we are about 3 to 4 years old, and maybe in switchgears, about 6 to 7 years old. I think these two categories are growing well, and I think we are able to grow the category at a faster growth rate than our overall business growth. So I think we should be able to grow them at about 25% to 30% -- over the next 3 to 4 years, right?
Sure. So when you start you believe that this category could hit INR 500 crores, I believe currently is INR 150-odd crores?
I think you can compound it at 25% per annum and probably you may reach to some number. But I think our base numbers may be a bit better than what you said.
Great. Just last question from my side. And pardon me if I'm repeating the question. In your press release, you mentioned there were some inventory losses. So would it be possible for you to quantify the kind of inventory losses, which are there in the wires segment? And what's the kind of inventory that you generally carry for the wires as a segment?
Sudarshan?
Yes. Yes, the impact of copper dropped during Q1 of about INR 10 crores. So impacted margins by about 1% at the company level. Typically, we tend to have RM plus S&G anywhere between 45 and 60 days.
[Operator Instructions] Next question is from the line of Rakesh Roy from Indsec Securities & Finance Limited.
Which region do well...
We can't hear you.
Mister, the line has been disconnected. So we will take the next in line, and that is Mr. Keshav Bharadia from PhillipCapital.
Sir, just to know why the margins in the ECD business could impact it? And also another question is, how do we see the in-house manufacturing share going forward like, let's say, in 2, 3 years? What do we see? How much can it go from the current 60%?
So the ECB margins have been impacted mainly because of the fan business. I think the fan business has been the most impacted -- one of the most impacted categories, primarily because most of the fans produced by us and competitors are aluminum fans. And basically, the component aluminum has shot up significantly after the Russian invasion of Ukraine, as Russia is one of the major producers of aluminum. And now I think the aluminum prices are coming down. So I think the Durables margins should improve. So this is one reason.
Second is we are relatively newer brand. If you look at fans, kitchen appliances. Apart from water heaters our market share in Durables are -- Consumer Durables are quite low. So obviously, being a smaller market shareholder and smaller brand in this segment will mean that our ability to pass on pricing can only be there after the leaders in the segment pass on pricing. And typically, we may be carrying less inventory in terms of strategic buying of raw material and all that because we are small in these categories compared with some of the larger companies. So that's one of the reasons.
But I think now the commodity prices are cooling down and I think the durable margin has already improved even if you look at Q1 and that will improve going forward.
Right, sir. And how is manufacturing share going forward in 2, 3 years?
So right now, it's about 60%. I think it will grow to about 75% in the next 2 to 3 years.
Okay. Okay. That's very helpful. And sir, one more question, if I can ask? Sir, how much high cost and inventory are we holding right now, like is it worth 1 month, 2 months?
So like Sudarshan mentioned, if you look at the -- if you look at the overall company, our FG inventories is about -- our FG inventory is about 70 days or 80 days. If you look at specifically copper and wire, it is about 60 days, including RM and S&G.
And sir, just another last question. Can you give the utilization levels for different plants?
Sudarshan, do you have these numbers, utilization levels?
No, don't have that data handy. We'll come back.
Sure, sir. That's all.
[Operator Instructions] The next question is from the line of Rakesh Roy from Indsec Securities & Finance Limited.
My first question is, sir, can you highlight all your non-South market performance, especially, sir, which region did well in this Q1, sir?
See, if you look at non-South to Northern and Western markets had very good summer, whereas Eastern markets, there was intermittent rains right from May onwards. So both North and Western market did well.
Right, sir. Sir, any addition to dealer or distributed non-South market in this Q1, sir?
We would have done it. I mean, we are not carrying any specific numbers with it. But like we said, our target is to add 3,000 to 4,000 retailers every year.
Okay, sir. Last question, sir. Any chance to take another price hike in near future or no?
I think for most categories, it may not be required because of the copper -- all the raw material prices have come down. Maybe -- there may be some small increase required in some parts of Durables. But largely, I think it may not be very large increases may not be required is what we believe.
Next question is from the line of Hitesh Taunk from ICICIdirect.
[indiscernible].
No, the voice is very feeble. Something like price hike or something.
Am I audible? Hello, sir.
Please try again?
Yes. I just wanted to know sir, what is the price hike you have taken for Q1?
Q1?
Price hike for Q1, about 2% -- 2% to 2.5%. Yes, 2.5%.
Okay. Sir, one more focus [indiscernible] why is the employee cost is high on a slowing [indiscernible], sir?
Sorry. Your question is on employee cost, is it?
Employee cost on a Q-o-Q basis. Is that your question?
Yes, sir.
Yes. So there are 2 factors. There is a variable pay accrual this quarter. Last quarter, it was not required. So that -- it's about INR 7 crore difference on account of that. And the other one is increment kick in Q1. So that's the difference between the 2 quarters.
Okay. And sir, my last question is about kitchen appliances category, largely pertaining to our built-in kitchen category. So what is the kind of distribution are we planning going forward in this strategy? And what is our strategy to take it forward? Are we looking for some kind of market share? I mean, what is the current market share, if you can throw some light? And in future, what kind of market share are you planning to take in that segment?
So V-Guard is not present in the entire spectrum of built-in kitchen. We are only doing hoods and hobs. And they're primarily today a traded business. And we are selling only through Amazon and Flipkart. Only to online partners. We are not intending to go to offline as yet. So yes, and that's -- so that's a beaten path of concern. It's very small today. It's not a very large business.
The next question is from the line of Prasheel Gandhi from Nirmal Bang.
Since the line of Mr. Bang is disconnected, we'll go for the next question, and that is from the line of Mr. Prasheel Gandhi from Nirmal Bang.
Yes. So just a question from my end. So what is the channel inventory -- channel partner, what does -- is it high, low?
Ram, you want to take this, channel...
Yes, channel inventory is more or less normal, yes. Channel inventory is normal. So nothing abnormal at this stage. I think wire might be a bit lower because with the expectation of price reduction, the later part of the quarter, we sense for a lower. So I think wire will be lower. But otherwise, I think by and large, I think our inventory should be normal.
And you highlighted that there was some demand slowdown in June. So could you throw a bit color on that? Do you think it is some transitory kind of a slowdown? Or there is...
It's related to weather. I think so what we observed is categories which are weather dependent, right? I think they had a bit of slowdown primarily stabilizer, inverter, battery to some degree and fan, right, fans and maybe pump. So a bit of slowness was there in these categories. but it is not across all categories, it's in these categories. And mainly, the slowness was in non-South.
And last question from my end. So do you engage in any kind of hedging for your raw materials?
No.
No, we had ForEx, not material.
[Operator Instructions] Next question is from the line of Bhavin Vithlani from SBI Mutual Funds.
About indigenizing TPW fans. So if you could just give us an update where are we? What's the kind of investment and the capacity that we are looking to create in that subsegment? And what's the kind of share that TPW has in the overall fans segment for us?
Sorry, the first part of the question is not audible. Can you repeat the question?
Sure. In the previous call, you had mentioned about indigenization of TPW manufacturing, which is currently being imported.
Yes, got it. Ram, you want to take this?
Yes. So TPW would be roughly about 25% to 30% -- 30% of our business. We can take 30% of our business with TPW. And the main challenge that we had the TPW was it was imported. So duty and freight were major challenges, and that was affecting our competitiveness and that's also reflecting in the significant drop that you see in our Consumer Durables business.
So with that context, I think -- and also to ensure supply activity, we've decided to invest in setting up TPW facility, yes. So I think as far as the facility is concerned, we would be investing probably some INR 30 crores, INR 35-odd crores in plant and machinery or TPW manufacturing. And obviously, we will start small with a few scales and then progress as we expand to address the category need.
Sure. What are the time lines that we are looking at? And when will the facility be ready?
Should be under 12 months, I suppose.
Okay. So till such time, margins for the fan segment will continue to be subdued?
Yes. It's -- for TPW fans, it will be better than...
So we are having to approach this. One is setting up our own factory, but even before that we had invested in our own molds and dies and the India made TPW fans are already started to come into the market. So some part of the issue will get solved there. But I think our range will be a challenge. The entire range will probably -- we can do only -- indigenize only once our factory comes in. So today, we are only probably going to make the most voluminous and most popular [ deals ] in India through a vendor in Hyderabad.
Sure. The second question also is on the fans. So we -- after the new manufacturing, we kind of entered the decorative segment too. So if you could just give us time lines and the way forward, how are we looking to move up on the premium and super premium subsegment of that? And that also will require significant investment and brand building. So how -- if you could just highlight the way forward on moving up the value chain on the fans segment, the ceiling fan segment?
Ram, do you want to take this?
Yes. So I think the investment that we have made in the plant is primarily focused towards premium and super premium categories. In fact, I think 85%, 90% of the output is targeted towards that. And 10% of the capacity is targeted towards mid-end fans. So I think and we hope to get to about 85%, 90% capacity utilization during the season, or probably even close to full utilization from coming seasons.
So I think that journey is progressing well for us. Mainly, we will be focusing with the manufacturing only on the decorative segment, which focus on premium and super premium fans, right? We will continue to source entry level fans from the market or the -- what I would say is the popular segment from the vendor ecosystem and that strategy will continue.
Sure. Just last question from my side. In the current quarter, we -- I mean it seems like there is a margin impact in the Electronics segment also. So is that due to the inverter segment or stabilizers? And how do you see margin stabilization going forward?
Sorry, how are you saying? We haven't announced yet. See the mix of stabilizers sold in this quarter is very different from last quarter. And even the proportion of stabilizers and inverters to the total is also different. So there's significant mix impact.
Okay. So the margin decline that we're seeing is a function of mix impact and not decline in the individual category margins? Is that the correct interpretation?
I think there is some impact. So Sudarshan, there is some impact on the inverter battery business in Q1. That is true. But there is also a larger impact of the mix in terms of the product mix and the category mix.
Okay. Fine. So would the sustainable margin come back to that 17-odd percent that we are seeing historically? Or is this the new normal?
No, I think 17% is probably what happened in Q1 and FY '20. That was probably a year where we had extraordinary high sales because summer was very good. So I think maybe 15% to 16%, maybe is the correct Electronics margin.
[Operator Instructions] Next question is from the line of [ Yash Khemka ] from [ Yashashvi Securities Private Limited. ]
Am I audible?
Yes.
So I just had one question that how are you looking forward towards the demand scenario of electronic statements? And [ color ] question is just your quarter prices reducing, how will the margins of electronic segment in particular will be impacted in the forthcoming quarters? Can you throw some light on it?
Mithun, can I take this?
Yes, yes.
Yes. See, just to tell you, we are setting up 2 manufacturing facilities, one for battery and one for inverter and stabilizer. So I think both these should help to improve our competitiveness. And obviously, we'll have a positive margin impact because the investment is hypothesized on getting a payback for the investment. So I think that basically -- and obviously, as far as inverter and battery are concerned, making this investment will help to improve our competitiveness, it will also help to improve our flexibility.
And therefore, should help us to grow the business better because we will be able to be more responsive in the season to market needs. And we will have more flexibility to address the market demand through a mix of own and sourced product portfolio.
So I think there will be favorable consequence because of our manufacturing investment on the overall health of the electrical and Electronics business.
There is some amount of margin stress, which is seen Q-o-Q, but that is also because I think some of the impact of input cost increase, right, has been later in some categories, like in the case of batteries. The red impacts has come later, whereas in some other categories, come out -- the impact has come much earlier in the year. So I think a bit of that is seen. But I think like in other categories, I think progressively as we go forward as commodities correct, I think this should also get corrected.
There may be some marginal drops in like stabilizer or inverter, but that is consistent with the increase in input cost that has happened and that should roll back as the input cost roll back over time.
That helps. And sir, another question, that how are you seeing demand in cable and switchgears in Q2, is it still strong?
I think as far as switches and switchgears, I think, as I think Mithun had said earlier in general, I think -- as far as the demand from the construction segment is concerned, it has been stable. And therefore, we expect to see continued demand. Having said that, our incumbent market size and market position is fairly small. So as far as we are concerned, we believe we should be able to post a decent growth consistent with how we have been growing in the last 2, 3 years.
The next call is from the line of Nikhil Kale from Axis Capital.
Just going back to the Electronics margin. Now we talked about new facilities that we are looking to put up for inverter and batteries and that would kind of improve your competitiveness. Just wanted to understand, will it be kind of the -- that given that you will kind of see margin benefits, and if that is the case, will the strategy be to retain the margins or pass it on to consumers and try to gain incremental market share?
So if you look at the inverter and battery business today, V-Guard is not very competitive in terms of pricing. So some of those margins will be passed on and some of it will be retained. So but we will still see some margin improvement is what we expect .
Okay. Okay. But then would you then still stick with like the 15% to 16% kind of a range for this segment over the medium term?
You're talking about Electronics?
Yes.
Yes. Electronics anyway, I think we should expect 16% margin. But that is in the -- yes, we should go back to the 16% margin. That is possible. Today, I think V-Guard's products are not very cost competitive especially in the battery segment, where we are outsourcing the production.
Okay. Great. And then just secondly, as we kind of move towards more in-house manufacturing. Again, from a company perspective, company level, how are you looking at the kind of margin improvement? Is there any target that you're looking at in terms of incrementally you want to take your margins to a particular level over the next 3 to 5 years? Any color on that one?
So I think we have already mentioned that we will look at [indiscernible] improvement from there on. And I think that is possible with these initiatives. But initially, it will take 2 or 3 years to gain fruit because in the first 1 year and 1.5 years, maybe there is excess -- there will be a lot of inefficiencies in the manufacturing process, which will then be streamlined going forward. So yes, we have seen that happening. And whenever we set up a plant, it is with a clear IRR and it is with the clear return that we do that, with a clear margin improvement program for the category.
As there are no further questions, we have reached the end of question-and-answer session. I would now like to hand the conference over to Mr. Deepak Agarwal for closing comments.
Thank you, management, for giving your valuable time for this call and allowing us to host this call, and thanks, everyone, for joining this call. Management, any closing remarks that you want to make?
Nothing, Deepak. Thank you so much for hosting this call, and thanks to PhillipCapital. Thank you.
Thank you so much, and thanks, everyone, for joining this call. Thank you.
Thank you. On behalf of PhillipCapital India, that concludes this conference. Thank you for joining us. You may now disconnect your lines.